What is a tax resident: resolving the confusion between citizenship, residence and domicile once and for all

In the consultations I have given to clients, especially those moving to Portugal and asking whether it is more appropriate to leave permanently or to maintain dual tax residency, a frequent point of doubt is knowing what a tax resident is. Being a citizen of a country or a foreigner would have some impact for income tax purposes, whether in Portugal or Brazil. More than one client talks about "dual tax citizenship". In fact, the use of similar expressions such as "citizenship", "residence", "domicile" and "non-habitual residence" creates a lot of confusion.

The aim of this text is to explain what a tax resident is, and what each similar term means. This should also help to make it easier to understand why each country taxes worldwide income in a different way, and why it is so possible to have more than one tax residence.

Nationality has nothing to do with being a tax resident

To make it clear, then, whether or not having the nationality of a country defines the migration situation of an individual as a "citizen" or "foreigner". In addition to the citizen's duty to vote, foreigners have fewer rights than citizens to come and go, as well as to live, work, study or access public services.

Many countries, including Brazil and Portugal, require a visa to enter the country for longer than a visit, and registration as a foreigner to have the right to housing.

The core of the confusion lies in the word "residence" itself. In everyday life, to be a resident means to inhabit some property, to adopt it as a place of residence. In other words, it is linked to exercising the right to housing. Citizens always have this right. A foreigner can acquire a certain type of visa in order to acquire this right to housing, i.e. to be able to occupy a property as a place of residence.

But that's not the same as becoming a tax resident.

What is a tax resident, in concrete terms?

To have or not to have tax residence sets the tax status of a person for income tax purposes. The non-resident is liable to pay income tax only on income sourced in that country, while the tax resident is liable to pay income tax without geographical limitation, on all income. Brazil, Portugal and the United States tax the income of their residents on a worldwide basis.

That's why I always add the word "fiscal", to reduce confusion between "being a resident" and "being a fiscal resident". Each state defines, in its own legislation, what type of link a person has with the country that denotes tax residence. And so new confusions arise:

• the United States directly links tax residency to nationality, so that a person's migratory status and tax status are almost identical. There, a distinction is made between "non-resident aliens" (non-resident alienor NRA), "resident alien" (resident alien) and "American citizen" (U.S. citizen or U.S. national). The first is a non-resident and the others are tax residents (tax residents), and acquire an immigrant visa (green card) results in the acquisition of US tax residency;
• for Portugal, being a tax resident in Portugal directly links an individual's tax residence to spending at least 183 days in Portuguese territory within any 12-month period beginning or ending during the tax year, or staying, even for one day, in a property as a "habitual residence". In practice, this is the place of residence reported on the NIF ("tax identification number", equivalent to the Brazilian CPF);
• Brazil, on the other hand, has a confusing criterion, with small differences between Brazilian citizens and foreigners. In both cases, the Brazilian criterion boils down to definite moodIn other words, the intention to remain in Brazil because of family or professional interests.

But that's still not enough to clarify everything about what a tax resident is. For clients interested in moving to Portugal, there is also the status of non-habitual resident (NHR).

What is a non-habitual resident (NHR) in all this?

There is confusion in Portugal about what the status of non-habitual resident means in relation to what is a tax resident. This confusion comes, once again, from the colloquial use of the word "resident".

To define migratory status in Portugal, a person becomes a resident when, as a Portuguese citizen or a citizen of a European Union country, or having acquired a visa granting the right to live, they start to maintain an address in Portugal, registered with the SEF (Immigration and Borders Service) and the local council.

Becoming a tax resident in Portugal, as we mentioned, also depends on informing the place of residence on the NIF, before the Portuguese Tax Authority, equivalent to the Receita Federal in Brazil. So far, the word "resident" has two different connotations, both having to do with an address.

The NHR, however, is a tax benefit aimed at tax residents who meet specific requirements. Non-habitual resident status is granted to those who have just become tax resident in Portugal, not having been for the previous 5 years, and have met the deadline for opting for this tax benefit.

Valid for 10 years, the RNH provides for tax reductions on income from work in some professions, as well as on various types of income earned outside Portugal.

Therefore, being a tax resident is a tax situation, and opting for non-habitual resident status is taking advantage of a specific tax benefit granted by the Portuguese government.

Finally: what is a tax resident has nothing to do with tax domicile, nor with civil domicile directly

Having resolved the doubts about the relationship between nationality and tax residence, and between tax residence and the RNH, it was not enough to mention the difference between tax residence and domicile. This point generates fewer doubts, but it is the most complex part to explain.

The word "domicile" comes from Latin, probably formed by "domus" (house or home) more "colō" (to dwell). So again there is a concept here that denotes the connection with a property used for housing.

In law, however, this word has taken on a more technical meaning, in slightly different ways in each country. Domicile is used as a legal or contractual criterion to define the place that will be taken as the core of a natural or legal person's obligations.

For example, when someone files a lawsuit against a person, the domicile will be the place where that person must be found in order to learn about the lawsuit and defend themselves. From there, depending on the branch of law we are dealing with, "civil domicile", "electoral domicile", "fiscal domicile" etc. will arise.

In Brazil, the "definite mood" is one of the components of civil domicile¹Civil Code, arts. 70-78.This is why it is relevant in Brazil for determining an individual's tax residence.

But there is also "domicile for tax purposes", or "domicile for tax purposes"²National Tax Code, art. 127.. There, the importance of domicile is to know, for the purposes of internal organization of the Internal Revenue Service or other tax authorities, which office should be competent to inspect the taxpayer³XAVIER, Alberto. Brazil's International Tax Law, 7th ed., Rio de Janeiro: Forense, 2010, p. 218..

Similarly, the choice of an "electoral domicile" is linked to the location for the purpose of fulfilling electoral obligations, and so on with all branches of law.

Conclusions

This fragmentation of concepts with similar names, such as "residence", "tax residence", "civil domicile", "electoral domicile", etc., leads us to question whether it is worth maintaining a maze of similar words with different meanings.

Of course. As much as the evolution of law requires the emergence of new technical terms in different areas, in practice, no one should be a master of law to be able to solve their bureaucratic problems.

This is part of our mission: to help reduce the uncertainty of legislation. I hope this text has provided some support in that direction.

On this blog you will always find relevant, up-to-date information on the subject and guidance on how to avoid problems with the tax authorities and other authorities. Feel free to tell us about your experience, share the content with other friends who need guidance and contact us by e-mail at contato@tersi.adv.br or via WhatsApp. Click here to send a message now.

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References:

• 1
  Civil Code, arts. 70-78.
• 2
  National Tax Code, art. 127.
• 3
  XAVIER, Alberto. Brazil's International Tax Law, 7th ed., Rio de Janeiro: Forense, 2010, p. 218.