Can a Second Residence Assist Me To Avoid Tax At Home?

We’re seeing a lot of interest in this field in particular clients looking for a second residency or a 2nd passport. The UAE is doing a lot of business in this regard as a number of Emirates offer a nil tax Company product that comes with a residency permit.


The key question with a second residency is how it would all work from a taxation perspective ie who has the right to tax you and why and which country’s tax laws would/should apply?


As we see it there are 2 angles:


(a)   Application of tax laws in theory

(b)   Disclosure and practicalities


Re (a) most countries (particularly big western countries like the USA, EU, Canada, Australia, UK etc) have a very broad definition of “resident for tax purposes”. Regardless of what passport or residency permit you hold if you’re in that country for more than 6 months and or if you have a substantial connection to that country (even if you’re on the ground there for less than 6 months in any tax year) you can be classified as a “resident for tax purposes” making you liable to declare your worldwide income in and pay tax there.  


Substantial Connection


So what constitutes “substantial connection”?


In considering whether you still have a “substantial connection” to your mother country a number of factors are looked at including:


  • Do you retain a residency/home in your mother country?
  • Do you own any personalty in your mother country (eg a car, furniture/home contents/boat/leisure toys etc etc)
  • Do you have a bank account in your mother country?
  • Do you have investments or business interests in your mother country?
  • Do you retain a professional or trade license (eg Lawyer/Plumber/Doctor/Teacher/Nurse/Engineer/Architect/Builder/Dentist etc) license in your mother country?
  • Do you keep current a golf/tennis/leisure club membership in your mother country?
  • Do you regularly renew a driver’s license in your mother country?
  • Do you have children at school in your mother country?
  • Do you have a spouse/partner living full time in your mother country?
  • Etc etc etc


Chances are, as a minimum, what you will need to do in order to become non-tax resident in your mother country is:


(a)   Sell your home/residence in your mother country (or cancel any lease you might have over residential premises there)

(b)   Sell any business you own on the ground in the mother country

(c)   Sell all personalty owned/held in your mother country

(d)   Hand in (and not renew) any professional/trade license you may have in your mother country

(e)   Close down any bank/investment accounts you might have in your mother country

(f)    Write to your local IRS/Tax Office and advise that you have departed the country permanently and filed your last tax return.


Disclosure & Practicalities


Re (b) the question here is will a 2nd residence enable you to incorporate an Offshore Company and or open a bank account for your Company wherein your name won’t be recorded as being a resident of your home/birth country. Generally speaking in these instances you’d need to produce photographic proof of ID AND proof of residential address. If you can produce evidence of ID/Residential address from/as being in your country of 2nd residence, in the event of information exchange, your details won’t be given to the tax authorities of your home/birth country.


The ideal end game there would be that your mother country’s tax authorities would (hopefully) never find out about the existence of your Offshore Company or your connection to it giving them no chance to apply a potentially extensive tax residency law/definition in their favor.


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