For many people, the mere mention of ‘international tax law’ and ‘the 183-day tax myth’ is enough to start lowering eyelids and shut down entire conversations.
Start the same tale with reference to how Colombian pop star, Shakira, was hauled into a Spanish court on tax fraud charges and facing up to eight years in prison and a fine of €23.7 million, and you’ll probably find your audience jerking awake.
Most people find the subject of tax boring or believe they understand it enough not to warrant further research. However, in the world of international tax, there are some concepts you underestimate or misunderstand at your peril.
If you’ve been researching offshore tax strategies or putting them into practice by living nomadically, you’ll undoubtedly have heard of the 183-day concept. Chances are you think you have a rough idea of how it works, or at least enough of an idea that you won’t need to seek independent legal and tax advice about it.
That would be a mistake. Just ask Shakira.
The Spanish authorities accused her of failing to pay €14.5million in income tax between 2012 and 2014, charges the singer denied outright. At the heart of the case was Shakira’s insistence that she had not spent more than 183 days in Spain in a calendar year, so shouldn’t be considered a resident for tax purposes. Not so, claimed the Spanish taxman and proceeded to the courts.
In the end, the singer settled the case on the opening day of her trial, agreeing to a deal in which she received a €7.3 million fine and a three-year suspended sentence.
There’s lots to take away from the Shakira case and Nomad Capitalist founder, Andrew Henderson, delves into how the singer fell foul of Spanish law in this video.
But at the heart of it is the lesson that even clever, aware, high-net-worth individuals should be aware of their own knowledge limits when it comes to international tax laws like the 183-day rule. Many make the dangerous assumption that they fully understand the rule or hire advisors who claim to be expert in this area.
While Nomad Capitalist isn’t here to give you legally binding tax advice, we can help you understand the complexity of one of the most misunderstood concepts in the world of international tax.
The Shakira case is proof of just how complex this area is.
The 183-day rule centres on the concept that a country will deem you a tax resident after 183 days of being there. Moving overseas, especially if you’re from a high-tax country, is an effective way to lower your taxes. However, it can be a complicated process with a multitude of obstacles to understand and overcome and chief among these is the 183-day rule.
With the exception of the United States, a citizenship-based tax country, most developed countries in the world are residential tax countries. For many people who relocate for economic reasons, the preponderance of residential tax regimes feeds into the assumption that they’ll be fine if they can keep the number of days they’re physically present in those countries under the magic 183 number. Different countries call this rule different things: some call it the ‘days test’, some the ‘physical presence test’.
But as the old adage goes, ‘assume makes an ass out of you and me’ – what most people don’t understand is that there are different tax tests in most developed countries. There may be three, four, or even five different tests and the ‘days test’ is only one. The notion that if you only spend 182 days in a country, you won’t trigger the ‘days test’ simply doesn’t work in Western countries.
This misconception harks back to the way the world used to be when travelling around the globe wasn’t so inexpensive or easy. As recently as 25 years ago, very few people left their countries to live elsewhere and, for the few who did, the general rule was that as long as you didn’t visit a place too often or stay too long, most governments would accept your presence.
Travelling and relocating have gotten much more complicated since then. Nowadays, with so many international businesses and so many global travellers, governments have made the process of establishing or reneging your tax residence far more complex.
Aside from the ‘days test’, other triggers exist and may apply to you in countries like Australia, New Zealand, the UK, Mexico, Canada and most European Union (EU) countries.
The 183-Day Tax Resident Myth
Most people think they are safe if they don’t trigger the 183-day test, but they forget that in most Western high-tax countries, like those in the EU, a whole different set of rules apply.
Take, for example, the ‘closer connection test’. In European countries, the tax authorities may also consider where your family is, where your primary bank is, where you go to the doctor and where your home is located.
Anything that signifies a closer connection could be looked at.
For example, if someone spends four months in Spain yearly but has a home, family and bank account there, Spain might consider them a tax resident. The individual has only spent around 120 days there but, according to Spanish regulations and its connection criteria, they could be deemed a tax resident.
It underlines the futility of relying on that magical, or should we say mythical, 183-day number.
Establishing a Tax Home For Tax Purposes
If you plan to travel and spend time, particularly in high-tax countries with strict rules, it’s beneficial to have already established your tax home in another country. You will need to plan this carefully. At Nomad Capitalist, we have years of real-world experience creating bespoke global citizenship plans. You can find out more here.
Not everyone wants to spend four or five months travelling in Europe, but for those that do, it’s safer to have established a tax residence elsewhere. Whether it’s bank accounts, a gym membership or registering with a doctor – whatever can prove you have, or are planning to establish, a home in another country will help prove a closer connection.
It’s not about proving you don’t have a connection to the country you’re visiting, but rather, proving you have a closer connection somewhere else. If the tax authorities audit you, you must show you have a closer connection and tax residence in a home country elsewhere.
If you’re a frequent traveller, the best way to be prepared is to have a tax residence somewhere else and track your movements in case the tax authorities question you.
When we say questioned, there won’t be much dialogue; they will send you a letter stating they deem you a tax resident. This will likely be followed by a tax demand you’ll be expected to pay.
