Tax residency is determined when an individual is considered fully tax liable in two jurisdictions—known as “dual residency.” This often occurs when a person maintains residence in the country they lived in before and also acquires 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 stays 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, as the conditions for permanent departure are not met, as the home in Denmark is maintained. 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 an 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 taxpayer may, by adjusting his or her whereabouts and circumstances, choose which country becomes the main centre of taxation.
For example, a person moving to Denmark from the U.S. for a few years may be able to arrange for full U.S. or full Danish taxation, and correspondingly, the opposite treatment in 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 related to residence, retention of property, and potential exit taxation of assets.
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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.
