Did you know that, if you spend more than six months in a foreign country, you might become a tax resident? This means that your income may become subject to tax in the host country.
If you’re not up to date with these rules, things may get pretty tangled, potentially ruining your plans to live comfortably away from home. To help you stay out of trouble, we’ve put together a brief guide with the factors to keep in mind when you’re planning to spend a long time in one place.
The 183-Day Rule
At its simplest, the 183-day rule is a threshold many countries use in tax or treaty contexts to determine whether a person should be considered a tax resident (or taxable) based on their physical presence in a given country.
Does this mean that, if you, as a traveler, spend 183 days or more in a host country in a given year (or rolling 12-month period), you’ll be considered a tax resident there?
The answer is not as clear-cut as yes or no. In reality, there are many other factors to consider.
Still, in the context of a tax treaty between two countries (the home country and the host country), the 183-day clause often triggers these kinds of questions.
Here are some of the factors that can protect you from becoming a taxable person in a host country:
- You must be present in the host country for no more than 183 days (in the aggregate) in any 12-month period (or tax year) that commences or ends in the fiscal year concerned.
- Your remuneration (salary, wages) must be paid by, or on behalf of, an employer who is not a resident of the host country.
- The remuneration must not be borne by a permanent establishment (PE) that the employer has in the host country.
In other words, if you stay in Country A for less than 183 days in a given period (and satisfy other conditions), you may avoid being taxed as a resident there (or avoid local income tax). If you exceed it, you may become taxable. Now, if this country is Spain and you’re self-employed, you may actually be at an advantage.
The System in the U.S.
Like with many things, this rule is a little different in the U.S. Here, the Internal Revenue Service uses a substantial presence test, which tracks your presence in the country during the current year plus fractions of the two prior years. If you’ve been in the U.S. for longer than 183 days in the last three years, you might qualify as a full-time tax resident.
To understand how this compares to how Americans are taxed abroad, it helps to look at the bona fide residence test, which determines whether a U.S. citizen living overseas qualifies as a foreign resident for tax purposes. You can explore this in more detail through this guide to the bona fide residence test, which explains how the IRS evaluates intent, duration, and ties to a foreign country.
Of course, this still depends on the type of treaties existing between your home country and the US, and several other factors. The rule also works the other way around, when an American citizen is living in a host country and may qualify for certain foreign earned income exclusions.
Wrap Up
The 183-day rule is more of an indicator, and not necessarily a universally acknowledged fact. Many countries use different time frames to start tax residency procedures, and other factors, such as treaties between countries, influence the decision. In other words, it’s good to familiarize yourself with the local tax law before you leave for any lengthy voyages.