Sure, that may never happen but it’s better to be safe than sorry.
If you’re travelling often, you can prepare by having a spreadsheet that tracks:
- Your travel dates
- Your destinations
- Your boarding passes (which you can scan and keep in a folder)
- Any other official document that proves your nomadic lifestyle.
Keeping documents and a travel diary makes sense – if you are questioned by the tax authority five years from now, how else will you remember where you were?
This is especially important if you spend a significant amount of time in high-tax countries. Even if you already have a closer connection and tax residence established elsewhere, tax authorities in certain countries can still claim you’re a tax resident if you’ve spent significant time there. It’s always better to have your defence ready than only starting to scramble for answers once you’ve been notified of an audit.
Receiving a tax demand doesn’t mean that you need to pay tax immediately. You can pay or fight it, but the onus is on you to prove you are not a tax resident. This can vary if you’re in a country that has tax treaties with other nations. If the new country has a double-tax treaty with your home country, you’ll pay the difference; otherwise, you will pay twice and trigger more than one tax residence, which is highly inadvisable.
The 183-Day Non-Tax Resident Myth
On the flip side of the same coin, in high-tax countries like Germany, Italy, the UK, Canada, New Zealand, and Australia, many people think it is enough to leave the country physically to be considered non-resident for tax purposes.
However, for tax residence or tax non-residence, the closer connection test can cut both ways.
For all of these countries, there are different tests that you’ll need to satisfy to become a tax non-resident. It’s not enough to pass the 183-day or closer connection test; both must be satisfied.
Suppose somebody simply leaves Australia, for example, and continues using their bank accounts in Australia daily and has a home and family there. In that case, they will fail to be deemed a tax non-resident. The fact they no longer live there doesn’t change their status. They will have to eliminate their ties to the country in order to be deemed a tax non-resident.
On the other hand, if someone eliminates all their ties but then spends 183 days or more in a country, they will still be deemed a tax resident. For tax non-residence, even having a bank account can be deemed a closer connection – the tax authorities could question your intent to leave a country even if you only bank there.
So, the second big myth is that you cannot simply leave a country and expect to be considered a tax non-resident. There are additional factors to consider and specific procedures to be complied with.
Most Western countries have stringent rules defining tax residence or non-residence – it’s not just about the 183-day rule.
For example, you may want to live in a European country but spend only four months a year there and travel around the rest of the time so as not to trigger tax residence. Be aware that buying a home or car in your base country could risk your tax residence status. Even though your days present would be under the 183-day test, your base would still be your most substantial home.
That’s why Nomad Capitalist recommends a scorched-earth policy to eliminate all your ties when becoming a tax non-resident.
Adopting the Nomad Capitalist Mindset
If you want to move offshore, instead of trying to maintain a base with your home country in the hope that tax authorities will not find out, you’ll have to demonstrate that you’re departing the jurisdiction.
The easiest way to do that is to actually leave; by that we mean fully leave. You must show your intent to leave because as you try to arbitrage the days you spent there and cut them as close as possible to 183 days present, the government will devise new ways of preventing you from doing that.
The same principle applies if you have a business you want to move offshore. It’s not just about where your company is based. You can’t just live in Germany, put your company somewhere like Belize, and forget about it.
Your business needs to leave, but you will also personally need to leave because if you don’t, then regardless of where you travel, Germany will remain your most substantial home and you will still be dragged into its tax net. Your offshore company will be taxable in Germany, too.
Not every country does this. Some only apply the ‘days test’ if you spend 182 days of the fiscal year there, otherwise they will leave you alone. These states tend to be emerging nations and some are Latin American countries. If you follow the Nomad Capitalist trifecta approach, you can use this to your advantage by having three different homes, spending about four months in each and passing the ‘days test’.
Most developed countries will not allow that, so the best plan is usually to spend time in very liveable countries that have not gotten around to bothering foreigners too much. These countries do exist – places which actually want you to come and spend four months a year there and not pay tax.
Increasingly, border control and tax authorities are talking to each other in countries like Australia, New Zealand and the UK. It’s entirely possible, especially if you are a citizen of that country, for the authorities to ask you why you visit so often.
At Nomad Capitalist, we tell people that mindset matters – trying to do the bare minimum or deliberately trying to deceive the government will only land you in trouble.
Instead, buy into the mindset that you are leaving your base country and can return as a tourist a few times a year. We advise acting and thinking like someone who is moving and living overseas by establishing a home and the trappings of life somewhere else.
Better Places to Live and Invest
Simply sticking to the 183-day rule will get you in trouble in most developed countries.
The good news is, if you want to live all over the world, you can arbitrage it to your advantage in other emerging countries that are off the radar but are great places to live and invest in.
It’s what we call ‘going where you are treated best’ and it’s where Nomad Capitalist comes in. We help seven- and eight-figure entrepreneurs and investors create a bespoke strategy using our uniquely successful methods. You’ll keep more of your own money, create new wealth faster and be protected from whatever happens in just three steps. Discover how we do things here.
