Tax residency: how changing citizenship affects taxes

In the era of globalization and digital nomads, changing citizenship has become a common tool for expanding opportunities. However, the key financial aspect that is often overlooked is not the passport itself, but tax residency. It is this that determines in which country you pay taxes on your worldwide income. In 2025, against the backdrop of tightening international tax regulation (BEPS 2.0, global minimum tax), understanding this difference and competent planning when relocating are critically important for preserving capital and avoiding legal risks.

The Concept of Tax Residency: Where Your Wallet Is, There Are Your Taxes

Tax residency is a legal connection between an individual or legal entity and a specific state, which obligates that person to pay taxes to the treasury of that country on their global income (income received worldwide). Unlike citizenship, which is a political and legal connection, tax residency is determined solely by economic and factual criteria:

• Physical presence: the number of days spent in the country's territory during a calendar (or tax) year (the classic 183-day rule).
• Centre of vital interests: where permanent housing, family, primary source of income, bank accounts are located, where main economic activity is conducted.
• Domicile: in some countries (especially Common Law, like the UK) the concept of "domicile" (the intention to consider the country one's permanent home) plays a key role.
• Citizenship: is only one possible, but far from the primary or sufficient factor for determining tax residency in most countries.

Citizenship vs. Tax Residency

Confusion between these concepts is one of the most common and costly mistakes.

Basis of Determination

• Citizenship: determined by citizenship laws (right of blood, right of soil, naturalization, and others). This is a legal status.
• Tax Residency: determined by national tax legislation and/or international tax agreements based on factual circumstances (where you actually live and work).

Tax Base

• Citizen: pays taxes in the country of citizenship only if they are its tax resident. A citizen living permanently abroad and not being a tax resident of their homeland usually pays taxes only on income earned in that country (if any).
• Tax Resident: pays taxes in the country of residency on all their worldwide income (salary, dividends, interest, royalties, rental income, income from asset sales, etc.), unless otherwise provided by national legislation (territorial principle) or a double taxation avoidance treaty (DTAT).

Possibility of Multiplicity:

• Citizenship: one can have two or more citizenships (if permitted by the laws of the countries).
• Tax Residency: in the same tax period, an individual, as a rule, can be a tax resident of only one country (determined by the DTAT or internal rules in case of conflict). A company can have residency in several countries.

Impact of Passport Change:

• Change of Citizenship: by itself does not automatically change your tax residency. You can obtain a new passport but remain a tax resident of the previous country if you maintain your centre of vital interests there.
• Change of Tax Residency: requires physical relocation and proof of transferring the centre of vital interests to the new country.

How a Passport Change Indirectly Affects Taxes

Obtaining new citizenship does not directly make you a tax resident of the new country. However, it opens the path and simplifies the process for changing tax residency, which is the key to optimization:

1. Facilitating Relocation and Residence: a new passport removes visa barriers, allowing for legal and long-term residence in a country with an attractive tax system – a necessary step for becoming its tax resident.
2. Access to Special Regimes: some countries offer preferential tax regimes for new citizens/residents (e.g., the recently closed NHR in Portugal, the regime for "impatriates" in Italy). Obtaining citizenship is often a prerequisite or simplifies access to such programs.
3. Exit from the Jurisdiction of "Tax-Aggressive" Countries: for citizens of countries that tax the income of non-residents (like the USA or Eritrea), obtaining another citizenship does not exempt from tax obligations to the homeland. However, it can facilitate a formal severance of ties and renunciation of the original citizenship (if strategically justified and possible), which can be part of the process of changing tax residency.
4. Use of Double Taxation Avoidance Treaties (DTAT): having a passport from a country with a wide network of DTATs can simplify the application of benefits under these treaties when receiving income from third countries, but again – only if you are a tax resident of the country that issued the passport.

Countries with Favorable Tax Residency

Choosing a country for tax residency is a complex decision, depending on the source of income, lifestyle, and the existence of DTATs.

