Foreign Income and Tax Residence: Where to Pay Taxes?

Determining tax residence can be confusing – whether you’re a Czech working abroad or a foreigner working in Czechia. Discover the criteria that will help you know where you should be paying income tax.

General Rules for Tax Residence

It sounds inviting – you find a country with an interesting social or tax system and choose to start your business or freelance work there to take full advantage of these benefits. But that doesn’t mean you instantly become a tax resident for that country.

The rules for determining residency derive from the requirements of the given international double taxation agreements. These take priority even over Czech income tax law, which sets the criteria for determining residency at 183 days spent living in the Czech Republic.

A tax resident is only allowed to be a payer (either a company or a self-employed person) in one country, where it pays taxes on all its forms of international income. Americans are the exception – they have to pay income taxes in the USA regardless of the country in which the money was made.

You are then a non-resident taxpayer in other countries where you receive income.

Criteria for Assessing Tax Residence

If you’re a commuter from abroad, an athlete, a manager who travels around the world, or even an artist or a programmer working from the beach, figuring out your tax residence can be a harder nut to crack.

Always look through the agreements for your given country to find the specific requirements for determining tax residence. However, you’ll most often come across the five criteria types (or something similar) described below.

When assessing your tax residence, start with the first criteria point. You don’t need to go through them all – as soon as one point determines your residence, you don’t need to bother yourself with the rest.

1/ Permanent Flat

The payer is a tax resident of a given country if they have access to a permanent flat there. This doesn’t mean an official permanent place of residence but rather long-term housing that is available to them at all times – whether they own or only rent it.

You can prove this point by presenting an excerpt from the land register, your rental agreement, or confirmation of payments made for rent, electricity, internet, and so on. Living with your parents or at your friends’ place does not count as a permanent flat, even if it is available to you at all times.

If you’re employed in a country that is not within the standard commuting distance, then it’s automatically assumed that you have a permanent flat. That is unless you prove otherwise with boarding passes or hotel receipts.

2/ Centre of Interest

If you’re unable to determine residence with a permanent flat, then the centre of interest criteria comes next. This point deals with the question of where you have your closest personal and economic ties (i.e., family and social relations, where you work or your place of business, where your bank accounts are, where your driving license was issued, where you engage politically or culturally, etc.).

3/ Primary Location of Time Spent

If step 2 doesn’t cut it, then you’ll need to look into proving where most of your time is spent. This point is only used rarely to assess tax residence.

However, a good example of where this criterion would apply is to a child-free programmer who flies around the world and works from various coffee shops, or a virtual assistant performing administrative work for their clients while sipping drinks on the beach.

4/ Citizenship

If you can’t establish your tax residence via a permanent flat or your centre of interest, and you happen to spend exactly 6 months of the year in two different countries, then tax residence is determined by your citizenship.

5/ Agreement from the Ministers of Finance

In extremely rare cases, residence is finally decided by the Ministers of Finance of the involved countries.

Practical Examples of Determining Tax Residence

Permanent Flat in the Czech Republic and Slovakia

A Slovak citizen and entrepreneur (programmer) owns property in the Czech Republic and Slovakia. His wife is in Slovakia, but he no longer lives with her and has yet to submit his request for divorce. He spends most of his time in Czechia, where he lives with his girlfriend. And yet, he was determined as a tax resident of Slovakia with the reasoning being that having a wife in Slovakia bears more weight than a lover in Czechia. The client was surprised because up to this point, he’d been paying income tax in Czechia.

Commuters

A woman lives on the border with Austria and is married to an Austrian. They own property both in the Czech Republic and Austria, while she also works in Austria and takes her children to school there. However, she’s considered a Czech tax resident because she also has a nonprofit there, she speaks Czech at home, and after work, she returns home to her Czech property.

Worried About Taxes? We’ll Take Care of Them!

Unsure if you’re paying your taxes correctly? We’ll process your personal income tax returns for you or help you with doing business abroad. Reach out to us using the form below and we’ll find a solution together.

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