People tend to treat the terms residence and domicile as the same. However, the two have specific legal and subtle differences, particularly concerning tax implications. This article will walk you through everything you need to know about residence and domicile taxes, and other critical aspects of these different legal definitions.
Domicile and Residence Differences
What is the difference between residency and domicile? Residency is a loose term for where someone chooses to live. You can easily have multiple countries of residence.
Domicile is more permanent and is effectively somebody’s home base. Once you move into a jurisdiction and take steps to establish your domicile in one country, that state becomes your tax jurisdiction.
To understand the substantial connection and difference between the two, let us cite an example that is easier to understand.
If you are a student and attend university or college, you may have to live in the college dorm for a few years. The college dorm is one of your residences. The home you are leaving to study in college is your domicile home.
Domicile
Domicile is the legal definition of the place or country where you have a lawful and official permanent home. It is your main residence where you may choose to reside after some time.
Domicile status means an individual has a domicile in their country where they have a permanent or primary home. Nobody can have more than one domicile home. This status also makes you a part of specific laws undertaken by your country’s government authority.
Domicile: The requirements to establish domicile residence vary from one’s domicile country to another. However, the critical factor required to establish a domicile home depends on the number of days you spend in the domicile country. For example, you can establish your primary residence if you stay for 183 days according to some legal terms in some regions.
Residence
A residence is legally termed as a temporary home where you reside for a certain period. It is said that you can have more than one residence but have only one domicile home. The key difference between residence and having domicile is a person’s intent to return to their primary home.
Residence: The requirement to be a lawful resident in a country or state is to live there for at least 183 days per tax year or visit the place frequently with the intention of staying. This can deem you as a resident for tax purposes. Once you have a legal residence, you can live, study, work, or establish a business in the country. Individuals can gain residency through various means such as work permits, family, or by investing in the country.
Take a look at our Residency by Investment Ultimate Guide by Experts
Residence vs Domicile Examples
To understand the distinctions between residence and that of domicile, let us cite some examples.
- John had lived in the United States of America for his entire life, making it his home country. He moved to the United Kingdom on a six-month job assignment, after which he will return to the United States. The United States of America is his domicile, while the United Kingdom is his residence.
- Dean and Alice grew up in Brazil but own property in the United States and intend to change their domicile to the United States. They acquire Green Cards, open US bank accounts at a local bank, and register to vote as permanent residents. The United States is now their principal home and domicile.
Domicile Challenges
It is essential yet difficult to understand domicile rules. Being clear about your intent is vital when choosing a principal home. A domicile is your permanent home where you intend to live for the foreseeable future.
Determining a domicile can be easy if you have only one home. In this case, your residence and your domicile is the where you live.
If you have two homes in two different countries, you must determine which one is your domicile. The two places you stay can be of various structures such as apartments, houses, or other residences. No matter where you stay longer, the country you intend to return to and reside in is your domicile or primary home.
Proving intent
When trying to prove intent, the length of time you spend in a home does not determine your domicile and residency.
The critical factor in determining your domicile is your intent. Many individuals choose to state their domicile depending on various factors they benefit from. These factors can be based on taxes such as state tax on income.
Hence, the true intent of an individual is determined by other authorities. These authorities can include judges and revenue agents. If you have changed your domicile and want to state a new domicile as your primary home, it is advisable to go through a thorough legal process and sever all ties to your prior domicile.
Domicile versus Residence Taxes
It is vital to determine and state your domicile for tax purposes. There are three main types of tax liabilities involved, including:
- Personal Income Tax
- Capital Gains Tax
- Inheritance Tax
Income Tax
Depending on the tax laws in the country where you hold residence, you may be liable to pay state taxes on your global income. Your financial assets or residences in other countries can fall under the tax policies known as worldwide income tax.
Residency rules in many nations dictate that upon becoming a resident, you acquire tax status within the country, thus making you liable for taxation. The tax rules for your domicile may differ if it is not your place of residence and your country of domicile practices residency-based taxation. In this case, you would not be liable to pay taxes from an income.
