In the context of Global Mobility, with employees transitioning from one location to another location, there will be potential for cross-border tax issues. Whether this is a temporary assignment or a permanent move, income taxes may be due in both the origin and destination locations and there is the possibility that the same income is taxable to both tax jurisdictions. So double tax relief is essential to minimize the tax costs.
Tax on employment income is generally due in the location of where the employee is working. This is known as taxation based on the source of the income. This may not be the same location where the employee is tax resident. Residency usually means that residents are taxed on worldwide income. This can result in two jurisdictions taxing the same income if there is no double tax relief. Fortunately for Global Mobility programs, there are several ways to take advantage of double tax relief. Understanding these ways to minimize tax costs is essential for the global mobility professional.
Home Country Residency and Ongoing Tax Exposure
Most of the world taxes individuals on a residence basis, meaning an individual that leaves the country on a long-term or permanent basis is no longer taxed on income received outside of that country. Citizenship-based taxation in the U.S. requires individuals to report all their worldwide income, with (partial or complete) double tax relief available through foreign tax credits, foreign earned income exclusion under the U.S. Tax Code section 911, or income tax treaty application.
Under residence-based taxation, an individual may still be considered a resident during a short-term or temporary assignment. Breaking home country tax residency is not always a “bright-line” test, or something that can be declared by filing paperwork. Governments intentionally leave residence open to interpretation of the “facts and circumstances” that are considered, such as owning property, frequent visits, location of immediate family members, center of economic nexus, voting registration, maintaining a driving license, etc.
If an individual is considered a resident of their home country while on a temporary foreign assignment, they will typically be required to report their worldwide income and make use of double tax relief methods.
In our first AIRSHARE post on the topic of double tax relief we discussed foreign tax credits and exemption with progression. Then we reviewed exemption from tax under local tax law and treaty rules. Today, we detail the unique considerations for U.S. citizens and permanent residents (green card holders).
Why not download our ‘Back to Basics’ whitepaper on the topic of U.S. residual taxation and double tax relief?
U.S.-Specific Rules – 911 and FTC, Citizens and GCH
U.S. citizens and permanent residents (known as “Green Card holders”) are always taxed on a worldwide basis irrespective of which country they live in or work in. U.S. citizens and Green Card holders run the risk of being taxed twice on the same income if they are also being taxed outside the U.S. There are two ways to mitigate double taxation for U.S. citizens and permanent residents residing outside of the U.S.
The first option is the foreign earned income exclusion (FEIE), also known as the 911 exclusion for the U.S. Tax Code section 911 which provides for the tax concession. For 2024, up to $126,500 of earned income received by a qualifying U.S. taxpayer may be excluded from taxable income if the individual has worked and lived outside of the U.S. for the entire calendar year. The exclusion can be increased for qualifying non-U.S. housing costs incurred; this housing exclusion amount varies by assignment location. The annual exclusion amount is prorated if the individual moved during the tax year.
The second option to avoid double taxation (which can be used exclusively or in conjunction with the first option) is the foreign tax credit. A tax credit can be taken to reduce the U.S. tax liability with respect to certain non-U.S. income taxes incurred on income earned outside the U.S. This credit amount is limited to the U.S. tax that would have been assessed on this income and does not apply to any employment income that has subject to the foreign earned income exclusion.
U.S. States – Domicile
Some states have objective tests to determine whether an individual is a tax resident and subject to worldwide taxation. Typically, these tests are based on the amount of time spent in the state such as spending more than 183 days during the tax year in that state. Other states have alternative tests to determine tax residency based on the concept of domicile. Domicile will often look at a range of facts and circumstances such as maintaining a center of economic interest in their home state, such as voting, owning property, family members remaining in the state, intention to return to the state after the assignment is complete, etc. These domicile rules can sometimes be difficult to apply, and do not necessarily align with the U.S. federal rules. States may not have the same double tax relief provisions as allowed for U.S. federal purposes.
