The Ultimate Guide to Tax Residencies & The 183 Day Rule

The famous 183-day rule is frequently abused when it comes to assumptions that actually used in real life. It is important to know that the 183-day rule is actually an exception to the basic rule. Also, it is totally related to the taxation of cross-border employee remuneration.

What is 183-day rule?

The 183-day rule shows how the applicable income taxation rights are allocated between the signatory countries. This is in the case of cross-border employment income. These are the needed tie-breaking rules. It is because in the case of cross-border work, at least two tax jurisdictions have an automatic involvement, each with a different set of local tax rules. This is a rule that is usually encompasses in bilateral tax treaties between countries. Also, it determines how the rights to tax employment income are allocated between treaty countries in the event of cross border employment. Sometimes, a different rule may apply than the 183-days-rule especially in case of really old tax treaties.

So, before even considering, one must always check first whether the rule even applies. This is only the case if the country where one lives and the country where he or she works have concluded a bilateral tax treaty and they have included this rule in that tax treaty. It is important that one must check if a treaty applies, and what the treaty actually says.

Living in Some European Countries in 183 Days

Malta

You are not a tax resident in Malta if you live there for less than 183 days . However, you have to only pay on the income that you earned in the said country. Also, you may be considered as a resident if you regularly spend a respectable time in Malta even if it is just less than 183 days in a year. Its income tax rate is 0% to 35%.

Greece

Living in Greece for less than 183 days can still make you a Greek tax resident. This is when the center of your life is there, your entire family is living there and you have your children’s education in there too. When it comes to income tax rate, it has a 22% to 45% of it.

Cyprus

You will pay tax on the income you earned in Cyprus even if you only live there for less than 183 days. On the other hand, if you earned an income from Cyprus or outside, it is mandatory to pay taxes especially if you live in Cyprus for a period exceeding 183 days. The income tax rate is 0% to 35%.

Bulgaria

Bulgaria is just like Malta where it says that you are not a tax resident if you live there for less than 183 day. Also, you will only be paying tax on the income that you earned in this country. However, living in Bulgaria for more than 183 days will make you pay tax on your income wherever in the world you earned it. They have a flat rate of 10% income tax.

Portugal

Living for less than 183 days in Portugal will not make you as a tax resident but you will be paying tax if you earned an income from this country. Nevertheless, whether you consecutively live for more than 183 days in Portugal or not, your worldwide income will be taxed in this country. Its income tax rate is 14.5% to 48%.

Spain

The income that you earned in Spain is taxed even if you live there for less than 183 days and not considered as a tax resident. However, you’ll be paying your worldwide income in Spain if you live there for a period that exceeds the 183 days. Income Tax Rate: 19% to 45%.

What is the criteria of the 183-day rule that you need to meet?

Foreign countries such as the Netherlands does not allow an individual to physically stay for more than 183 days. The moment he or she takes the airplane out is a physical day in that foreign country. The 183-day rule is applicable in a one calendar year, or if the tax year is not the same to the calendar year. For example, the United Kingdom, the 183 day period is counted in the 12 months of the other calendar year.

During the period that a person is physically staying in less than 183 days in Netherlands, an employer, who is not a resident in the said country, is paying him or her. His or her salary can’t be allocated to a permanent establishment that his or her non Dutch employer has in Netherlands.

How not to use the 183-day rule?

The most simple situation is that a person should stay much longer than 183 days. Some focus on the working days while others forget the travel days.

One clear scenario is this: An overseas person who works for less than 6 months in Netherlands thinks that no Dutch tax should be applied to him or her. The rule does not apply since that overseas person who works for a Dutch company is not sent from abroad by a foreign employer.

Moving on, there are subcontractors who think of using the 183-day rule to a 6-month contract. However, subcontracting only happens in the Netherlands if the company of that person that  he or she is working with, nearly has their own UK Ltd. In Netherlands, it is called WAADI employment agency if the UK Ltd is registered there. The Dutch rules with respect to payment in the Netherlands apply upon completion. Hence, Dutch tax rates apply.

How to count the 183 days in the 183-day rule?

The assumption of most companies regarding on how to count 183 days is really incorrect since most of them refer it to a standard calendar year. This kind of incorrect assumption could cause an increased risk of noncompliance. As many countries’ rules consider and for the 183-day rule’s purposes, an official tax year or a 12-month rolling period in the United Kingdom for instance runs from the 6th day of April to the 5th day of April the following year.

Besides, the considered days of presence do not only limit to working days but more importantly to nonworking days such as annual leave and weekends. These are counted towards the all in all 183-day period for tax exemption purposes. Also, distinguishing whether the applicable tax treaty considers as within the limit departure and/or arrival days is really important.

Is this applicable to all countries?

In other countries, departure days are counted as one full day, whereas arrival days  are not counted at all. For instance, the country Sweden both counted the departure and arrival days as days spent in the said country for the purposes of the 183-day rule for treaty exemption qualification.

Other conditions to qualify for the exemption

The condition of not staying for more than 183 days within a certain period is not an exception for isolation. In general, there are two more conditions in order to qualify and benefit from the tax treaty exemption that is relevant to the treaty article of the applicable income tax treaty that have to be met as well. First, the employee should not be performing the activities for an employer in the work country. Second, the remuneration and related costs are not borne by the employer or by the home country employer’s permanent establishment in the country of work. The tax treaty exemption to the remuneration earned while working in another country apply only if all these conditions are met.

Is the 183-day rule universal?

The 183-day rule is not universal and does not apply to immigration and social security law. It is important to take into consideration that both the immigration and social security law are locally and internationally governed by separate of laws in the case of taxation.

Lets take the case of immigration legislation as an example. There might be some time limits specified in immigration legislation on a local that allows for an exceptional approach. This means that it is a reflection of what the favored strategies of each country regarding free trade, attracting overseas workers, and security. Therefore, the 183-day rule may not be relevant to immigration compliance considerations. It is always a requirement to have a review of the destination country’s immigration rules which is a case-by-case basis.

Is is the same with the social security rules?

The situation is the same with the social security rules. The tax treaty rules, although derived from bilateral treaties are not governing social security compliance in any way. Rules governing social security compliance differ to a huge extent in content and approach, both in national and international. For example, in the European Union, a multilateral social security regulation is in place with a vast network of bilateral totalization agreements with other countries. These countries govern the social security rights and obligations of migrating workers but none of these rules contain the 183-day exception.

Conclusion

A lot of misconceptions exist in the application of the 183-days-rule especially in the situation of cross-border employment. An increase risks in tax is one of the results of such. Also, unaccounted and undesired tax consequences such as double taxation could happen too. So, a bilateral income tax treaty must take in place in order to take advantage of the 183-day exception. In any situation, the 183-days-rule may still be useful as an advantage to the taxpayers, either achieving tax benefits or avoiding complexity. Hence, a certain level of knowledge and expertise is to play the rules at your hand.

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