Understanding Tax Residency for Individuals vs. Companies: Key Differences


The amount of tax an individual or company pays to a country is determined by their residency in that country. Tax residency can be critical to one’s financial status, as different countries have different tax regimes, rules and treaties. Consequently, it is necessary to distinguish between tax residency of individuals and companies and how double taxation or tax evasion can be avoided.

Tax Residency for Individuals

Generally, personal tax residency is determined by the number of days an individual spends in a particular country within a given year which depends on each jurisdiction such as France where if someone stays in France for more than 183 days per calendar year or has his/her main home, principal activity or center of economic interests there then he/she will be resident for tax purposes.

In United States an individual is said to be resident if he meets the substantial presence test which means that he has been present in US at least for 31 days during the current year and 183 days during three-year period consisting of the current year plus two years immediately preceding that.

Notwithstanding, there are other considerations besides day numbers in determining individual’s tax residence. For example some countries also consider factors such as citizenship, nationality, domicile-family ties-permanent residence etcetera; thus Canada persons are considered residents when they possess significant residential ties with Canada like having home/spouse/dependents regardless of their length of stay while UK persons become residents under statutory residence test which consists complex set of rules considering various factors such as number of days; purpose of visits; location of home; work ties; family ties.

Tax Residency for Companies

Tax residency determination for companies is often based on place where incorporation was done i.e., place company was legally registered. For instance if a business entity is incorporated in Ireland then it would be considered as resident for Irish taxes so it would pay corporate income tax on worldwide income earned unless otherwise provided in a relevant tax treaty such as residency rule. However, some countries also take into account the place of management which means the country where the company’s central management and control is exercised. If a company was incorporated in Bermuda but its central management and control takes place in UK then this allows the UK to be treated as the tax residence for that corporation hence it should pay taxes on income that it earns from all over the world.

However, this is not the only criterion for determining tax residence of corporations. Some jurisdictions have specific regulations for some types of companies like branches, subsidiaries or permanent establishments. In Germany, a company registered under a foreign law but has a permanent establishment such as an office, factory or warehouse in Germany is considered resident there for purposes of the revenue that arises from the permanent establishment.

China regards a company incorporated by another country as its own tax resident if it has its effective management center within China such as board of directors, senior management and key decision-making organs and in relation to its worldwide income.

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