Today, the development and integration of the global economy allow individuals and companies to earn income in different countries. Although this has made borders less important for business, each country still applies its own tax rules to residents and non-residents.
If different countries use different rules to define tax residency, the same taxpayer may be treated as a tax resident in two countries at the same time. If both countries tax their residents on worldwide income, the same income may be taxed twice.
| Double taxation means that the same income, profit or property of an individual or legal entity is taxed by two different countries. |
Double taxation means that the same income, profit or property of an individual or legal entity is taxed by two different countries.
According to economic literature, there are two main ways to reduce or eliminate double taxation:
In many cases, countries use both methods at the same time.
Countries adopt different tax rules to regulate international economic activity. These rules are based on several principles, including principles designed to reduce double taxation.
For a person or company operating both inside and outside a country, it is important to understand not only the applicable tax rates but also the taxation principles.
The way income is taxed may change depending on which principle is applied. In general, taxation systems can be divided into two main groups:
In the first case, the taxpayer’s status is mainly based on the global taxation principle. In the second case, the territorial taxation principle is applied.
Understanding how global and territorial taxation principles are applied can help business owners better understand the tax system of a country before starting operations there. When choosing a country for doing business abroad, one of the main questions is how the future business and its income will be taxed. The concept of a resident is central to both global and territorial taxation systems. For this reason, it is important to understand who may be considered a resident for tax purposes.
| Residents are generally individuals or legal entities that are registered in a country or live there for a certain period and are subject to that country’s laws. Non-residents are generally individuals or legal entities that carry out activities in one country while having their permanent residence or registration in another country. |
The criteria used to determine residency may differ from country to country. Some of the most important criteria include:
The term “centre of effective management and operations” usually refers to the place where the company’s main business activities or management decisions are carried out.
Citizenship is generally understood as a legal relationship between a person and a country. It can be acquired by birth, descent or naturalisation.
| Naturalisation is the process through which a person who has legally entered a country, received permission to stay there and lived there for a certain period may obtain citizenship |
Citizenship gives a person certain rights, such as:
However, citizenship does not mean that a person must live or work in the country of their citizenship. Citizenship is usually a long-term status and can be difficult to lose.
A person’s place of residence, whether temporary or permanent, usually shows where they actually live and work. As a result, residency rights often depend on the person’s physical presence in the country.
Most people live in the country of their citizenship, but citizenship is not always the main factor in determining where a person lives. For example, a person may be an Azerbaijani citizen but live and work in Türkiye or Russia.
Tax residency, sometimes called fiscal residence, usually refers to the country where a person is required to pay tax, often based on the worldwide income principle.
A taxpayer’s status for tax purposes is determined by the domestic legislation of each country. Every country may apply its own definition of tax residency. Individuals are usually considered tax residents:
Depending on the applicable legislation, a person may be considered a tax resident of more than one country at the same time.
If you have dual tax residency, a double taxation agreement may help prevent the same income from being taxed twice. Professional advice may be useful in such situations.
You can contact Accounting.Az LLC for tax consulting services
A company established under the laws of a country and carrying out business activities there is generally considered a tax resident of that country. In addition, many countries determine the tax residency of a foreign company based on the location of its effective management and operations.
In practice, determining tax residency based on the place of management can be complicated. For example, this criterion has been used in the United Kingdom for many years, but its application may still involve uncertainty, as shown by a 2020 court case.
An individual or legal entity may be considered a tax resident of more than one country. If there is no international Double Taxation Agreement, or DTA, between those countries, this may result in double taxation. If a DTA exists, the agreement usually contains rules for determining which country the person or company should be treated as a resident of for the purposes of that agreement.
In the Republic of Azerbaijan, the concepts of residency, resident and non-resident status, as well as tax residency, are regulated by the Tax Code of the Republic of Azerbaijan. This topic will be covered in more detail in our next article.
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