The concept of tax residency is to become a resident of a country that has little or no taxation on foreign worldwide profits that effectively allows you to eliminate your taxation requirements.
To move from a non-resident status to a residential status is different from country to country with some countries like Argentina, Uruguay or Costa Rica make it quite easy to get a resident permit whereas many European countries like Austria, Germany and Switzerland make it very difficult.
The difference between a second residency and a tax residency is that while a second residency gives you the legal rights to physically live in a country or territory, a tax residency is a place where you legally reside and are obligated to pay taxes.
The point of having a second residency is to give yourself a back-up plan so that you have another country where you are legally allowed to live. While that might be an appealing in an of itself, it is very different than establishing a tax residency.
If you are a resident in a high taxed jurisdiction you are liable to pay taxes based upon your income generated.
Choosing a second country where you are able to establish tax residency is important in order to transfer your tax obligations from your home country. In order to transfer your obligation, you must declare to your former country of residency that you are now liable to taxation in a different country.
The most common test whether or not you qualify to become a tax resident was often determined by the number of days you spend living in that particular country in a year. In the past, it was a common rule that if you lived more than 183 days per year in any one place then you were considered tax liable.
However, the rules have changed and it has unfortunately become a lot more complicated. While it is different for each country, many high tax jurisdictions especially those that seek to keep their resident tax liable, have created a multifaceted residency test to determine your liability in order to make it more difficult to leave.
This test was made to determine whether or not a resident had a substantial connection with his/her country.
A “substantial connection” is a term that can be widely used and arbitrarily applied. It is used to determine whether or not an individual has a connection with their home country through:
Severing these ties with your home country may be the only way to move tax obligations to another country as being considered a tax resident is about the long-lasting relations that you have with the territory.
While tax residency may not be the only option in order to effectively reduce your tax burden is the most comprehensive.
Some popular offshore tax residencies that offer low or no tax residency opportunities are Andorra, Portugal and The Cayman Islands. Each of the countries offers individuals the opportunity to establish some form of residency through their programs that gives you the benefit of not having to pay any taxes on foreign-sourced income.