Tax Residence
Tax Residency – Determining Your Centre of Taxation
Tax residency is a specialized field within international tax law and is governed primarily by the double taxation treaties, DTAs, concluded between states with taxing rights.
In today’s globalized world, many individuals work abroad for extended periods or relocate across borders while maintaining income or assets in more than one country. In other cases, individuals may move abroad temporarily but keep their Danish residence with the intention of returning.
Another frequent scenario arises where a person takes up employment abroad but cannot meet the conditions for full departure or expatriation—perhaps because a spouse retains a home in Denmark, or because limited work continues to be performed in Denmark.
What Does Tax Residency Mean?
Tax residency is determined when an individual is considered fully tax liable in two jurisdictions—known as “dual residency.” This often occurs where a person maintains residence where he or she lived before, and also obtains residence in a new country.
In such cases, it becomes essential to determine which country has the right to tax the individual’s worldwide income. The country determined to be the tax residence holds exclusive taxing rights over global income, while the other country may only tax locally sourced income.
For example, consider a person who resides with family in Denmark but accepts a job in the Netherlands and lives there during the working week. This individual will be fully tax liable in the Netherlands (due to work and accommodation) but will also remain fully tax liable in Denmark, since the conditions for permanent departure are not met since the home in Denmark is upheld. In such cases, it must be determined which state has primary taxing rights over worldwide income, and whether Denmark may also tax income earned in the Netherlands.
How Is Tax Residency Determined?
Double taxation treaties typically apply a “centre of vital interests” test, assessing where the individual’s closest personal and economic ties lie. If this is inconclusive, secondary criteria such as the number of days spent in each country, and ultimately citizenship or an assessment by the tax authorities, are applied.
The differences can often rest on fine margins, but the tax consequences can be substantial.
Quite often, the tax payer may by adjusting his or her whereabouts and circumstances choose which country becomes main centre of taxation.
A person moving to Denmark from i.e. the U.S. for a few years may have the option to arrange full U.S. or full Danish taxation and the opposite for the other state.
Strategic Considerations
Determining tax residency must often be viewed in relation to broader planning options such as full departure from Denmark or formal expatriation. For some individuals, the decision is straightforward. For others, it involves complex considerations around residence, retention of property, and potential exit taxation of assets.
Get in Touch
If you are navigating dual residency or have questions about determining your tax residency, please contact us for tailored advice and sparring on your options.