Discover the truth about territorial taxation
The differences of becoming a non-resident for tax purposes in the UK vs USA.
Many Digital Nomad entrepreneurs and location independent freelancers have left their homes. They are unsure about their tax liability in their country of citizenship. Becoming a non-resident for tax purposes requires specific steps and requirements for each country.
You might think “ I haven’t been there for years, surely I don’t owe any tax”. This might lead to unexpected surprises.
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The United States is infamously known for its worldwide taxation of its citizens. If you are unfamiliar with the term worldwide taxation or better yet, citizenship-based taxation (as opposed to residence-based taxation). Essentially, the government taxes citizens based on being a citizen of that country whether you live there or not.
Becoming a non-resident in the United States
Physical Presence Test
John is nomading around the world, splitting his time between Thailand, Indonesia and Mexico. He earns money from several different sources but is a US citizen. Therefore, the IRS expects him to file and pay tax on his income regardless of whether he does not live in the US. Fortunately, there is something called the Foreign Earned Income Exclusion. John can claim the FEIE under the Physical Presence Test because he is in a foreign country or country for 330 full days a year. This allows John to claim the earned income that he receives while being abroad.
John must be in a foreign country for 330 full days. Let’s look at a couple of examples..
John is flying home from Hong Kong to the US. His flight leaves at 6 a.m. on March 3rd. He arrives in the US on March 4. Since March 3rd was not a full day, he could not count that as part of his 330 full days.
But if John flies from Chiang Mai to Hong Kong on March 2nd, since he is not travelling to or from the US, March 2nd would be considered a full day and count towards his 330 days.
US citizens need to take special care if they are connecting via the US, and could potentially lose 2 days.
John is leaving Mexico city to fly to Dallas on February 5th at 1 p.m. Feb 5th will not count, as we already know. John isn’t staying in Dallas, but connecting on his flight to Seoul at 10 p.m. on the same day. Because of the length of the flight, John will not arrive in Korea until February 6th Dallas time ( not local time which would make it the following day). Since he will not have a full day in a foreign country on January 6th as well, he will lose 2 days because of this US flight connection.
If you are running short on days to visit the US, be cautious about flights going to and from the US.
Bona Fide Residence Test
One other option for US citizens for the FEIE is the Bona Fide Residence Test.
The IRS states:
- “You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year”
- You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for one year.
- If you go there to work for an indefinite or extended period and you set up permanent quarters there for yourself and your family, you probably have established a bona fide residence in a foreign country.
Determining if you are a bona fide resident of a foreign country:
- Factors such as your intention or purpose for being in the foreign country,
- Your activities in the foreign country
- Whether you paid taxes to a foreign country, among other things.
You are also not a bona fide resident if you ever made a claim that you are not a resident or subject to tax in the foreign country you stated as your residency to the IRS.
Uninterrupted tax year
“An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis. During the period of bona fide residence in a foreign country, you can leave the country for brief or temporary trips back to the United States or elsewhere for vacation or business.”
“To keep your status as a bona fide resident of a foreign country, you must have a clear intention of returning from such trips, without unreasonable delay, to your foreign residence or to a new bona fide residence in another foreign country.”
All of these points indicate you actually need to be a resident of another country. This wouldn’t be ideal for most digital nomads and remote workers who are hopping from country to country on a tourist visa, especially when it comes to whether you paid taxes to the foreign country, which is unlikely if you haven’t established any sort of residency.
A major key point about the FEIE is that the income needs to be earned. Not investment income, interests, capital gains, etc.
If John is collecting a dividend from his Hong Kong company, it would not have the benefit of falling under the FEIE because it is not earned.
So, yes, US citizens have to pay tax on worldwide income regardless of their residence but to become a non-resident under FEIE is pretty simple as filing your tax return with a couple additional forms. This is particularly the case with the Physical Presence Test.
Becoming a non-resident in the United Kingdom
For citizens or the UK the situation is quite different. There are several factors to consider to be considered a non-resident.
The HMRC recommends you inform them as soon as possible when you are no longer a resident (or vica versa).
They determine your residence in several different ways:
Automatic overseas tests
2.1 First automatic overseas test
You’ll be non-UK resident for the tax year if you were resident in the UK for one or more of the 3 tax years before the current tax year, and you spend fewer than 16 days in the UK in the tax year.
