Residence and double taxation

[allanb]

I have a question about the application of tax treaties.  I am personally affected by three treaties to which France is a party, so I have some knowledge of how they work in principle.  However, they always seem to contemplate a simple situation in which the taxpayer is resident in country X and receives income in (or from) country Y, and the treaty tells you which country has the right to tax the income.

What if it isn't clear in which country he is resident?  Is it possible that both X and Y might consider him to be resident?  If so, does the treaty become irrelevant? 

This question has been prompted by recent discussion of the 183-day rule, for example.  As others have pointed out, the 183-day rule applied by the UK doesn't necessarily have any effect on the French rules for tax residence.

[Will]

Yes, it is quite possible to be 'resident' in two, or even more, countries at the same time. People do have problems with that, but in tax terms 'residence' is not necessarily the same as 'domicile'. OK, the French authorities sometimes think it is, but that's another story altogether. UK and some other countries complicate it further by having concepts like 'ordinarily resident' which sounds bad, but in fact can be great for people first coming to France. HMRC's booklet IR20 (http://www.hmrc.gov.uk/pdfs/ir20.pdf)  goes into the nuts and bolts for those who may be interested, though of course it can only explain how you can (or can not) be classed as UK tax resident.

So let's assume you are employed in Britain, carrying out your work there and spending more than half the year there. Your main home is in France, with your family living there. These two facts establish that you are tax resident in both countries. And rather than becoming irrelevant, the double tax treaty really comes into its own.

You pay tax in  Britain, through PAYE. Let's say you have a small business in France, renting out gites, which your wife looks after. Under French law (and the provisions of the treaty), you pay tax on this in France, because this is income arising in France, from a France-based business. French law says you have to declare your worldwide income in France, which you do, but the major part of your income, arising in UK, has already been taxed there. So you enter it into the box that refers to income which has already been taxed in its country of origin, and the tax paid in UK is offset against your French liability. You can't say that because it has been taxed in Britain you won't pay French tax, because thanks to your overseas income you may well pay French tax at a higher rate than you would on your French income alone.

That's it, in a fairly simple but not untypical example. It works the other way round too, but exactly how it works depends on the terms of the individual double taxation agreement - there is no standard agreement, each country is different. If the other country is not covered by a double taxation agreement, then there may be reliefs available to make sure you are not taxed twice on the same income.

NI and Social Security is a different story altogether, unfortunately - you can be tax resident in one country but social security resident in another, just to complicate matters. Leaflets N138 (http://www.hmrc.gov.uk/pdfs/nico/ni38.pdf) and SA29 (http://www.dwp.gov.uk/publications/dwp/2006/sa29_jan06.pdf - for Europe) give the UK viewpoint.

[Gluestick]

[quote user="allanb"]I have a question about the application of tax treaties.  I am personally affected by three treaties to which France is a party, so I have some knowledge of how they work in principle.  However, they always seem to contemplate a simple situation in which the taxpayer is resident in country X and receives income in (or from) country Y, and the treaty tells you which country has the right to tax the income.[/quote]

Not at all: large transnational trading corporations with various physical presences around the World, adjust their fiscal affairs to optimise their tax charges.

With a person, however, they can only, quite obviously be Resident, per se in one state at the time.

Also Domicile comes into this: a multinational corporation, for example, carefully selects its domicile to optimise its global tax charges. Divisions of the holding parent, however can be physically based - and thus resident - in many different tax jurisdictions. Shell Tankers for example are based in Bermuda: many international banks are too: however they both havetrading arms resident in various other states.

Therefore your residence will be determined by either tax authorities, or yourself, if you can mount significant evidence to prove residence, using the normal tests.

[quote] What if it isn't clear in which country he is resident?  Is it possible that both X and Y might consider him to be resident?  If so, does the treaty become irrelevant?[/quote]

It is, in basic terms, up to the taxpayer to convince any tax authority of their residence, in the case of dissention

[quote] This question has been prompted by recent discussion of the 183-day rule, for example.  As others have pointed out, the 183-day rule applied by the UK doesn't necessarily have any effect on the French rules for tax residence.
[/quote]

The French rules for residence are similar to those pertaining throughout all member states of the EU.

