Introduction to Domicile and Residence
"What is the difference between Domicile and Residence?" is question expats often ask. If you are planning to move abroad, it might be useful to understand the difference between Domicile and Residence, mainly for income tax purposes.
Whether you need more guidance on tax laws in a particular country or need advice on your tax status, it is a good idea to seek the counsel of experienced professionals. Making a presumption about your tax status can have severe financial ramifications, however, understanding if you fall under the domicile or resident category is not straight forward.
What does Domicile mean?
The term domicile refers to the country where you have a strong connection to or where you have a permanent home. In other words, it is your home. You can have more than one residence, however, you can only have one domicile.
At birth, you are automatically assigned to the same domicile as your parents. This is called your domicile of origin and this is unlikely to change unless you consciously acquire a new domicile.
Why is your domicile important?
As mentioned in the beginning, it is essential to ascertain your domicile for tax purposes.
Tax liabilities are classified into 3 main sectors:
- Income Tax (from investment or employment);
- Capital Gains Tax;
- Inheritance Tax.
If you own property or financial assets in foreign jurisdictions, your domicile becomes a particularly important factor, especially when determining how your estate should be passed on in the event of your passing.
Changing your Domicile
Once you reach the age of 18, you are able to change your domicile. In order to do this, you will be expected to satisfy certain criteria together with evidence.
The minimum requirements which one is obliged to meet are the following:
- Leaving the country in which you are, at the time of application, domiciled and settle in another country.
- Provide strong evidence that you intend to live in your new location permanently or indefinitely.
When considering Maltese jurisdiction, it is particularly hard to obtain domicile status in Malta. According to Maltese administration, you may have multiple residences but only one domicile, which means that you will need to break all ties with other countries in order to achieve this status. Furthermore, once achieved, you will be taxable on a worldwide basis.
The said criteria for changing your domicile will vary and each case will be decided on its merit combined with the provided evidence.
It is worth noting that although you may take up Maltese Citizenship by Investment (IIP) you are still regarded as domiciled in your native country. IIP does not grant you domicile.
What is Non-domiciled status?
In order to be classified as a non-domiciled, you will typically be a foreign national residing in Malta, ie, you or your parents are not of Maltese origin.
If this is the case, you are considered a tax resident of Malta but your domicile will remain as your country of birth. If you are classified as a “non-dom” you will be unable to live in Malta indefinitely.
What does Residency mean?
If you are present in Malta for 183 days or more per tax year, then you are considered a resident, at least for tax purposes. Residency also grants you the right to live, work, travel, study and set up business in a particular country.
It is important to highlight that there is a difference between being a resident and a tax resident in Malta.
Let us elaborate.
What is Tax Residency?
As outlined by Article 13 of the Income Tax Act, individuals who spend more than six months of the year in Malta are likely to qualify as tax residents.
The following factors are considered when determining the residency of individuals:
- Place of abode;
- Physical presence, ie more than 183 days;
- Regularity and Frequency of visits;
- Intention to reside in Malta;
- Ties of birth;
- Ties of the family;
- Business ties.
In instances of dual residence, this is normally resolved by tax treaties, and one should consult with a tax advisor.
What does Tax Status mean?
Issued by the Maltese tax authorities, the tax residency certificate can be applied for on a yearly basis. A number of documents are needed in order for this certificate to be rewarded, to serve as evidence that you were physically residing in Malta.
- Proof of utility bills (water and electricity);
- Bank Transactions (money spent in Malta);
- Rental/purchase agreements.
Malta Tax Status
This refers to the status awarded to you when you take up residency through the residency programmes such as the GRP; for non-EU nationals; and the TRP; for EU nationals.
With this status, your income will be managed under source and remittance basis of taxation.
A benefit of acquiring residency with one of the programmes is that any income received in Malta or capital gains arising from outside Malta will not be taxed in Malta.
What is Ordinary Residency?
An ‘ordinary resident’ is an individual that spends the majority of their time, 183 days or more, in their home country, each year without taking major trips overseas.
Therefore when a resident travels abroad for a period of time, greater than the period spent in Malta, they are not considered as ‘ordinary residents’.
Taxes for Expats
Taxation in Malta with regards to an individual's income is based on a progressive model. That means, the higher the income, the higher the tax paid.
As an incentive for highly qualified foreign personnel, Malta has launched an incentive scheme targeting international executives. Professionals in the financial services, gaming and aviation sectors may benefit from a flat personal income tax rate of 15%on income up to €5 million. Any additional income earned which surpasses the €5 million mark is not subject to income tax.
Among other criteria, the executive must earn a minimum of €86,385 per year so as to qualify for this tax incentive.
The period of time in which this reduced tax rate applies depends on the professionals' nationality. EEA and Swiss nationals benefit from a period of 5 years and third-country nationals for four consecutive years.
Q1. if a person is not a Tax Resident anywhere, does it mean he/she is not obliged to pay tax anywhere?
In short, yes it is possible.
However, if the individual would like to open a bank account, most likely the bank will ask for a National Insurance number in order to receive the income. Therefore being a tax nomad will not serve you.
Q2. What is the double taxation system?
Malta has over 70 double tax treaties in effect;
Double taxation system serves to reduce withholding taxes when a foreign company is paying dividend to Malta;
According to the Domestic Legislation, if a Maltese enterprise is paying dividends outside of Malta, there will be no withholding tax even if there is no agreement;
Treaties act as ways of reducing the restricting tax on inbound dividends, interests and royalties;
It also provides a solution to dual citizenship conflicts where income is levied twice; and
When earning foreign income in Malta, if the foreign country and Malta have signed a relief tax treaty, then tax is paid in the foreign country. That amount paid will be deducted or refunded from the tax due in Malta.
Q3. What does Capital Gains Tax (CGT) mean?
- In layman’s terms, Capital Gains are the profits made on the transfer of particular assets like:
Immovable property (subject to final tax);
Securities and shares (but excluding those quoted on the Malta Stock Exchange);
The beneficial interest in a trust;
Business, Goodwill, Trademarks, Trade Names, Patents and Copyrights.
A tax year is regarded as a calendar year and Capital Gains are recorded in the tax return of the individual.
A provisional tax payment of 7% on the transfer value is payable upon transfer. If any tax is to be paid, it will be due by the 30th June of the following year. Immovable property is taxed at a final rate based on the transfer value. The value depends on the year the property was acquired and whether it forms part of residential development.
It is worth noting that there is no distinction between Short-term Capital Gains Tax and Long-term Capital Gains Tax
Capital Gains Tax Rates - with the exclusion of transfers of immovable property, capital gains are documented in the individual’s tax return for the year. Added to the individual's other income, the relevant tax rate will be applied to the total sum of income. (Transfer of Immovable Property is subject to a Final Property Transfer Tax Rate)
Capital Losses - They are set off only against any capital gains made during that year. Immovable property is however still taxed at the applicable final tax rate. Underutilized capital losses can be carried forward indefinitely, to be set off against future capital gains.
As outlined in this article, there are several distinctions between domicile and resident status. Especially when considering your options for tax purposes, it is crucial to be knowledgeable about your options.
For more clarity on your options, you can find out more here.