This is pretty simple, if you are in the UK less than 16 days, you will qualify as a non UK resident.
2.2 Second automatic overseas test
You’ll be non-UK resident for the tax year if you were resident in the UK for none of the 3 tax years before the current tax year, and spend fewer than 46 days in the UK in the tax year.
If you did not live in the UK for the previous tax years, you can spend more time in the UK as long as it is fewer than 46 days.
2.3 Third automatic overseas test
You’ll be non-UK resident for the tax year if you work full-time overseas over the tax year and:
- you spend fewer than 91 days in the UK in the tax year
- the number of days on which you work for more than 3 hours in the UK is less than 31
- there is no significant break from your overseas work
This is a little confusing, as what can be determined a “significant break” from your overseas work? Assuming you are working “full-time”, this shouldn’t be an issue. Also, this would technically allow stays up to 90 days in the UK and even allow you to work there as long as its for 3 hours or less and less than 31 days during the year.
A situation to return home to help a sick relative might be a situation where this would play out.
If you have a significant break from overseas work you’ll not qualify for full-time work overseas. As mentioned before, you will need to working full time overseas.
There are exceptions if you did not do so because you were on annual leave, sick leave or parenting leave.
Keep in mind there are situations you will automatically be considered a UK resident.
Automatic UK tests
- You’ll be UK resident for the tax year if you spend 183 days or more in the UK in the tax year.
- Second automatic UK test:
You’ll be UK resident for the tax year if you have, or have had, a home in the UK for all or part of the year and the following all apply:
- there is or was at least one period of 91 consecutive days when you had a home in the UK
- at least 30 of these 91 days fall in the tax year when you have a home in the UK and you’ve been present in that home for at least 30 days at any time during the year
- at that time you had no overseas home, or if you had an overseas home, you were present in it for fewer than 30 days in the tax year
If you have more than one home in the UK, you should consider each of those homes separately to see if you meet the test. You need only meet this test in relation to one of your UK homes.
This is where it gets more complicated and confusing. To sum up, it is best that you don’t have a home to return to in the UK, especially if it is available to you for a period of 91 days. It is in your best interest to rent it out or consider to place it on Airbnb. Even if you have a relative who has bedroom open to you for 91 days, this could leave you on the hook. Best to avoid being there for 30 days. Also good to show you have a home to return to (abroad) while you are visiting in the UK, to avoid any issue with having no overseas home and in it less than 30 days in a tax year.
- Third Automatic UK
You’ll be UK resident for the tax year if all the following apply:
- you work full-time in the UK for any period of 365 days, which falls in the tax year
- more than 75% of the total number of days in the 365 day period when you do more than 3 hours work are days when you do more than 3 hours work in the UK
- at least one day which has to be both in the 365 day period and the tax year is a day on which you do more than 3 hours work in the UK.
Sufficient Ties Test
This is an example to test if you have enough ties to be considered a UK resident. Particularly if you do not fall into the previous two categories: Automatic overseas tests and Automatic UK tests.
If you were not UK resident in any of the 3 tax years before the one you are considering, you’ll need to check if you have any of the following for the current tax year:
- a family tie (Husband,Wife, civil partner or Child)
- an accommodation tie (Home available to you in the UK)
- a work tie (more than 3 hours of work a day in the UK for at least 40 days in that year)
- a 90 day tie (spent more than 90 days in the previous 2 tax years)
Here is a chart from HMRC to show you how many ties you need based on the number of days spent in the UK for the said tax year if you were a resident in any one of the past 3 tax years.
| Days spent in the UK in the tax year under consideration | UK ties needed |
| 16 – 45 | At least 4 |
| 46 – 90 | At least 3 |
| 91 – 120 | At least 2 |
| Over 120 | At least 1 |
And if you were not in the UK for any of the previous tax years.
| Days spent in the UK in the tax year under consideration | UK ties needed |
| 46 – 90 | All 4 |
| 91 – 120 | At least 3 |
| Over 120 | At least 2 |
This all may be a lot to digest, book a consultation to let us know your needs and we can see how we can best help you at Nomads Accounting.