The 183-day rule is a widely recognised concept used by most countries to determine whether someone should be considered a resident for tax purposes. The rule states that if a person spends 183 days or more per year/rolling 12 month period (the criteria varies) in a single country, they will be regarded as a tax resident and pay taxes on their worldwide income (if that country adopts worldwide taxing rules), from all sources, there. However, this concept is more complex than it seems and is often misunderstood and misused.
One of the main misconceptions about the 183-day rule is that it applies to all types of workers, including contractors and freelancers. However, this is not the case. The rule only applies to dependent workers/employees (e.g. posted workers, posted abroad from their home country) who are on a full-time employment contract with a company. For these posted workers, should the duration of the stay in the non-home state extend beyond 183 days, taxes are payable in the work country from the start of the contract. The key point to take from this is that should the contract extend beyond six months, the worker will be liable to tax in the work country, back dated to day one and if local registrations have not been made, penalties/fines and late payment interest may apply. Independent workers (contractors/freelancers) and those operating through a personal service company (PSC) must observe the work country taxation and Social Security laws as soon as their assignment begins (i.e. from day one).
Another common misconception is that the 183-day rule covers work permits and social security contributions. However, this is not true. Immigration laws and Social Security contributions are typically determined by the host country and must be considered separately.
It is also important to note that the 183-day rule counts all days of physical presence in the country, including holidays, visiting family or friends, and any other days spent there. This means that even if someone does not work more than 183 days, they may still be considered a tax resident if they have spent a significant amount of time in the country.
The 183-day rule can have a significant impact on the work country if it is misused or misinterpreted. If the rule is not applied correctly, the work country is defrauded of the appropriate tax, VAT, and Social Security contributions for the worker during their contract. Misuse of the 183-day rule can also be a breach of laws such as the Criminal Finances Act 2017 (CFA 2017) in the UK, which could mean that agencies, clients, and contractors face prosecution.
For recruiters, the incorrect use of the 183-day rule when placing contractors abroad can have damaging consequences for their agency. There is a risk of losing clients if a contractor is non-compliant when placed, and there is also the possibility of penalties for the agency itself. The potential reputational damage to the agency is very real.
Contractors who wish to use their PSC abroad and who do not ensure that they have the correct personal and company registrations in place locally, also risk paying the work country income tax and social security on their entire global earnings as well as corporate tax on all profits and VAT on their services. They also risk hefty fines, penalties, and back-dated liabilities if they use a PSC that is not registered correctly in the host destination. In severe cases, the individual and the agency may even face operating restrictions within the country, and the contractor could be deported or even sentenced to time in jail.
As you can appreciate, the 183-day rule can be complex and difficult to navigate, especially for those working in multiple countries or for those who are not familiar with local tax/Social Security/immigration laws. This is where Access Financial comes in. As a leading international payroll and contract management solutions provider, Access Financial is the one-stop shop for recruiters, corporations, and professional contractors looking to contract or expand internationally.
Access Financial has 20+ years of experience in providing support for outsourced contractor payroll and other back-office services. Our mission is to de-risk contracting for independent contractors, recruiters and end clients by offering expert knowledge and broad experience operating in key contracting destinations worldwide. We offer a variety of services, including client onboarding and contract management, payroll services and immigration assistance, tax and legal compliance services, and limited company solutions.
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