Tax Independence Day marks a significant milestone for expatriates (expats) around the globe, particularly for those living and working abroad in countries that operate on a calendar tax year.

Tax Independence Days marks the point in the year when expats transition from being tax residents of their home country to their country of residence, under certain conditions.

To qualify for this 'tax independence', expats must be residents in another country with a double taxation treaty in place with their home country, and they must possess a residence permit that allows them to stay in the host country for more than 183 days. This residency status potentially obligates expats to register for tax, submit a tax return, and pay social insurance taxes if they are working.

At this time of the year expats should take time to plan their financial affairs carefully. Doing so allows them to potentially reap substantial tax savings during the year. Expat tax planning involves several aspects, including tax registration, submitting tax returns, and investigating possible tax rebates.

Split year treatment

Split year treatment is a crucial concept in taxation that could provide substantial benefits to expats. Essentially, split year treatment allows an individual's tax year to be divided or "split" into two parts: one part when the individual is a tax resident of their home country, and another part when they're a tax resident in a foreign country. This can result in significant tax savings and has several implications for expats.

1. Minimisation of Double Taxation: The most substantial benefit of split year treatment is the prevention of double taxation. Double taxation can occur when an individual is considered a tax resident in two countries and both countries tax the individual's worldwide income. Split year treatment helps mitigate this by ensuring that the person's income is only taxed in one jurisdiction at any given time.

2. Optimisation of Tax Liabilities: The split year treatment allows expats to strategically plan their finances to minimise overall tax liability. For instance, by timing their move effectively, expats can align the more substantial part of their income to fall within the jurisdiction with lower tax rates.

3. Tax Relief on Specific Income Sources: Depending on the taxation laws of the home and host countries, split year treatment might also provide relief on certain types of income. In some cases, specific types of income like dividends, interest, or capital gains might be tax-free or taxed at a lower rate in the host country, providing significant savings.

4. Greater Flexibility in Planning: Split year treatment allows for greater flexibility when planning moves between countries. Knowing that you won't be double-taxed can make the financial implications of moving less daunting and make it easier to plan for a change in residence.

It's essential to note that not all countries offer split year treatment, and the rules can vary significantly among those that do. Therefore, it's highly recommended for expats to seek professional tax advice to understand the tax laws in both their home country and the country they are moving to. By doing so, they can maximize the benefits of the split year treatment and minimize their overall tax liability.

Tax abroad

The benefits that you can derive changes depending on what country are from and which country you are becoming a resident in. If you need specific advice then please contact us.

However, here is an overview of the tax situations in a few expat destinations:

Cyprus

In Cyprus, expats who have taxable income are required to submit a tax return. Sources of taxable income can include dividends, savings, property rental, royalty and license income, pensions, overseas income, and in-country income. Corporation tax and health taxes might also apply, particularly for those involved in remote working. The process for filing a 2022 return is yet to be confirmed.

Portugal

In Portugal, expats with the Non-Habitual Resident (NHR) status can benefit from certain tax exemptions on overseas income not sourced from Portugal. However, tax residents are required to submit a tax return, with potential tax rates up to 20% on certain income.

United Kingdom

The United Kingdom presents a complex situation for inbound and outbound expats, particularly in relation to the sale of UK properties and investment in cryptocurrencies. The tax treatment for these items requires careful consideration, with the potential for a tax liability even for those who have changed their tax residence outside the UK.

Middle East

While many Middle Eastern countries do not require the filing of a tax return, expats from the UK should be aware that liabilities in their home country may arise. Expert advice is recommended to understand and mitigate any potential tax implications.

Spain

In Spain, expats have an obligation to complete a tax return if they're classified as tax residents. There are certain tax allowances that may apply, but a return is generally required.

The tax situations for expats in different countries can be complex and varied. Seeking advice from tax experts like ProACT can help expats to navigate these complexities and make the most of their financial planning for the rest of the year and beyond. Remember, the fireworks of your tax world should be a celebration of savings, not a signal of distress.

—> Read more about tax in different countries

Freedom to Look Forward

Tax freedom Independence Day on the 4th of July is a time to celebrate and also a time to start preparing for the tax return and any payments due for the current year now more than halfway through.

Consider tax residence, dual residency, non residency and any split year rules that could apply.

Expat family and business should plan ahead to make sure that they maximise the tax savings to benefit the family and not the taxman.

Watch our recent webinar on the 4th of July Tax Independence Day at all YouTube channel ProACT Partnership

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