What is the 183-day rule? And how does it impact contractors?
Many countries use the 183-day rule to help determine where an individual is tax resident and liable for taxation on their worldwide income. This is generally done by an international ruling called the 183-day rule.
Generally speaking, the 183-day rule applies to the number of days within a 12-month rolling timeframe or calendar year an individual spends in that country. One important distinction to note is that the criteria for this varies from country to country.
But how does this rule apply to contractors, and what should contractors do to ensure they are tax-compliant? This piece examines the 183-day rule and tax residency for international contractors.
The rule generally states that an individual must pay tax in a country where they spend 183 days or more living and working.
Sometimes, contractors have been misinformed that if they work under this time frame in a specific country, they do not need to pay taxes there and are, therefore, not liable to pay tax on income earned in that country. However, this is not true.
Some generally conflated the issue of tax residency and tax liability on locally sourced income in a new country as "the same thing" and a "golden ticket" to not paying tax locally. However, it is not.
Any income earned in a country where the contractor or employee is not ordinarily resident or where their centre of economic interest lies should, by default, be declared. Any locally sourced income should be declared in the country where it was earned first.
The 183-day rule separates from the above because it is concerned with where that individual is a tax resident and likely pays income tax on ALL of their worldwide income. This statement means that if the person in question has other income or investments that result in earnings in other countries, it should be declared in the country where that individual is tax resident.
Taking the above information into account, the 183-day rule, therefore, separates whether the locally sourced income AND also the worldwide income should be declared in the new country of work for a particular contractor or employee after 183 days have passed.
Contractors who are either unaware of the above or intentionally do not declare their locally sourced income from the beginning of any new contract in a new country should note that not registering does not mean escaping the liability for income tax by staying less than 183 days in any country. Once the threshold of 183 days is passed, all tax liability is backdated to the beginning of the first day of arrival in the new country.
One must note that the 183-day rule accounts for all the time an individual spends in the country in question, including personal visits such as holidays and not just the time spent working there.
Considering all of the above, it is highly advisable to get your tax commitments in order from the first day you begin working in a country and seek professional advice.
Social Security Contributions & Working Permits:
Does the 183-day rule consider a worker's visa to work in a country and any social security benefits they may have to pay?
The answer is no; all workers must abide by the laws of their host nation and consider their contributions following local immigration regulations.
This consideration also applies to contractors who must ensure their permits are in order before their contract begins.
Regarding social security contributions, workers must ensure they make the appropriate contributions set out by their country or host nation.
A contractor must account for several considerations to utilise their home Social Security contributions in their host country. What is known as an "A1 Certificate" may be an option for some to allow contributions to continue in the home country. Still, in many instances, it may not be feasible.
Firstly, in doing so, they must correctly register in the country they are working in. Otherwise, they face serious penalties for non-compliance.
Risks and Penalties for Non-Compliance:
Contractors and freelance professionals must understand their tax obligations and have the correct information about what they are and are not liable for. Failure to comply with the tax laws in countries where their global earnings and income are earned can result in fines and additional taxes, among other liabilities. In some cases, contractors can face more serious legal consequences, such as prison or deportation, if their relevant tax commitments are not filed correctly.
There are many essential considerations that international contractors must consider when working abroad to ensure they are compliant in their host country. Contractors and freelance professionals must understand their tax requirements and have the correct information about what they are liable for.
We know that for many people, international taxes and tax residency can be a complex subject to get your head around.
Our team at 3C Global are on hand to help. With our in-depth knowledge and years of experience working with international contractors, we can help you ensure your contract is secure and compliant with all relevant regulations in your host country and any other countries you may work in.
We provide a wide range of services including, but not limited to, in-country accounting services, tax registration, tax support and advice, immigration queries, invoicing and payments in a wide range of currencies.
It is essential to maintain tax compliance when working as an international contractor, so contact us today and let us help you.