Navigating tax residency and the 183-day rule

Last Updated on 30 December 2024

Moving abroad can open up a world of exciting opportunities for you, from living as a digital nomad to settling in a low-tax country.

However, determining your tax obligations can be confusing. Your tax residency determines where you pay income tax and affects everything from doing business to retirement planning.

This guide explains the intricacies of determining (and avoiding) tax residency. I explain what tax residency means, explain the infamous 183-day rule, and give tips on how to separate yourself from high-tax countries.

Whether you want to minimize your tax burden legally or simply understand your options, read on.

What is tax residency?

Your tax residency refers to the country (or countries) that can tax your worldwide income.

For most people, this is their home country, where they live and work.

However, for location-independent entrepreneurs and constant travelers, it becomes difficult to determine residency.

You can gain new tax residency if you spend time abroad. Likewise, you can lose residency status in your home country if you move away.

Understanding the rules of residency is critical to legally minimizing your tax obligations. By choosing advantageous residences, you can retain more income by avoiding high tax rates and restrictive policies.

The infamous 183-day rule

The 183-day rule is the most common benchmark for determining tax residency.

If you spend more than 183 days in a country during a tax year, you are generally considered a tax resident.

While this simple rule of thumb is not universal, it does apply in many jurisdictions. In some countries, however, there are exceptions that make it easier to become a resident or harder to lose residency.

For example:

• The United States uses a “Substantial Presence Test” based on the number of days you spend over a 1-3 year period.
• TheUnitedKingdom considers residency ties such as home ownership and family in addition to the number of days.
• Switzerland recognizes you as a tax resident after only 90 days.

Despite all the nuances, 183 days is the clearest threshold for most countries. If you want to avoid residency, limit the number of consecutive stays and track your days closely.

Sever ties with high-tax countries

For entrepreneurs from high-tax countries, taking up residence in another country can drastically reduce your tax burden. However, your home country won’t just give up tax rights.

Here are some tips on how to give up residency in select countries:

USA

The United States uses a unique system called the ‘Substantial Presence Test’ to determine the tax residency of non-citizens.

Unlike citizens, who must pay taxes regardless of where they reside, non-citizens owe taxes in the U.S. only if they meet the thresholds for residency. Residency is based on time spent in the United States during the current and preceding two-year periods.

Specifically, to qualify as a resident under the substantial presence test, an individual must have

• Spend at least 31 days in the United States during the current tax year

AND

• The total number of days spent in the U.S. during the current year, plus 1/3 of the days in the previous year, plus 1/6 of the days two years earlier, equals 183 days or more.

For example, someone who spent 120 days in the U.S. this year, 100 days last year, and 90 days two years ago would meet the Substantial Presence Test because the formula yields more than 183 days (120 33 15 = 168).

This test captures extended stays in the U.S. for tax residency purposes by covering both the current year and prior years.

United Kingdom

Citizens of the United Kingdom are considered tax residents if they:

• spend 183 days or more in the United Kingdom
• Have a residence, such as a home or spouse, in the U.K
• Have sufficient ties based on visits, assets and working hours

To cease residency, sell or rent your home in the UK, limit visits to less than 16 days in the first year, and cut ties.

Canada

In Canada, residency is determined based on physical presence, residency, and social and economic ties. To lose residency status:

• Move abroad full time
• Cut ties such as home ownership and bank accounts
• Limit your visits, especially during the first year after the move

Australia

Australia has four different tests for residency. To meet them all:

• Leave Australia completely, not just for short-term travel
• Prove that you have found a new permanent home overseas
• Cancel Medicare and Australian financial and social ties
• Sell your primary residence or rent it out long-term

Next steps

Once you have addressed residency requirements, there are two options:

1. Determine yourresidencestrategically. Whether in a no-tax country or a low-tax country, choose a residence to legally minimize your tax burden.
2. Become a perpetual traveler -movebetween countries constantlyto avoid residency. The perpetual traveler theory doesn’t work because you have to be a tax resident somewhere!

With proper planning, you can drastically reduce your tax obligations and keep more of your hard-earned income.

Frequently Asked Questions

Do I have to consider calendar or tax years for the 183-day rule?

The rule relates to your tax status, so tax years are most important. However, in most countries, the tax year coincides with the calendar year, so the same 183-day calculation applies.

How do the days count towards the 183 days?

Unfortunately, the counting rules vary slightly from country to country. Arrival days usually count as full days, while departure days may not. In some countries, such as Sweden, both arrival and departure days are counted as full days.

Can I spend 183 consecutive days in a country without establishing tax residency?

Generally, no. A stay of 183 consecutive days triggers residency in most countries. To maximize the time without triggering the rule, you should split your stays over the end of the calendar year.

Is the 183-day rule generally applicable?

The 183-day rule does not apply for immigration and social security purposes, which are governed by separate laws. It is strictly focused on taxation. Immigration time limits may vary. Therefore, always check the specific immigration policies of the destination countries.

Knowing the rules for tax residency can help entrepreneurs and nomads manage their lifestyles to legally minimize their tax burden. With the right residency strategies, you can keep more of your hard-earned money.