"Visitors" are allowed a finite term: thereafter they must take some definitive action, such as leaving for a few weeks, or registering, or applying for an extended stay permit or whatever. This is where EU rules are still "Woolly" it seems.

What does seem clear is that PTs (Permanent Travellers), who spend just less than 90 days in each jurisdiction can escape the TAX net. Where this leaves them for other matters such as Health Care is a matter for other debate!

It seems that in your unusual case, professional advice may well pay dividends.

 

[andyh4]

You can certainly be tax resident in more than one country at the same time.

In this case the basic rules of taxation apply:

You pay income tax in the country where you (physically) do the work.  So doing IT work in France for English clients who pay you in pounds into your UK account for example - attracts French income tax.  There can be specific exceptions to this based around short term contracts for a company based in one country but doing work in another.  These have to be agreed with the tax authorities of both countries in advance - in my experience at least.

Your tax liabilities for interest and other unearned income generally is paid in the country where the assets are based.  So interest on your UK savings account, dividends on your UK shares etc are taxed in the UK.  There are exceptions to the interest situation where you can elect to take your interest tax unpaid in a foreign country however.

Also if you make money from renting property that is taxed in the country where the property sits.

 

In all cases all income has to be declared in all countries where you are tax resident - except where the tax legislation specifically allows you to not declare - for example gains made from share dealing in the UK that fall under the minimum threshold for declaration.  Because something is non-declarable in one country does not mean you do not need to declare it in another.

 

Tax paid in one country is off-set against liabilities on those earnings in another.  Normally this means no tax is due, but this will not always be case.   The accumulated taxable income can be used to assess your liability for some taxes.  So if you paid income tax in several countries (by virtue of working in these countries) but paid little or no social charges, you cold find that the French system would require 8% of your total earnings as their social charges.

 

The 183 day rule is really applicable only in the case of people not working, since this then establishes tay residency where otherwise no residency would exist by virtue of employment.   In other words if you work in a country you become tax resident and you don't need a 183 day rule to establish tax residency.  You can see however how this rule can indeed establish tax residency in more than one country - where I work seasonally in say the UK, but live unemployed in France for more than 183 days, I am tax resident  in both countries. 

[Will]

Andy, we agree in essence I think (as you will see from my earlier post) but you have to consider the UK's 90 day rule as well. It won't make a lot of difference to the case you describe, but it is very relevant indeed to those trying to avoid UK tax residence status, and can be used for those like yourself who may spend less than 183 days in the country but still find it advantageous to pay certain taxes in UK rather than France.

Although I, and HMRC, disagree with some that Gluestick says (for once), he is perfectly correct that it is ultimately the law and the authorities who decide where you are fiscally resident, rather than you. What you can do of course is to arrange your movements to your advantage, and be prepared to fight your corner if necessary.

[Gluestick]

[quote] it is ultimately the law and the authorities who decide where you are fiscally resident, rather than you.[/quote]

Absolutely, Will. And, as the Bard may have said "And herein lies the rub!"

Normally, revenue authorities will determine an assessment on the worst case to the taxpayer: it is then up to the taxpayer to, as you say, fight their corner and dispersaude them!

As always with law, there are significant anomolies and unusual situations. Fixed property, for example, is taxed in the state where it is, since it obviously cannot change its domicile or residency! Additionally, gradually, withholding taxes are being introduced to try and combat tax avoidance, particularly in the EU.

Tax treatment of incorporated businesses and remittances, (and remittances from people too!) therefrom are also being tightened.The globalisation of business and capital markets has also created a desire for harmonisation of both tax treatments and accounting rules, since different corporation tax rules create various unlevel playing fields and problems with equities.

Professionally, I would invariably advocate taking good professional advice, well before making any core changes and moves, as retrospective tax planning don't work too well! As I keep telling many of my clients! [blink]

I used to be quite involved with offshore work and tax havens: not these days, I have enough headaches and the rules seem to change each day!

