Dual Tax Residency

This article delves into the concept of dual tax residency, drawing insights from the piece "On Dual Tax Residency in Tax Treaties" authored by Murong Xiao (a pseudonym, hereinafter referred to as "the author"). It is important to clarify that our intent is solely to discuss the topic of dual tax residency and not to critique the author of the aforementioned article.

1. Dual Tax Residency and Its Challenges

Dual tax residency refers to a situation where an individual or entity is simultaneously deemed a tax resident in two different countries or regions. This is a common occurrence. For instance, a Chinese individual working overseas for more than 183 days may simultaneously qualify as a tax resident in both China and the foreign country.

Under international tax principles, this dual residency creates the risk of double taxation:

• Income sourced from China may be subject to taxation in both China and the foreign jurisdiction.
• Similarly, income sourced from the foreign jurisdiction may face taxation in both the foreign country and China.

However, in practice, most Chinese individuals adopt the source-based taxation principle, meaning:

• Income earned in China is taxed in China.
• Income earned overseas is taxed overseas.

In other words, individuals often avoid paying taxes on overseas income in China and vice versa.

While this approach may seem pragmatic, it is technically non-compliant. The reality is that most countries (including China) have limited capacity to monitor overseas income. As a result, taxpayers who fail to declare and pay taxes on their overseas income often evade detection by tax authorities. However, with the advancement of international information exchange mechanisms (e.g., CRS) and domestic systems such as China's Golden Tax Phase IV, such non-compliance is increasingly likely to be uncovered.

Although we acknowledge that source-based taxation is non-compliant, what constitutes a compliant approach? According to both international and Chinese law, there is no definitive answer. Tax liability depends entirely on the facts and circumstances of each taxpayer. This is not due to a lack of professionalism or diligence but rather because determining an individual’s international tax obligations is inherently complex.

The author’s attempt to address such a multifaceted issue in a brief article like "On Dual Tax Residency in Tax Treaties" and provide clear conclusions is indeed ambitious. In international tax literature, it is common to see dozens of pages dedicated to the subject of dual tax residency. The complexity arises from the interplay of:

1. Tax laws of two countries;
2. Bilateral tax treaties (if applicable);
3. Each country’s interpretation and application of these treaties; and
4. The individual or entity’s specific facts and circumstances.

Even after thorough analysis, it is often impossible to guarantee absolute accuracy in determining international tax obligations.