Residency-Based Taxation

Full Definition

In a residency-based taxation system, the place of residence—not the source of income—determines tax liability. If you're considered a tax resident of a country, that country generally requires you to report and pay taxes on worldwide income, not just income earned within its borders.

Key principles:

• Tax residence is defined by local laws (e.g., physical presence, center of vital interests, habitual abode).
• Common thresholds include:
  • 183-day rule: Present in a country ≥183 days/year
  • Permanent home test: Where your habitual residence is located
  • Economic ties: Location of bank accounts, employment, business operations

Some residency-based taxation countries include:

• United States – taxes citizens and residents on worldwide income
• Germany – global taxation if habitual abode is in Germany
• France, Italy, Canada, Australia – similar models apply
• Ukraine – tax residents pay tax on global income

Many countries pair this system with Double Taxation Agreements (DTAs) to avoid taxing the same income twice.

Use Cases

• A remote worker living in Portugal for over 183 days becomes a Portuguese tax resident
• A dual resident of France and Germany must determine primary residency per DTA
• A US citizen working abroad still reports global income to the IRS
• A startup hiring in Canada ensures local workers are classified as tax residents
• A compliance team verifies contractor tax status to manage global tax risk
• A digital nomad tracks days in each country to avoid triggering residency

Visual Funnel

1. Employee or Contractor Location Logged
2. Days-in-Country Calculated (183 rule, others)
3. Permanent Home or Center of Life Checked
4. Tax Residency Confirmed
5. Global Income Declared Locally
6. Foreign Income Evaluated via DTA or Tax Credit
7. Withholding + Filing Obligations Triggered

Frameworks

• OECD Model Tax Convention — Residency tie-breaker rules
• Double Taxation Agreements (DTAs) — Avoid double taxation
• CRS (Common Reporting Standard) — Info exchange between countries
• US Substantial Presence Test — Defines residency for non-citizens
• Local Income Tax Acts — Germany, France, Australia, etc.
• Global Mobility Compliance Models — Deel, Remote, Deloitte guides

Common Mistakes

• Assuming non-citizenship = no tax residency
• Not tracking physical presence → surprise tax obligations
• Believing remote work exempts you from local tax residency
• Ignoring passive income (e.g., dividends, crypto gains)
• Missing DTA provisions → paying double tax
• Assuming company presence determines worker tax risk

Etymology

“Residency” derives from the Latin residere — to remain or stay. In tax context, it refers to where one “lives” from a legal or fiscal standpoint. The term underscores the shift from territorial-based taxation (based on income origin) to personal residence as the primary nexus of tax responsibility.

Localization

• EN: Residency-Based Taxation
• FR: Imposition basée sur la résidence
• DE: Wohnsitzbasierte Besteuerung
• ES: Tributación basada en la residencia
• UA: Оподаткування на основі податкового резидентства
• PL: Opodatkowanie na podstawie rezydencji

Comparison: Residency-Based vs Territorial Taxation

Mentions in Media

GreenbackTaxServices

GreenbackTaxServices explains that residency-based taxation taxes individuals on income earned while residing in a country, unlike citizenship-based taxation which taxes regardless of residence.

Wikipedia

Wikipedia outlines that tax residence criteria vary by country, often depending on physical presence, domicile, or center of economic interests.

Wikipedia

Wikipedia describes the U.S. Substantial Presence Test, which determines residency for taxation based on days present in the country over a set period.

IRS

IRS explains that individuals meeting either the Green Card Test or the Substantial Presence Test are considered U.S. tax residents.

NTU Foundation

NTU Foundation describes RBT as taxing only U.S.-based income rather than worldwide income, marking a shift from citizenship-based rules.

RSM US

RSM US discusses a proposed bill allowing U.S. citizens abroad to elect to be taxed only on U.S.-source income under a residence-based system.

KPIs & Metrics

• % of Workers Properly Classified as Residents
• Number of Countries with DTA Coverage
• Days-in-Country Tracking Accuracy
• Tax Withholding Compliance Rate
• DTA Benefit Utilization Rate
• Audit Risk Score (per country)

Top Digital Channels

• LinkedIn HR & Tax Groups — #remotework #taxresidency
• Slack Channels — #globalpayroll, #mobility
• Podcasts — “Nomad Capitalist”, “Global Mobility Insider”
• YouTube — IRS expat guides, Remote.com explainers
• Twitter/X — Tax lawyers & nomad influencers
• Subreddits — r/tax, r/expatfinance, r/digitalnomad

Tech Stack

• Residency Tracking Tools — Tax Residency App, MBO Partners
• Global Payroll Platforms — Deel, Remote, Papaya Global
• Tax Compliance SaaS — TaxBit, Avalara, Sovos
• HRIS + Location Logs — BambooHR, HiBob, Deel
• Entity Management — Pulley, WorkMotion
• DTA Lookup Tools — OECD Portal, Tax Treaties Explorer

Understanding via Related Terms

Double taxation agreement

Seeing residency-based taxation through the lens of double taxation agreement shows how bilateral treaties help prevent individuals from being taxed twice on the same income.

Local compliance

Relating residency-based taxation to local compliance highlights how adhering to each country’s tax laws is essential when determining tax obligations based on residency status.

Global mobility strategy

Understanding residency-based taxation alongside global mobility strategy demonstrates how companies plan employee relocations while managing tax residency rules across jurisdictions.