What does tax residency determine?

Tax residency is a critical concept in taxation that directly impacts an individual's tax obligations based on where they reside. This is because tax laws vary significantly from one jurisdiction to another, and where an individual is considered a tax resident determines which income is subject to taxation in that jurisdiction.

When determining tax obligations, jurisdictions use various criteria to establish tax residency, which may include the duration of stay, the presence of a permanent home, and additional ties to the location such as family or business connections. Being classified as a tax resident generally means that an individual must report their worldwide income to that jurisdiction and comply with its tax laws, hence determining how much tax they owe based on their residency status.

Understanding tax residency is vital for individuals, as it helps them to navigate their responsibilities and ensure compliance with local tax laws, allowing them to avoid potential penalties for misreporting their income based on incorrect residency status.