How to Determine Your Tax Residence?

How to Determine Your Tax Residence?

The Importance of Tax Residency

Determining tax residency (also known as fiscal domicile) is a crucial factor in defining an individual’s tax obligations to a particular country, whether for income tax, capital gains tax, or even inheritance and gift taxes.

Each country has its own rules that define when a taxpayer is considered a tax resident, which can lead to significant tax implications. For instance, a person who is considered fiscally domiciled in France is generally subject to taxation on their worldwide income, except in certain specific cases.

Likewise, French inheritance tax applies to the entire estate of a person whose tax domicile was in France at the time of their death. In contrast, a non-resident for French tax purposes is typically only taxed on French-sourced income. Similarly, inheritance tax is generally only due in France on French assets when a person who lived abroad passes away, though exceptions exist, such as when the heir is a French tax resident.

In an increasingly globalized world, many taxpayers organize their lives across two or more countries due to career opportunities, family obligations, or a desire to live abroad while maintaining ties to their home country. This raises the question of how to determine tax residency.

Tax Residency Rules in France

The “183-Day Rule”

Many people are familiar with the 183-day rule, assuming that their tax residency is in the country where they spend more than half the year. While this rule is important, it’s not the only factor. In fact, determining tax residency involves considering several other criteria beyond just the number of days spent in a particular country.

Additional Criteria

French tax law, particularly Article 4B of the General Tax Code, specifies that individuals are considered to have their tax residence in France if they meet one of the following criteria:

1. They have their permanent home or main residence in France;
2. They carry out a professional activity in France, whether salaried or not, unless the activity is purely secondary;
3. They have the center of their economic interests in France.

These are alternative criteria, meaning a person is considered a French tax resident if they meet just one of these conditions.

The Role of Tax Treaties

In some cases, a person may be considered a tax resident both in France and in another country, according to each nation’s respective rules. Conflicts over dual residency can arise, as each country applies its own criteria independently.

To resolve such conflicts, the determination of tax residency is based on the relevant tax treaty between France and the other involved country or countries. Bilateral tax treaties help clarify the concept of tax residence, establishing clear rules for which country takes precedence, ensuring that an individual is only deemed a tax resident of one country.

Securing Your Tax Position: Determining Your Residency

Establishing your tax residency is a complex process that involves assessing various factors, including economic, professional, family, social, and even nationality-based considerations.

The French tax law firm CM-Tax, with offices in Lyon, Marseille, and Toulon, provides expert advice on all matters related to French tax law, including tax planning and tax disputes. Our team of English-speaking French tax advisors assists international clients with both real estate transactions and tax residency issues across France.