While working at home or overseas, one of the most important issues for consultants, agencies and end clients alike is the subject of tax compliance.
It is a fact that income tax is due in the country where the income is earned. It is therefore important to ensure that your tax affairs are in order both in your home country and in the country where you are working. We mitigate your tax risk by managing your taxes through a combination of double taxation treaties and providing a compliant solution that is also tax efficient.
Many tax topics are often mis-understood, so here are a brief rundown of some of the most frequently asked questions:
What is a double tax treaty?
This is an agreement between two countries to prevent international double taxation. This occurs when two different states impose a comparable tax on the same potential taxpayer on the same taxable item. Most developed countries have a large number of double tax treaties in place. The UK has over 110. Double tax treaties are in place between all EU/EEA countries.
When going to work on contract abroad, it is important to check that your home country has a double tax treaty with the country where you will be working. If no treaty exists, you should try to ensure that you will be able to acquire a tax certificate which clearly states how much tax you have paid in the country of work. Without this, you run the risk of being taxed twice on the same income.
What is the 183-day rule?
The so-called 183 day rule relating to tax liabilities rarely exists as a clear-cut rule but is used as a guideline in some circumstances (see our related newsletter).
If you work less than 183 days in many countries you may be considered tax non-resident if certain other criteria are also met. However even as a non-resident you should normally still be paying tax on the revenue you generate in that country.
If you work more than 183 days in most countries, then you will become tax-resident and liable for tax on your worldwide income, i.e. revenue from your work, interest on investments, etc.
The ‘183 day rule’ does NOT automatically mean that you can work for 183 days in a new country without paying tax or becoming tax-resident. However in most situations, particularly if a double taxation avoidance treaty exists between your country of work and your home country, you will not have to pay tax on the same income twice.
What is the 91-day rule?
The 91 day rule forms part of the test governing tax residency in the UK and it works in conjuction with the 183-day rule. From April 2008, when deciding if an individual is resident in the UK for tax purposes, days will count if you are in the UK at the end of the day (i.e. at midnight) for residence test purposes. A person who is currently not resident in the UK will always be treated as resident in the UK if they spend 183 days or more in the UK in any tax year. If they visit the UK on a regular basis and spend, on average, 91 days or more in the UK in a tax year (taken over a period of four years), they will be treated as resident in the UK. If they know that they are going to visit regularly and that the time spent in the UK in that and the next three tax years will average 91 days or more in the UK, they will be resident from the beginning of the tax year in which they make the first visit. If they have been resident in the UK and, having left the UK, continue to visit, they will continue to be treated as resident if those visits average 91 days or more a tax year, taken over a maximum period of four years. Therefore if you leave the UK for work overseas, remain out of the UK for one complete tax year and during the period your trips back to the UK are not more than 91 days (midnight rule applies), averaged over a four year period, you will become non tax-resident.
Why can’t I continue paying taxes through my Limited company?
Tax is due where income is earned. If you are contracting abroad, you need to ensure that you have a mechanism by which income tax can be paid in your country of work.
By continuing to pay tax through your Limited company, you will be remitting tax in your home country, but not in the country where you are working. Although your tax affairs at home will be in order, under this type of arrangement, a tax liability will build up in the country of work. In many countries, there exists a chain law which means that the tax liability can be passed on to the client you are working for. For this reason, many clients will insist that contractors are paid via an in-country payroll.
The 183-day rule does not apply in situations where a one man Limited company is the employer. As soon as the director of the company moves, the permanent establishment of the company moves with him. Contractors operating through UK Limited companies outside the UK are consequently running the risk of being liable not only for unpaid personal income tax, but also for corporate tax, having created a permanent establishment in the country where they are working.
What does “tax non-resident” mean?
When moving to a new country to work, you are generally liable for tax from day one. This status is termed “tax non-resident” and in most countries means that for the first 183 days of work, you are taxed only on your locally-sourced income. Once you go over the 183 days, and in some cases this can be in one tax year or cumulative over 2 tax years, your status changes to “tax resident”. This change means that you become potentially liable for tax on your worldwide income. For most people this will actually mean no change if the locally-sourced income is the same as the worldwide income, but those with other sources of income will need to be aware of the potential tax implications this creates. Having the status of tax non-resident does not mean that you can work without paying tax, unless you are working in a country that is zero tax rated. Tax residency is complicated and the rules vary from country to country.