Watch out: Common interpretation of 183-day rule could actually mean tax evasion!

162313202Having talked about the myths surrounding business visas last month, I thought it’d be good for us to look into one of the tax myths, and I believe the biggest one out there is the 183-day rule!

The 183-day rule is normally quoted as the rule that would enable a person who is a tax resident of one country (country A), to work in another country (country B – where it is assumed he or she is not resident for tax purposes) for up to 6 months without having to pay any taxes on the income earned during that period in either territory!

It sounds like a dream, but this is in fact quite a distorted interpretation some have assumed as accurate when considering double tax treaties. Even though the 183-day rule tends to be mentioned as if it were an absolute truth like the law of gravity, I’m afraid it isn’t! So, for example, let’s look at the actual official title of a tax treaty:

CONVENTION BETWEEN THE GOVERNMENT OF  ‘COUNTRY A’ AND THE GOVERNMENT OF  ‘COUNTRY B’ FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL

Note the word double right before the word taxation, because that makes ALL the difference here: these bilateral agreements have been signed by countries in order to avoid double taxation and not in order to completely avoid taxation! If anybody had any doubt, the second part of the title clarifies it further by specifying it is for also preventing fiscal/tax evasion!

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Let’s unpack this a bit more and get some facts:

  • In order to try to apply the rule, first one needs to verify that a tax treaty between the two relevant countries has been signed and is currently in force;
  • Many tax treaties tend to follow what is called the OECD model, but they do vary and there are other models such as the UN model, meaning the interpretation of the rule may depend on the countries it applies to and the actual model the treaty is based on;
  • The 183-day rule applies to workers engaged as employees only, and there are certain conditions that have to be fulfilled so that the double taxation can be avoided;
  • In some cases it’s not even 183 days! Some countries mention 180 days or even 90 days;
  • The 183 days can be considered within a tax year, any twelve months or the calendar year, so it will again depend on the treaty, etc.

When it comes to taxes, things are not always that straightforward, so the bottom line is that the 183-day rule as it is normally quoted oversimplifies things and is therefore very misleading. The fact that an applicable tax treaty exists and that it includes the 183-day rule should not be taken as a synonym of or understood as tax free income!

Taxation is such a vast subject and there is so much more to say, but I think we’d better stop here for now. However, next time you hear someone say that there will be no taxes payable on specific earnings due to the 183-day rule, do ask more questions and if not clear, seek professional advice. Otherwise you could be entering the field of tax evasion and I’m sure you don’t want that!

And before I go, please let me just mention one last thing: the 183-day rule should provide relief on income tax only – social security contributions (employee’s and employer’s) are not covered by double tax treaties so that is a completely separate subject! Maybe we can look at that next time?

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Helga Venturini Townend

Helga Venturini Townend
Helga Venturini Townend is the founder and director of International Compliance Experts Ltd (ICE) and has extensive experience in contingent workforce compliance matters. She can be reached on helga (at) icexps (dot) com.

Helga Venturini Townend

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