Countries with a Territorial Tax System:

• Paraguay: only income earned in Paraguay is taxed. Minimal presence requirements. Popular among digital nomads and owners of international businesses.
• Panama: no taxes on income from foreign sources for residents. Requires residence permit/passport and an economic link.
• Costa Rica: a new attractive tax regime for remote workers and service providers has appeared.

Countries with Low or Zero Personal Income Taxes:

• UAE (Dubai, Abu Dhabi): 0% PIT on most types of income. Requires a residence visa (easily obtained by purchasing real estate, opening a company, or employment). Important: A federal corporate tax (9%) was introduced in 2023, but personal income remains untaxed.
• Monaco: 0% PIT for residents (except French citizens). Requires proof of financial means and housing.
• Bahrain, Oman: 0% PIT.

Countries with Special Preferential Regimes for New Residents:

• Italy: regime for "impatriates" (repatriates/relocators) – 70-90% exemption from PIT for 5-10 years for certain categories of income (employment, business income). Requires relocation and no residency in Italy in the previous 2 years.
• Greece: reduced PIT for 7 years for qualified foreign specialists and freelancers moving to Greece.
• Malta: the Global Residence Programme (GRP) / Malta Permanent Residence Programme (MPRP) offers fixed minimum taxes for residents on foreign income (upon remittance).

Countries with Reputational Stability and an Extensive DTAT Network:

• Switzerland: cantonal-level taxes can be moderate (especially in cantons like Zug, Schwyz) when concluding a special agreement (lump-sum taxation, forfait fiscal) for wealthy individuals not working in Switzerland. Or the regular progressive rate for working residents. High reputation and asset protection.
• Singapore: progressive PIT rates (up to 24%), but no capital gains tax and no tax on dividends (in most cases), low corporate tax. Excellent reputation.

Risks and Limitations

Changing tax residency is a serious step, associated with risks:

1. "Superficial Relocation" and Non-Recognition of Status: tax authorities of the former country may challenge the change of your residency if you have not proven a complete transfer of your centre of vital interests (sold/rented out housing, moved family, closed accounts, changed doctors/clubs, etc.). Consequences – double taxation and fines.
2. Controlled Foreign Companies (CFC): if you retained control over a company in the former country after moving, the new country of residency may tax you on the profit of that company (even if undistributed), according to its own CFC rules.
3. "Economic Presence" (Substance) Requirements: for business owners, it is not enough to simply register a company in an "offshore". Countries require real presence: office, staff, operations in the jurisdiction of the company's or its owner's residency.
4. Exit Taxes: many countries (EU countries, UK, Canada, Australia) levy a tax on unrealized capital gains upon exit (e.g., on the increase in value of shares, real estate, business), as if you sold these assets on the day of departure.
5. Complexity and Cost: the process requires significant resources: consultations with lawyers and tax consultants in both countries, relocation, settling in, paperwork.
6. Global Minimum Tax Rate (Pillar Two): the introduction from 2024 of a global minimum tax for large corporations (15%) indirectly affects the attractiveness of low-tax jurisdictions for business structures.
7. Risk of Tax Evasion Charges: unprofessional planning, concealment of income, or false declaration of residency can lead to criminal liability.

Conclusion

In 2025, obtaining a second passport can be an important step towards changing tax residency, but by no means is it an automatic solution. The passport itself does not change your tax fate. The key importance lies in the actual relocation, the transfer of the centre of vital interests, and strict compliance with the laws of both the former and the new country. Tax residency is a complex legal status requiring a deep understanding of national legislations and international agreements. Any attempt at tax optimization without professional planning and full legality is fraught with serious financial and reputational losses. Remember: true tax efficiency is achieved not by changing a passport in a desk drawer, but by a well-thought-out change in lifestyle and place of actual residence within the legal framework. Consultation with international tax lawyers and consultants before any move is not a luxury, but a necessity.