When it comes to expat taxes, it's best to look at it twice. Tax residence, as well as terms of income tax return and payment of taxes, can vary significantly when you move abroad. What if you receive income from a foreign source? Find out whether you have to file these in your returns even if they are not taxable in your host country.
Defining tax residency
While each country defines tax residency differently, it is generally considered that a tax resident is someone whose tax domicile is registered in a particular country. Place of residence may be declared for any stay over 6 months yearly in that country. Otherwise, the place of residence remains the country of origin. There are several criteria for establishing tax residence: the main place of residence, occupation (whether salaried or self-employed), and economic interests, which are located in that country.
It is possible to distinguish between income earned from the country of tax residence and from abroad, depending on the economic interest. For example, a resident living in Belgium who derives most of his income from Belgian sources (wages, rent, pensions, etc.) has economic interests in Belgium. Their income from Belgian sources is higher than their income from foreign sources.
Filing of foreign income
How to make an income tax return of foreign income? Is it necessary to submit the return even if it is not taxable in your expat country? It all depends on your destination country and whether or not there is a tax treaty between both countries (the country of origin and the host country). The expat's status must also be considered: permanent resident, non-permanent resident or non-resident.
In particular, the tax treaty determines whether foreign income will be taxable or exempt from tax in the host country, whether it must be declared in that country or not, and whether double taxation can be avoided. The tax treaty also specifies the terms and conditions of application. For example, if the treaty stipulates that foreign income will be exempt from tax but must be declared, it will state that this return will not be taxed but will simply be used to calculate the amount of income tax. However, if the foreign income is taxable, the tax treaty will provide solutions to avoid double taxation.
What types of foreign income could be taxable?
In general, expats need to pay income tax on income earned in their host country. However, factors such as tax rules in the foreign country and whether or not there is a tax treaty with the home country must also be considered. In the absence of a tax treaty, foreign income is taxable in the country of origin.
Several types of foreign income are taxable in the absence of a tax treaty: wages, salaries and pensions, income from self-employed professions, rents received, capital gains and income from property.
Foreign income return
For the purpose of income tax returns, it is always best to refer to the host country's regulations. In Japan, for example, permanent and non-permanent residents have to pay taxes on foreign income, while non-residents do not pay taxes on foreign income. Another example: the Canada Revenue Agency considers that all Canadian residents are liable to be taxed on their global income, regardless of its source. All income must be declared, whether it comes from Canadian or foreign sources. Hence, it is essential to constantly refer to the tax regulations of the host country and check whether or not it has a tax treaty with the home country.