The Accounting Standards Board and Audit Practices Board are enough, without the European Accounting Standards and International Accounting Standards Committees....................[B]

[allanb]

Gluestick says: "With a person, however, they can only, quite obviously be Resident, per se in one state at the time."  

However -

Will says: "Yes, it is quite possible to be 'resident' in two, or even more, countries at the same time", and Andyh4 says: "You can certainly be tax resident in more than one country at the same time."

I must say that the second view seems more likely to be true.  Different countries have different rules, so there must be occasional conflicts.  And this was the point of my question, which is still unanswered, I think.  

Here's a specific example:

Suppose a person is considered to be resident (for tax purposes) in both the UK and France.  Suppose that he is receiving the UK state retirement pension.  Under the tax treaty, if he is resident in France, this particular kind of pension is clearly taxable in France and not in the UK.   But if he is resident in the UK, the treaty is irrelevant so far as the Inland Revenue is concerned (since it only applies to people who are resident in one country and are getting income from the other).  So it will be taxed in the UK in the ordinary way.

More important, I don't think in that situation he can get any relief from the double taxation.  Each country will argue that it has the exclusive right to tax the pension, so why give relief for tax wrongly paid in another country?

Does anyone really know the answer to this question?

[andyh4]

I cannot answer the pension question, but I can definitively confirm that you can be tax resident in 2 countries - even 2 EU states at the same time.  I have been - but am not currently (unless the French authorities think differently).

I think in the exceptional pension case you quote, the UK tax authorities would take precedence, and that the tax paid would have to be taken into account by the French authorities under the treaty, but this would be an area that you would need professional advice upon and I doubt anyone has the competency to provide that on the forum.  As Gluestick suggests plan ahead.

 

Will (or is it Dick?), Gluestick,

I think our first postings were all cross postings.

[andyh4]

PS  Will

I assume the 90 day rule you are referring to relates to being tax resident in the UK if you spend more than an accumulated 90 days in the UK after you have been declared non-UK tax resident.

[Will]

Booklet IR20 categorically states that it is possible to be resident (though not domiciled) in more than one country.

Quote: "1.4 It is possible to be resident (or ordinarily resident) in both the UK and some other country (or countries) at the same time. If you are resident (or ordinarily resident) in another country, this does not mean that you cannot also be resident (or ordinarily resident) in the UK. Where, however, you are resident both in the UK and a country with which the UK has a double taxation agreement, there may be special provisions in the agreement for treating you as a resident of only one of the countries for the purposes of the agreement (see paragraph 9.2)."

I am not an accountant, but I would have thought that in allanb's example, the pension would be taxed in UK as it is income arising from the UK. It would still have to be declared in France, but tax would only be paid once. If the recipient was solely tax resident in France then the pension would be declared and taxed in France.

Of course, the rules cannot encompass every situation, so there has to be some flexibility, and that is partly why the double taxation agreements are different for each country concerned.

[Gluestick]

Yes, I quite agree, andy. It is possible for a person to be classed as resident in more than one state: however, since physically, one can only be in one place at any one time, it therefore behoves the taxpayer to endeavour to minimise tax attraction by convincing the tax authorities in the different jurisdictions that they are only in fact resident, principally, in one. Then the tax treaties can be used to optimise income and taxation.

Tax authorities, as I said, will, if given the chance, intepret their jurisdication and resulting tax to the detriment of the taxpayer!

That's what forward tax planning is all about!

In my experience many employers are quite cavalier about sorting out their own employment bases and thereby exploit the poor old long-suffering employee even more!

 

[Ron Avery]

Assuming that this is a question that actually affects you and not a I'm bored so lets ask hypothetical "what if" questions,[Www].........  but assuming this question affects you, in your example, you would only actually be tax resident in one country.  BUT, as you have been told earlier, you have to notify the UK tax people that you are leaving the country.  So if you did not, then you will continue to have any UK income taxed in the UK.  You would then also run the risk of receiving a tax demand in France for the same income. As you will not be under a double taxation treaty because you have not left the UK and filled in the appropriate forms, you will have the pension taxed again in France and pay social charges and be deemed ALSO to be tax resident in France. 

