What Is Foreign Domicile and How Does It Affect Your Taxes?

Where you are considered domiciled for tax purposes affects how much and where you owe taxes. Foreign domicile refers to residing in one country while maintaining tax obligations in another, influencing income taxation, reporting requirements, and estate planning.

Residency Criteria Under Tax Laws

Tax residency is determined by legal tests that vary by country. In the United States, the Substantial Presence Test considers the number of days spent in the country over three years. An individual is a tax resident if they are present in the U.S. for at least 183 days using a weighted formula—counting all days in the current year, one-third from the prior year, and one-sixth from two years ago.

Other countries use different criteria. The Statutory Residence Test in the UK considers time in the country, employment, and personal ties. Spending 183 days or more in the UK generally results in residency, but fewer days may qualify if strong connections exist. Australia’s resides test examines habitual living patterns, family location, and economic ties, even if an individual spends less than half the year there.

Some jurisdictions impose domicile-based taxation, meaning individuals remain tax residents even after leaving. France considers individuals tax residents if their primary economic interests remain in the country. India’s Resident but Not Ordinarily Resident (RNOR) status taxes certain foreign income for those who have been non-residents for nine of the past ten years.

Filing Status for Global Income

Domicile affects how income is taxed across borders. Some countries tax residents only on locally earned income, while others impose taxes on worldwide income. The U.S. follows a citizenship-based taxation system, requiring citizens and permanent residents to report and pay taxes on all income, regardless of where it is earned. In contrast, territorial tax systems, such as those in Hong Kong and Singapore, tax only locally sourced income.

Double taxation can occur when multiple countries claim taxing rights over the same income. Many nations have tax treaties that define which country has primary taxing authority. The U.S. has agreements with over 60 countries that provide exemptions or reduced tax rates on specific types of income. The Foreign Tax Credit (FTC) allows taxpayers to offset U.S. taxes with amounts paid to foreign governments.

For individuals earning income abroad, special exclusions apply. The Foreign Earned Income Exclusion (FEIE) allows U.S. taxpayers to exclude up to $126,500 for the 2024 tax year if they meet the Physical Presence Test—spending at least 330 days outside the U.S. in a 12-month period—or the Bona Fide Residence Test, which requires establishing a permanent home in another country. While this reduces taxable income, it does not eliminate reporting obligations, and Social Security taxes may still apply.

Business owners and self-employed individuals face additional complexities. Some countries impose controlled foreign corporation (CFC) rules, preventing individuals from deferring tax on foreign earnings. Under U.S. law, a CFC is a foreign corporation where more than 50% of the voting power or value is owned by U.S. shareholders. Profits retained in such entities may be subject to immediate taxation under Subpart F income rules or the Global Intangible Low-Taxed Income (GILTI) regime, which applies a minimum tax rate to foreign earnings.

Reporting Foreign Assets and Accounts

Holding foreign financial accounts introduces additional reporting responsibilities. The U.S. requires taxpayers with foreign accounts exceeding $10,000 at any point during the year to file a Report of Foreign Bank and Financial Accounts (FBAR) using FinCEN Form 114. This applies to bank accounts, brokerage accounts, and some pension funds. Noncompliance can result in penalties starting at $10,000 per violation for non-willful cases and escalating to the greater of $100,000 or 50% of the account balance for willful violations.

Beyond FBAR, individuals meeting specific asset thresholds must file Form 8938 (Statement of Specified Foreign Financial Assets) under the Foreign Account Tax Compliance Act (FATCA). Single filers in the U.S. must report foreign assets if their total value exceeds $50,000 on the last day of the year or $75,000 at any time during the year, while those residing abroad have higher thresholds of $200,000 and $300,000, respectively. FATCA also requires foreign financial institutions to report accounts held by U.S. persons, leading some banks to refuse services to American clients.

Other jurisdictions impose similar reporting requirements. The Common Reporting Standard (CRS), developed by the Organisation for Economic Co-operation and Development (OECD), enables automatic exchange of financial account information among more than 100 countries. Banks and financial institutions must disclose foreign-held accounts to tax authorities, who share this data with the account holder’s home country.

Investments in foreign mutual funds or other passive income-generating assets can trigger additional tax consequences. The Passive Foreign Investment Company (PFIC) rules in the U.S. impose punitive tax treatment on foreign mutual funds, ETFs, and certain foreign corporations where 75% or more of income is passive or at least 50% of assets produce passive income. Gains from PFICs are taxed at the highest ordinary income tax rate, and deferred gains incur an interest charge.

Estate and Gift Tax Implications

Domicile at the time of death or when making a gift affects tax liabilities, especially for expatriates with assets in multiple jurisdictions. Unlike tax residency, which often depends on physical presence, domicile for estate and gift tax purposes is based on intent and long-term ties to a country. The U.S. imposes estate and gift taxes on worldwide assets for domiciliaries, with a 40% federal estate tax rate applying to estates exceeding $13.61 million in 2024. Non-domiciliaries are taxed only on U.S.-situs assets, such as real estate and certain securities, with a much lower exemption of $60,000.

Many countries apply different estate planning frameworks. Some rely on forced heirship laws, where assets must be distributed according to statutory rules rather than personal preference. France, Spain, and Italy mandate that a portion of an estate automatically transfers to children, regardless of a will’s terms. This can create conflicts when an individual’s domicile is unclear or when assets are spread across multiple legal systems. Gift tax rules also vary, with some nations imposing immediate levies on transfers exceeding specific thresholds, while others allow unlimited tax-free gifting between spouses.

Exit Procedures for Changing Domicile

Changing domicile requires demonstrating a permanent shift in legal and financial ties. Tax authorities scrutinize such changes closely, as domicile status affects long-term tax obligations, particularly for estate and inheritance taxes. Individuals seeking to sever domicile ties must take deliberate steps to establish a new permanent home, such as selling primary residences, closing local bank accounts, and cutting social and economic ties with their former country. Some jurisdictions, like the UK, apply a deemed domicile rule, where individuals remain subject to inheritance tax for up to three years after leaving unless they can prove a permanent change in residence.

Tax exit charges can also apply when renouncing domicile. The U.S. enforces an expatriation tax on certain individuals who relinquish citizenship or long-term residency if they meet specific thresholds, such as a net worth exceeding $2 million or an average annual tax liability above $190,000 (as of 2024). Those classified as covered expatriates may be subject to an exit tax on unrealized capital gains above $821,000 in 2024. Some countries impose similar departure taxes, such as Canada’s deemed disposition rules, which trigger capital gains tax on worldwide assets when an individual ceases residency. Proper planning, including restructuring asset ownership and utilizing tax treaties, can help mitigate these financial consequences.