Contractors that are looking for work in the Americas (including South America, Latin America, and North America) will want to know when they will become tax residents in the host country. Tax residency status will determine where you pay tax and on what type of income, regardless of your legal residency.
Although there is proximity and familiarity between the cultures in the Americas, each country sets its tax residency laws and enforcement methods. There are also many bi-lateral tax treaties to support international contractors.
What is Tax Residency?
Tax residency is a specific status that is applied to foreign nationals that work in a country for a certain period. If you meet the time criteria, you will be taxed just like a citizen of the country, with some exceptions. The most common period used is 183 days in 12 months, and after that, you are deemed a tax resident.
The 12-month period is usually ‘rolling’ which means it is not dependent on the calendar year and begins on the entry date. The period is also cumulative, so a quick visit home will not reset the clock just because you crossed the border. The time away is usually just not counted.
If you stay less than the tax residency period, you are taxed as a non-resident. That amounts to paying tax only on earnings inside the host country. Foreign non-residents may also be offered alternative flat-tax rates to keep things simple.
Once you cross the tax residency time threshold, you will usually need to pay tax on earnings outside the country as well, for the affected tax year. At first, this looks like unfair double taxation assuming you are still liable for tax in the other countries or at home. But there are ways to offset this result with some research and planning around tax treaties.
What are tax treaties and how do they work?
A tax treaty is a bilateral agreement between two countries that prevents double taxation of individuals with cross-border earnings. The actual rate applied and the country where it is paid will depend on the treaty. In general, the higher rate will apply, and there will be credits or offsets deducted in the tax return of the amount paid.
Case Example #1: A Canadian working in the US for two years
If you are Canadian and will be under contract with a client in the US for two years, you would meet the criteria (183 days) for US tax residency. However, you would not lose your Canadian tax residency as long as you maintain ties to Canada.
This is where the US-Canada tax treaty is helpful, as it does supersede other domestic tax rules. Under the treaty, you would continue to be a tax resident in Canada but be deemed a non-tax resident of the US, despite your long stay. You would only be taxed in the US on US-sourced earnings and then receive a credit on your Canadian tax return.
Case Example #2: A Brazilian working in the US for two years
Illustrate another way that double taxation can be avoided is that of a Brazilian who contracts in the US. Under Brazilian law, any citizen who lives abroad for 12 months or more will “lose’ their Brazilian tax residency and become a non-resident. As non-residents, they are only obligated to pay tax on Brazilian revenue, not their primary US revenue. They would still pay US taxes of course and would have to rely on a tax treaty for the first 12 months in the US to avoid double taxation.
How is tax residency different from legal residency?
A point of confusion with tax residency is how it differs from legal residency. Tax residency only relates to the right of the host country to tax your global earnings. It does not confer any type of legal residence, permission to stay or immigration status.
Depending on the country, legal residency has an entirely different set of requirements and qualifications that have to be met. This means that although you are taxed the same as a legal resident, you do not have any residency status.
Can remote work result in tax residency?
Because tax residency relies on one’s physical presence in a country, working remotely for clients in other countries will not meet the criteria. But if you were to visit your client periodically on a business visa it might open the door to scrutiny for tax residency. You would still have to meet the annual period, so it remains unlikely.
Examples of specific tax residency rules in the Americas
Foreign nationals: 183 days/12 months
Columbians: 183 days or 50% of income/assets are Colombian-sourced/held
Foreign nationals: 183 days/12 months
Peruvians: Domicile in-country (can be ‘lost’ with 183 days outside of the country)
Foreign nationals: 183 days/12 months or centre of ‘vital interests’ (income, home, etc.)
Mexicans: Cannot lose residency just by leaving or working abroad
Foreign nationals: 183 days/12 months, but only liable for Chilean sourced income for the first three years (similar to non-residents).
Chileans: Cannot lose residency by leaving or working abroad
Does the North American Free Trade Agreement (NAFTA) affect tax residency in Mexico, Canada, or the US?
NAFTA has many benefits for its member nations, including eased trade and immigration procedures. However, nothing in NAFTA affects individual tax residency rules or any applicable tax treaties. Immigration and tax authorities operate under different regulatory schemes, that may not always match. For example, the TN visa for Canadians to work in the US is explicitly “temporary”. However, this does not affect tax residency status.
How can Contractor Taxation help with tax residency?
If you don’t want to take any chances navigating the tax residency rules in the Americas, Contractor Taxation can be your valuable partner. We have a network of umbrella companies across the Americas with local experts who know all of the residency criteria and tax rates.
The umbrella company can also assist with handling client payments, withholding taxes, and negotiating any client disputes. Please contact us if you are interested in using an umbrella company for all of your contracting needs.