What is the fiscal residency?

As an expat, you might know what your legal residence is and that having residency in a foreign country gives you the right to stay there for different purposes, such as working, running a business or studying. On the other hand, fiscal residency is more of a taboo, and very few people actually talk about it.

In a nutshell, fiscal residency is the ability of a country to tax your income independently of the country where from where you actually obtain that income.

Usually, even if you obtain residency in a foreign country and live there, your fiscal residency remains in your home country and you have to go through a difficult procedure in order to change it.

The relationship between all your earnings and your fiscal residency

As a fiscal resident of a certain country, you have the legal obligation to report all your earnings in that country. Therefore, if you work in Romania and have fiscal residency in the US, you have the legal obligation to report in the US all the income you receive in Romania and tax it accordingly to US legislation and international treaties, if applicable.

Therefore, establishing your tax residency has a major impact on what taxes you pay in each country, either your home country or the country in which you live as a foreigner.

Double taxation treaties and their effect on the taxes you pay

We are sure that nobody wants to pay taxes twice for the same income. For example, no one wants to pay tax wage in Romania and then pay taxes again in the US for the same wage, if the countries signed a treaty for avoiding double taxation.

This treaties take each type of tax from both countries and expressly state where the taxes should be paid and in what amount, respectively if the tax paid in one country is enough or it will be seen as a tax credit in the country where you have your tax residency.

The best part of the double taxation treaties is that most treaties establish that income from wages will be taxes only in one country. However, you need to read and apply the treaty to your particular case, because as the solutions could always differ from treaty to treaty and from income to income.

Changing your fiscal residency

Considering the above, be aware that if you spend more than 183 days per year in another country, then you are eligible to apply for establishing your fiscal residency in that said country.

The procedure is quite bureaucratic and can take up to 6 months until the fiscal residency is actually changed. But if you can become resident in a country with lower taxes, it might be worth the wait.

Keep in mind that if you do not inform the fiscal authority that you have spent more than 183 days in their country, they have the right to declare you a fiscal resident, which could affect your taxes a lot. Respectively, you may be required to request refunds on the taxes you already paid in your home country and pay taxes again in the country where you spent over 183 days, plus interest and penalties.

Remus Popovici

Managing Partner – R&R Partners Bucharest

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