International Tax Residency Risks

When Your Dream Trip Overseas Turns Into a Financial Disaster

Summary

You finally made it. Congratulations. Years of hard work and smart investments have finally paid off. You are rich. Rich enough to finally live where you want to live.

Maybe you want to live in another country for an extended period of time? Enjoy fine wine in France? Enjoy the beautiful countryside in Switzerland while working remotely on your business? Live in exotic Singapore for a while?

Life is good. Until you get an income tax bill from your vacation country. They want income tax on your worldwide income for the entire year. Surely, you say, they must be joking. I made sure to stay in that country for less than 183 days. That is the international standard, you say, for determining tax residency. And you would be right; that is the international standard.

But like Swiss cheese, there are many holes in this general 183-day standard that can cost you dearly. For example, here are some popular vacation destinations and remote work locations that can cost you dearly, and turn your foreign trip into a foreign tax nightmare.

At the end of this article, I have provided tips on how to avoid the foreign income tax trap on your global income

Switzerland

Switzerland is a beautiful country, centrally located in Europe, known for its stunning natural beauty and stable currency. It is consistently voted one of the best places to live in the world.

However, after a stay of at least 90 days, congratulations, you are now a tax resident and subject to Swiss income tax on your worldwide income for the year.

The U.S.-Swiss tax treaty may or may not provide some relief, but regardless, you now have to make your case to the Swiss tax authorities. You probably will need to hire a Swiss tax professional to either make the case that you shouldn't be a tax resident, or to help you prepare and file your Swiss taxes for the tax year.

All because you didn't know about the 90-day rule. Not a good way to end a good time in Switzerland.

Australia

You learned your lesson, but you still don't feel like doing research before living in another country for an extended time.

So you tell yourself, “Let's make sure that wherever I go, I stay less than 2 months (say, 50 days) and that should be fine.”

So you go to Australia and enjoy the beautiful nature and culture of Australia for 50 days. You love it so much that you think about coming back. Maybe you decide to buy a small vacation home for the next time, or a small share in a local Australian establishment. Maybe a small share in a local bar, just for fun.

Congratulations. You have just become an Australian tax resident and will have to pay Australian income tax on your worldwide income for this year, because you spent more than 45 days in Australia and have an Australian economic interest (your tiny share in the Australian bar).

The U.S.-Australia tax treaty may provide some relief, but regardless, you will now have to spend some "quality" time with the Australian Tax Office. By the way, the top income tax rate in Australia is 45%.

France

Perhaps you want to spend a year in Europe, starting with France. You quickly check the French tax residency rules, and they seem to follow the 183-day standard.

You say to yourself, “Cool, no worries, I will spend 5 months in France and then 1 to 2 months each in different European countries like Germany, Greece, Spain, and so on. Or maybe I will keep it under a year and spend 5 months in France, 3 months in Spain, and then return to the US.”

Congratulations! By having done either, you have become a tax resident of France for the year, with a top income tax rate of 45% on your global income.

But why? Because France has this little, tricky, tax residency rule: "If you spent less than 183 days in France, but more than in any other country, you could still be considered a tax resident of France."

Again, the U.S.-France tax treaty may provide some relief, but either way, you are now probably destined to spend some "quality" time with the French tax authorities.

United States

The situation also applies to foreigners visiting the United States. If you are a foreign national and spend more than 31 days in the U.S. during the current year, and accumulate over 183 days of substantial presence over the past three years (including the current year), congratulations—you are now classified as a U.S. tax resident.

This means you are required to pay U.S. income taxes on your worldwide income.

The calculation for substantial presence can be complex, and while the tax treaty with your home country might offer some relief, it is easy for a foreigner to inadvertently become a U.S. tax resident.

Why do countries make it so easy to become tax residents?

Most countries are suffering financially. It doesn't make the headlines, but it's clear to anyone interested in fiscal policy. Taxes are not enough to pay for what the government wants to spend.

Governments have been borrowing like there is no tomorrow, for decades. Now the debt-to-GDP ratio is sky-high in many countries, and the hunt for money - any money - is on. 

A foreigner who can afford to live in a foreign country for more than a short vacation of 1 to 3 weeks is considered wealthy. And those countries want that foreigner's money. Badly! And not just income tax. Some countries also have a wealth tax.

So if you become a tax resident of a foreign country, you may have to pay a foreign wealth tax in addition to foreign income tax. All of this, of course, in addition to your U.S. income tax, unless the tax treaty between that foreign country and the U.S. provides some relief.

You may say to yourself, "Eh, how are they going to find out." And that may be true for now, but as everything moves from paper to databases and now AI, it won't take too much effort for foreign countries to run tax residency checks on visitors who spend more than, say, 2 weeks in a country.

Desperate people will do desperate things. The hunt for money - your money - is on.

How much tax will I have to pay to this foreign country?

The income taxes you may owe in a foreign country are not just an additional income tax on your U.S. net income. You may have to pay foreign income tax on hypothetical profits.

What does that mean? Let me explain. Suppose you buy and sell a stock for $100. In the U.S., that means no capital gains tax. But in a foreign country, it might be different.

• Let's say you bought the stock:

  • $1 = 1 foreign currency unit (FCU)

  • Your $100 = 100 FCU

• Now, when you sell the stock:

  • The foreign currency has depreciated.

  • 1 = 1.5 FCU

  • Your $100 = 150 FCU

In U.S. dollars, you broke even ($100 - $100 = $0 profit).

But in the foreign currency, you made a profit (150 FCU - 100 FCU = 50 FCU profit). And if you became a tax resident of, say, France, you would have to pay up to 45% tax on that hypothetical gain.

All because you didn't check the foreign tax residency laws.

How can I avoid unintentional tax residency in a foreign country?

Unless you enjoy spending time with foreign tax professionals and tax lawyers, and paying additional income tax and even wealth tax in foreign countries, don't ignore this topic and don't assume anything.

The hunt for money from foreign individuals is on. Your money is the target. You have it. And they want it.  

So, to avoid unintentional foreign tax residency, follow these key strategies:

• Understand tax residency rules: Research the tax residency criteria of the countries you plan to visit, focusing on day-count thresholds (often 183 days, but sometimes much less).

• Track your days: Keep a detailed log of your time spent in each country to ensure you don't exceed residency limits.

• Limit your stay: Avoid long stays in any one country and refrain from establishing a permanent home, such as by renting or buying property.

• Maintain ties to your home country: Maintain strong ties, such as a permanent residence, bank accounts, and family ties, to prove your primary residency.

• Be cautious about work activities: Avoid working abroad, as this can trigger tax residency in some jurisdictions.

• Consult tax professionals: Seek the advice of international tax experts to navigate specific residency rules and relevant tax treaties.

By implementing these strategies, you can minimize the risk of inadvertently becoming a foreign tax resident. Always consult a qualified tax professional for personalized advice.

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Disclaimer

Neither the author nor Fringe Finance is a financial advisor or a tax professional. This article is for illustrative and educational purposes only and does not constitute a specific offer of any product or service.

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