In practice, you cannot actually live equally in the UK and in France in a year, you must reside more days in one than in the other, that is why there is a 183 day rule. 

If you try and not be tax resident in France or the UK, by notifying the UK that you have left but not telling the French that you are now resident, then you would not comply with the conditions of the taxation treaty, you have to declare the income in France that you are claiming as tax free in the UK and in this case you will end up as tax resident in both countries and be liable for tax in both.  However, if you were to throw in another country, so that you spent 150 days in both the UK and France and 65 days in another country, assuming that the travel costs involved outweigh the tax "avoided",  the onus would then be on you to convince the French, UK and the other country's tax authorities that you were not liable to tax in all three countries.

[andyh4]

Sorry Ron you are making the classic mistake of taking the 183 day rule as the basis for tax residence.  Unless you are unemployed or retired this is one of the least likely way in which tax residency will be established.

Earning a living immediately establishes tax residency in the place where you do the work.

Making money from renting property establishes tax residency.

 

So you could work in France rent your house in the UK and spend less than 183 days in either and still be tax resident in both.

[Will]

[quote user="andyh4"]

PS  Will

I assume the 90 day rule you are referring to relates to being tax resident in the UK if you spend more than an accumulated 90 days in the UK after you have been declared non-UK tax resident.

[/quote]

Andy, yes, you have to have been non-resident before HMRC can use the 90-day rule (which is actually a 91-day rule, see IR20) to grab tax from you. Or, conversely, to declare yourself UK tax resident and thus take advantage of UK tax on income arising from UK, but that's less common. Gluestick is perfectly correct, it is all in the planning, and taking advantage of what concessions are available and/or differences between tax systems.

[allanb]

[quote user="Ron Avery"]Assuming that this is a question that actually affects you and not a I'm bored so lets ask hypothetical "what if" questions ...[/quote]No, as it happens, it doesn't affect me, but I'm not bored and I'm not trying to waste anyone's time.  There has been a long discussion of the general question of residence, the 183-day rule, etc, etc, and it seemed to me (still does) that (a) it is possible to be fiscally resident in two countries at the same time, and (b) there's a risk of unrelieved double taxation as a result.  So the question of how you make sure that you get the benefit of the treaty, when one country may say that you're not subject to it, can be quite important for anyone whose resident status is in any doubt. 

I don't doubt that there are forms to be filled in, but I don't think that's the answer.   In France (and I think in  the UK and most countries) residence is primarily a question of fact, not a declaration by the taxpayer.  You may be resident in France, but the Inland Revenue may say "we have received your declaration, but on a review of the facts, we do not agree that you are non-resident in the UK."  Does France then say "pas de problème, Monsieur, in that case we will agree not to tax your UK pension even though we have the right to do so"?  I doubt it.

[Will]

The fact that seems to be very difficult to get across on forums like this is that it is not the taxpayer who makes the choice about where and how he/she is taxed. The authorities do that.

The taxpayer, and the accountant, can arrange one's affairs in the most tax-efficient way of course, but that doesn't amount to a decision that, if you qualify for dual residency status, you can make solely based on where it is more economic to be taxed. You have to arrange things so that you, for example, spend the right amount of time in Britain to be regarded as taxable there. Even then the authorities might take a different view.

I see Gluestick's point, dual residence is often a bit of an irrelevance, as you can, indeed, only be in one place at a time. It's important to understand the concept from a tax planning point of view, but it doesn't, in itself, offer a choice as to where tax is paid.

[Ron Avery]

Alan

After all the explnations above, I did feel that we were getting into the realms of what if ..........

However, the question you are posing now, as I understand it, is if you actually move to France and tell the UK that you are no longer resident in the UK can the UK deny this and continue to treat you as a UK resident and tax any UK generated income?  Then as a consequence of this, can the French by virtue of you claiming to be in France, also tax you?.

