Tax liability Part 1
Tax residency is one of the basic pillars if you are talking about tax planning, tax optimisation or just have an unusual life situation. Foreign income, foreign business, possibly foreign residence, all of these can lead to a tax situation where you are tax resident in several countries at the same time.
Reporting tax liability for individuals
Tax residence for individuals means the country in which a person is considered a taxpayer for tax purposes. Tax residency basically determines the tax rules and regulations to which an individual is subject and which country's tax authorities are entitled to collect taxes on the individual's income.
Why residency matters:
In practice, in very simple terms, someone may receive income abroad but not have to comply with the tax laws of that country or pay tax there, but in the country where they are tax resident.
The determination of tax liability is generally based on the following criteria:
Permanent residence (habitual residence or "domicile") can also affect tax liability. Permanent residence is often a legal concept, and the tax system in some countries determines tax liability on this basis.
Your usual place of residence:
An individual's tax liability can be established in the country where he or she stays for the longest period of time. In many countries, tax residence is determined on the basis of length of stay. It is accepted that for stays of more than 183 days per year, an individual becomes tax resident in that country.
Personal family and economic relationships
You can also be declared a resident on the basis of personal family and economic ties, if there is evidence that these ties link you to the country. For example, an individual is not resident in any country for tax purposes because he or she has no address in any country or has multiple addresses in several countries. Or, to take another example, an individual travels extensively for work and does not spend more than 183 days in any one calendar year in any one country. However, he has a wife and children who live, go to school and go about their daily lives. A little facetiously, we also say that an individual's usual place of residence and family and economic ties are best mapped by where he has his toothbrush, for example, or where he takes his children to school or kindergarten in the morning. Even if you are not registered in the property but have access to it for permanent residence, it can be considered as a permanent residence.
Some countries determine tax eligibility on the basis of nationality. This means that citizens are subject to the tax system of that country, regardless of where they reside or what income they earn.
Tax treaties between two countries can also affect tax liability. Such treaties determine how potential tax conflicts and double taxation between the two countries concerned should be resolved.
For individuals, determining tax residence can be complex, especially if you live, work or earn income abroad. The determination of tax residence may vary depending on regulations, conventions and individual circumstances. It may be worth seeking expert advice on determining tax residence, especially if your tax affairs are international.
I have heard countless misconceptions on this subject. "I have a British address", "I have checked out of the country", "my foreign company pays my taxes", "I am abroad for more than 183 days", to name but a few. All of these could be true, but just to bang on about them is very dangerous. Generally speaking, it is not enough to take an ostensible measure, as state laws tax according to the actual residence of the facts. So it is possible for a Hungarian citizen to create a Slovak address and avoid Hungarian taxation for years. But it's important to be aware that if you happen to be scrutinised by the NAV, this will be of little use.
Determination of tax liability under Hungarian income tax law:
According to § 3 of Act CXVII of 1995:
According to § 3 of Act CXVII of 1995:
a) a Hungarian citizen (unless he/she is also a citizen of another state and does not have a domicile or residence in Hungary as defined in the Act on the Registration of Personal Data and Address of Citizens);
b) a natural person who, as defined in the Act on the Entry and Residence of Persons with the Right of Free Movement and Residence, exercises his/her right of free movement and residence for a period exceeding three months for at least 183 days in the territory of Hungary in a given calendar year, counting the day of entry and exit as a whole day;
c) a person with a settled status or stateless person covered by the Act on the Entry and Residence of Third-Country Nationals; and
d) from a)-c) a natural person not referred to in point (a), who
da) have their permanent residence exclusively in the country;
db) has its centre of main interests in the country, if it is not domiciled or not domiciled at all;
dc) has his/her habitual residence in the country, if he/she does not have a permanent residence in the country or has a permanent residence in a country other than the country of origin, and the centre of his/her main interests cannot be established;
the centre of vital interests being the State with which the individual has the closest personal, family and economic ties, and the permanent residence being the place of residence where the individual has settled and effectively resides on a permanent basis. Permanent residence does not change if the individual is temporarily staying abroad for a longer period."
The Income Tax Act is very clear about who is a resident individual. So, in the case of a person resident in Hungary and receiving income from abroad, the tax is payable to the Hungarian State. Except in cases where a double taxation convention between two states provides otherwise.
In almost all cases, the income from the property will be taxed separately and the place of taxation will be in the state where the property is located, rather than the state of residence.
Change of tax residence, but where?
In our experience, a large number of people who want to change their tax residence do not want to pay tax in their home country. Many of them do not because they may not earn their income in Hungary. There are also some who are running away from something, whether it is an enforcement issue, a credit problem, or we have clients who have "inherited" huge debts from their parents. If you want to escape paying tax, it is clear that it will not feel any better to pay tax elsewhere, so you need to look for a destination country where you can be exempt from taxation. This may be because we have income from abroad or because the tax system basically offers us tax exemption.
Such a country is United Arab Emirates, where individuals remain fully exempt from taxation. But expats also enjoy great conditions in countries such as Portugal or, for example, in South America, where many countries have territorial tax systems so that foreign income can be tax-free. For example, Italy has just introduced a tax ceiling of €100,000 per year, so now a lot of very high income earners are moving their residences to Italy. We will look at these countries in an upcoming article.
Summary of tax liability for individuals:
Determination and planning of residence will be the very first task, in case an income is (or may be) taxable in more than one country or someone wants to optimise tax. Tax optimisation is dealt with in a separate article. So it's not enough to look at one part of the picture, we need to look at the whole picture factually and take steps towards our goals. At present, we do not see serious disputes over the tax residence of individuals. However, as a Hungarian citizen, we strongly recommend that you comply with the provisions of the Income Tax Act.
The country of the bank account does not in itself give rise to tax liability, but if you are considering opening a bank account abroad, the foreign bank account our article may be of interest.
If the aim of our actions is to reduce taxes without any other real interest, we must pay the utmost attention to the smallest detail, and a pretence test will not be enough. It is always worth seeking the help of a specialist in international tax planning.