Country of Domicile vs Country of Residence
For most people their country of domicile is where they were born and their country of residence is where they live.
That means more often than not they are one in the same because most people live in the country where they were born and where their parents were born before them.
Tax
This makes thing simple for tax purposes, and it is tax where domicile and residence become important.
When you earn money above a certain threshold you become liable to pay certain taxes. Everyone knows that, and everyone usually pays.
Where it gets complicated is when multiple jurisdictions come into play because you no longer live where you were born or because you have ways to make money in other countries.
In other words, you may be liable to pay tax where you live, wherever that money was earned and to the tax authorities in your country of domicile (COD).
But again for the vast majority of people that’s going to be the country where they were born, grew up, live and work because that’s usually one in the same.
Lets get into it.
Country of Residence
Your country of residence or COR is where you live. Sounds easy, but knowing your which country it is isn’t perfectly straightforward all of the time.
Shorter time periods may confuse the issue and in fact, in some cases people can be resident in multiple countries at once.
However, when you spend years rather than months in one country you more than likely become resident there.
In the UK government’s eyes you are automatically resident in the UK if either:
- you spent 183 or more days in the UK in the tax year
- your only home was in the UK – you must have owned, rented or lived in it for at least 91 days in total – and you spent at least 30 days there in the tax year
Along similar lines, you are automatically non-resident if either:
- you spent fewer than 16 days in the UK (or 46 days if you have not been classed as UK resident for the 3 previous tax years)
- you work abroad full-time (averaging at least 35 hours a week) and spent fewer than 91 days in the UK, of which no more than 30 were spent working
For those in doubt about whether they are UK resident or not, the UK government has a guide that you can use to determine this called the Statutory Residence Test (SRT) / form RDR3. You can find here.
Earning Money Abroad
Perhaps, the most common way people earn money in a country without living there is through rental property. When you earn money in a country that you don’t live in you may need to pay tax in that country.
In fact, its not beyond the realms of possibility to need to pay tax to the local tax authority and to have to pay again where you live.
The UK government will certainly tax your rental income above a certain threshold if you have rental property in the UK, no matter where you live or what your official residence is.
And if you were resident in the UK, but had income in another country that would be taxable too.
So it figures that your COR may expect you to pay tax on income earned outside its borders.
Tax treaties and the possibility to claim tax back means in many cases you won’t be charged twice, but that isn’t always the case.
This will depend on the tax policies where you live and where your money was earned.
If large amounts of tax are at stake it makes sense to make sure you are clear about your liabilities and possibly request the services of a professional.
Inheritance Tax
The most common situation where your COD becomes important is for inheritance tax purposes.
As already mentioned, most governments want taxes on money earned on their own soil. They are often less bothered about money earned elsewhere. Your country of residence may want to tax you everywhere, but other countries usually only want to tax you on any money earned within their borders.
But that’s not the case with inheritance tax. Here’s where COD really comes into play.
Let’s say your COD, like mine and many other British expats is the UK, it won’t matter that you live abroad, that your assets are outside the UK or even that your heirs don’t reside in the UK, inheritance tax can basically be collected no matter what.
And this is where people may run into issues because the place where they are resident may also want to tax those same assets. Ouch!
Similarly, if you have assets in additional countries you could be liable for taxes on multiple fronts.
As mentioned above, there are tax treaties or similar between some countries which mean tax may only be liable in a single jurisdiction, but that isn’t always the case.
If you do have a large estate that you are passing on it is worth being clear about your tax liabilities. Some people may actually change their domicile specifically to avoid inheritance tax, and that’s possible, through domicile of choice. We’ve talked a bit more about people doing this whilst living in the UK here.
Types of Domicile
There are four types of domicile that you may come across:
Domicile of origin is usually the same country of domicile as your father at the time you were born, unless your parents weren’t married, whereupon it would be your mother’s. This is the one most people are talking about when they talk about country of domicile.
Domicile of dependence refers to the fact that until you are 16 years old, you are legally dependent on an adult and your country of domicile would be the same as the adult you legally depend upon.
Domicile of choice as the name suggests, describes the fact that you can choose a new domicile, but don’t think doing so wouldn’t be without difficulties. At the very least, you would need to provide strong evidence of your intention to remain in your new country permanently.
Deemed domicile is where you are treated as domiciled in a country for all tax purposes, even if you are not (You can read more about this here).
Here’s what the UK HM Revenue and Customs says about working out your domicile:
Your domicile’s usually the country your father considered his permanent home when you were born. It may have changed if you moved abroad and you do not intend to return
HM Revenue and Customs
