Domicile – or your place of residence – can have a huge impact on your tax liabilities. However, understanding the concept of domicile and its subsequent impact on taxes can be tricky. Let’s break it down.
What Is a Domicile?
Domicile refers to an individual’s permanent place of dwelling. In other words, it’s where he or she permanently lives and resides. It is a legal term that denotes the relationship between an individual and a locality. There are three primary categories of domiciles:
- Domicile of origin: Domicile of origin typically refers to the domicile an individual acquires from his or her parents upon birth. This is not to be confused with place of birth. Just because someone is born in a specific country does not make that country his domicile of origin. For example, if a child is born in Germany to two American citizens, his domicile of origin will be America – not Germany. Domicile of origin is almost always derived from the parents. Domicile of origin stays with an individual until another domicile has been acquired.
- Domicile of dependency: Until an individual reaches a certain age (typically 16), domicile is linked to the person upon whom he or she is legally dependent. So, if in an Indian family immigrants to the United States with their three children and become American permanent residents, the children will also become residents, and their domicile of dependency will, therefore, be the US.
- Domicile of choice: Domicile of choice, sometimes also called necessary domicile, refers to a domicile that is self-acquired. For example, if a person from Argentina immigrates to the United States and eventually obtains a green card that grants him the right to permanent residency, the United States will be his domicile of choice. Typically, in order to change one’s domicile by choice, an individual must show that he or she is completely removed from their president residence and demonstrate a full intention to reside in another place. In other words, the Argentinean citizen wouldn’t be able to change his domicile to the US unless he was no longer living in Argentina and could prove he had the intention to stay in the US for the long term.
Non-Domiciles and Taxes
Domicile can have a significant impact on taxes. Domicile tends to have the biggest impact on an individual’s taxes when his or her domicile differs from his or her country of citizenship (e.g. a UK citizen domiciled in Japan or a US citizen domiciled in Peru). Different countries have different ways of determining whether a citizen is actually domiciled in it. In the United States, this is determined using the substantial presence test. A citizen is considered a US resident if he or she was present in the country for a total of 183 days during the current year and the two preceding years.
Just because a citizen isn’t domiciled in his or her home country doesn’t mean they are exempt from paying taxes. In the United States, an individual deemed to be a non-domicile, or a resident alien abroad, does have tax liabilities. The UK also recently tightened its tax laws on non-domiciles, and as a result, many UK citizens domiciled in other countries are now facing increased tax liabilities.
All US citizens – regardless of domicile – must file a US tax return. This isn’t to say that a resident alien abroad will face double taxation. The US has treaties with a number of countries to ensure that resident aliens abroad aren’t taxed twice on their income (e.g. the US and their country of domicile), and in many cases, they are actually exempt to paying foreign income below a certain amount. This amount changes from year to year.
It is important to remember that taxes can be quite complex. If you’re a non-domicile and need help understanding and planning for your tax liabilities, it may be worth it to contact a professional.