First principle of taxation
Residence jurisdiction vs source jurisdiction
Rules governing tax residence
Jurisdiction that may not have rules defining tax residence
Trust vs residence rules
Tax Residence Certificate
First principle of taxation
Income can be earned from economic activities, and income can also be derived from properties that a person owns.
Residence jurisdiction vs source jurisdiction
Under a residence jurisdiction, income may be taxed under the tax law of a country because of a nexus between the country and the person earning the income, irrespective of the place where the income is earned.
Under a source jurisdiction, income may be taxed under the tax law of a country because of a nexus between the country and the activities that generate the income, with no reference of the residence of the taxpayer.
Most countries or jurisdictions adopt both the residence and source concepts in the tax system, such as the U.S. and China. Some of the jurisdictions only adopt the source concept in the tax system such as Hong Kong and Macau. Tax residents are entitled to claim credit for tax paid on foreign income but non-tax residents are not entitled to do so.
Some jurisdictions like the Cayman Islands and BVI, do not impose income tax and their tax laws do not define residence for tax purposes. Companies that are incorporated in those jurisdictions have no residence for tax purposes.
Conflicts between source and residence
In case that the same income is both taxed by a residence jurisdiction and a source jurisdiction. The source jurisdiction shall take precedence over the residence jurisdiction. In any bilateral double tax agreement, the tax right is allocated to the source country.
Rules governing tax residence
Tax residence is defined under the domestic legal rules of a country or jurisdiction. For purposes of implementing the exchange of tax information, the OECD has provided a platform where one can search for the rules governing tax residence in respect of individual countries/regions. [read]
Jurisdictions that may not have rules defining residence
- Some jurisdictions do not impose taxes on income whether or not a person earns any income.
- Some jurisdictions only impose taxes on income on activities that a person performs within the country. One example of these jurisdictions is Hong Kong.
- Therefore, the jurisdictions mentioned in above bullets do not have legal rules defining residence for tax purposes. If any, the residence rule only applies to some specific types of income such as airline and shipping service income.
Trust and tax residence
- A trust is a legal arrangement. Therefore it does not fall into the scope of a legal entity that has a residence. Trusts are deemed to be an entity by some countries in order to bring them into the tax net.