Well the answer to that as Will has implied is yes, they can do what they like, the onus is on you to prove them wrong.  However, unless the UK had grounds to suspect that were lying, why would they deny that you had left the country?  In fact many people, it seems half the English here, are stil taxed in the UK as they receive government pensions taxed in the UK, that does not mean that they are not also tax resident for declaring that and any other income in France.  I doubt somehow that the situation you describe is commonplace and would have to involve significant amounts of money for the UK revenue to take an interest, it would also have to involve deception and fraudulent statements as to have your UK generated income paid gross assuming that it is a private pension, you would have had to have completed the double taxation treaty paperwork and have also made a declaration of tax in France, the French do not sign off the forms and return them to the UK unless the UK income being claimed as to be paid gross in the UK has been declared in France for tax.

[Gluestick]

This thread is becoming awful convoluted!

Firstly, this IR&C site does provide some clarity:

http://www.hmrc.gov.uk/cnr/faqs_general.htm#2nr

Residence:

 This is determined by principally, your main centre of economic interest. Next comes a raft of other qualifiers, such as property, dependant relatives, activities and personal volition.

It is NOT clear cut, however! It is mainly up to the individual taxpayer to take the necessary essential steps to "prove" their residence and determination and defined lifestyle.

Registering with the (e.g.) French fiscal and health authorities can be considered a major "Proof" of residency, as is de-registering from home state official bodies, notification of Revenue, DWP and so on, of move abroad.

Merely doing nothing and floating backwards and forwards on the "I'm Jack the lad, no one can catch me!", basis is an open invitation to be taxed twice at top rates by both states!

Domicile:

 In  order to ireevocably change your natural domicile, the taxpayer must take robust steps; these can include all the above, plus applying for citizenship in the new country; making arrangments to be buried/cremated there and etc.

Persauding one's natural revenue authorities of an irrevocable change of domicile is not easy nor is it easy!

Dual Taxation Treaties:

The core internationally accepted principle of these is that a person or body corporate or indeed a non-incorporated firm can only suffer taxation on the same source of income or gain once. If an income or gain attracts tax twice (two states) then it will finally be taxed at the rate applying in the state of residence.

There are caveats to this and that is what tax lawyers and international firms of accountants earn their large fees doing!

For the average person, however, if one income suffers tax in two states, then the tax paid in the country of non-residence will be credited against the tax due in the state of residence; if the tax rates are different, and the tax in the state of residence is lower than the tax rate in the state where the income or gain arises is higher, then normally, a tax credit of the difference should be due. Again, there are exceptions!

Income and gain sources are normally taxed in the state where the income or gain arises. e.g. pensions, income from land and property. Again, there are exceptions: for example, by appropriate tax planning, whilst immovable real property would be essentially taxed in the state in which rents are arising, by creating on offshore holding company (in a state which enjoys a dual taxation treaty with the income arising country) it is possible to minimise tax arising. Again, there are caveats, since various anti-avoidance measures are continually introduced to harvest tax, including Withholding Taxes etc.

Ownership of "Foreign" based shares and remittance of dividends and capital gains, has been tightened up by new rules considerably, in the past few years: as has the wheeze (used by Sir Richard Branson and many others) of setting up an offshore Beneficial (or other) Trust and vesting principle ownership of equity in the trust. Worth mentioning, here, for example, that Philip Green, owner of Top Shop, BHS etc,  has transferred circa £2 billion in dividends, tax free, to his co-owner, Mrs Green, who just happens to be a Monaco citizen!

If you really want to avoid tax, then buy a flat in Andorra; apply for citizenship; base your money and investments there: visit France et al for no more than three months at any one time and become a Permanent Traveller!

Warning: even a studio appartment  in Andora now costs upwards of £200,000; I wonder why?[:D]

Final comment: again: a few pounds spent on professional advice before you make irrevocable decisions, can repay itself many times over.

These boards and ideas and propositions contained herein do not constitute proper profesional advice: they merely indicate what might and might not apply.

Above is given in good faith as indicative and informative only and cannot be relied upon as legally correct and no professional responsibility can thus be accepted. Always take appropriate professional advice in all matters pertaining to legal and financial and taxation subjects.