Should your country of domicile impose territorial or citizenship-based taxes, you would be liable to pay income taxes if you’re a citizen of the country or you earn income there.
Capital Gains Tax
Owning financial assets or property in foreign jurisdictions and determining domicile is important for state income taxes. Most countries impose territorial taxes regardless of where you live, so you can expect to pay tax on capital gains in your country of residence or domicile.
Specific jurisdictions, such as Caribbean citizenship by investment countries, do not charge Capital Gains Tax regardless of immigration status.
Inheritance Tax
Like capital gains, inheritance is subject to taxation in both the place of residence and domicile based on territorial taxes, meaning that the tax is levied on assets located within the jurisdiction. However, individuals can avoid paying taxes on inheritance to taxing authorities in countries that do not impose inheritance taxes, including Cyprus, St Kitts and Nevis, and Vanuatu.
Determining Your State Taxes
State Income Tax: As mentioned above, depending on the state’s tax framework, domicile states and taxing authorities may tax you on your worldwide income. Some legal constructs require individuals to pay taxes and undertake all tax liability proposed by the state government whether they live in the country or maintain a foreign residence.
Death Taxes: The primary location where death taxes are imposed is your country of domicile. If you have yet to fully sever ties with your previous domicile property, you may face significant tax liabilities on both properties.
Establishing a New US Domicile
Individuals may choose to change their domicile for various reasons. If you wish to establish a new domicile, you must undertake the following steps to do so lawfully:
- Change your driver’s license details and get it authorized by your new domicile state.
- Update the address of the automobile registration.
- Update your voter’s registration.
- Inform your bank of your new primary address and locate your new local branch.
- Show your last state income tax and tax return that you have paid for, establishing transparency for tax purposes.
Change your domicile
The two primary conditions required to change domicile are:
- You are leaving the country where you are domiciled and settling in a different country permanently
- Firm proof that establishes your intention of staying in the new domicile home for an indefinite period
There can be various other reasons for a person to change their domicile, but the points mentioned above are the two primary reasons an individual can change their domicile.
Physical Residency vs Tax Residency
Physical residency refers to the physical location where an individual resides. It’s determined by how much time an individual spends in a specific place and is typically defined by immigration laws.
Tax residency, on the other hand, is based on tax laws and regulations and may not always align with physical residency and immigration regulations. Tax residency depends on factors including:
- Number of days spent in the country
- Income earned in the country
- Assets held in the country
Individuals may be considered tax residents even if they don’t physically reside there, and be subject to paying income, capital gains, property, or other taxes based on their circumstances.
Frequently Asked Questions about Domicile versus Residence
What's the legal definition of domicile?
The legal construct of domicile is the primary home that you declare in legal documents for tax purposes, voting, bank, registering an automobile or pet, and receiving social security. You can have more than one residence but only one domicile.
What's the US difference between domicile and residency?
Tax residence or residence in the United States is a temporary concept that is determined for each tax year, depending on statutory residency. You are considered a statutory resident living in the US for a temporary period with a domicile in another country. If your domicile is outside the United States, you must still pay taxes on your entire income earned in the US and abroad.</p>
US domicile is permanent, referring to the United States being your primary home. As a legal term, domicile means playing a more significant role regarding legal matters and civil responsibilities.
Is your present abode your residence or domicile?
A statutory residence is where you live temporarily, whereas a domicile is the home where you live indefinitely. Your domicile of origin is based on your legal documents and authorized registration under state law.
Can I claim residency in another country?
It’s possible to live in one country and claim residency in another, depending on the immigration laws of both countries. Many have their own criteria for determining residency status, which may include factors such as the amount of time spent in the country or ties to the country through family or property ownership.
Can a person have two domiciles?
No, a person can only have one domicile.
How to acquire a Domicile Certificate?
You can acquire a Domicile Certificate or a Certificate of Residence based on the state laws and policies. For example, in the US, you must apply for a Certificate of Residence if you are a resident and have a taxation agreement, among several other procedures.
