Bona Fide Residence Test for International Tax Purposes

International tax laws govern how much taxes are required to be paid by:

• U.S. Citizens receiving income from foreign countries; and
• Foreign Nationals and Foreign Corporations receiving income in the United States.

What is a Tax Home?

An individual’s tax home is their main place of:

• Business;
• Employment; or
• Post of duty.

In other words, an individual’s tax home is where they permanently and indefinitely work as an employee or a self-employed individual. This does not mean that it is an individual’s residence or domicile for tax purposes.

How is My Foreign Income Taxed if I am a U.S. Citizen?

If an individual is a United States citizen, they are taxed on any income that they earn, whether it is earned in the U.S. or abroad. In general, the rules for income, estate, gift and estimated taxes are the same whether the individual is living in the U.S. or abroad.

An individual is also required to file additional documents with the IRS if the individual:

• Is a shareholder of an international corporation;
• Receives large gifts from a foreign individual;
• Owns part of a foreign trust or receive disbursements from a foreign trust; or
• Are receiving interest on foreign bank accounts.

How is My U.S. Income Taxed if I am a Foreign National?

An individual’s taxes will depend upon what type of foreign national they are, a resident alien or a non-resident alien. A foreign national is a resident alien if they:

• Have a green card, or
• Have been physically present in the United States for 183 or more days during the current tax year, or
• Choose to be a resident alien for tax purposes.

If the foreign national does not meet any of the criteria listed above, then they are a non-resident alien. A resident alien is taxed the same way as a United States citizen.

Anon-resident alien is subject to different taxes than a resident alien. The business income of a non-resident alien is taxed the same as that of a United States citizen.

A non-resident alien is also taxed 30% on all of their other sources of income that are generated in the United States, such as interest payments.

What about Foreign Corporations?

A foreign corporation is also required to pay taxes on any income that is generated in the United States. This includes business income as well as other sources of income, for example, investment returns.

Do I Qualify for Foreign Earned Income Exclusion?

Both United States citizens as well as resident aliens may be eligible for the foreign earned income exclusion. If a U.S. citizen has a foreign tax home, they may be able to exclude up to $80,000 if they meet either of two following tests:

• The bona fide residence test: In order to meet the bona fide residence test, the individual must determine if they have established such a residence in a foreign country. A bona fide residence is not necessarily the same as a domicile; or
• The physical presence test: An individual meets the physical presence test if they are physically present in a foreign country or countries for a 330 full days during a period of 12 consecutive months;
  • The 330 qualifying days are not required to be consecutive.

A resident alien of the United States with a tax home in a foreign country may be eligible for exclusion if they meet one of the following qualifications:

• The physical presence test; or
• If the individual is a citizen or a national of a country with which the United States has an income tax treaty with an applicable nondiscrimination clause and they meet the bona fide residence test.

What is the Bona Fide Residence Test?

The Internal Revenue Service (IRS) uses the bona fide residence test to determine whether or not an individual is eligible to claim the foreign earned income exclusion or the foreign housing exclusion. In order to meet the bona fide residence test, an individual must determine whether they have established such a residence in a foreign country.

The factors for determining whether an individual meets the bona fide residence test include:

• Intention or purpose of the individual’s trip;
• Nature and length of their stay abroad; and
• Bona fide residency in a foreign country for an uninterrupted period that includes an entire tax year, or January 1 to December 31.

Is My Bona Fide Residence the Same as My Domicile?

An individual’s bona fide residence is not necessarily the same as their domicile. An individual’s domicile is their permanent home, or the place to which they always return or intend to return.

An individual’s bona fide residence is a place where they have set up a permanent residence, perhaps for business purposes, but without the intent to remain there until they die. For example, if an individual is working in Paris and they set up a permanent residence indefinitely due to their job, it would likely be enough to establish a bona fide residence.

Simply going to Paris for a time, such as for tourism, would not likely make the city the individual’s bona fide residence.

Who Does the Bona Fide Residence Test Apply to?

The bona fide residence test applies to:

• U.S. citizens; and
• Any U.S. resident alien who is a national or a citizen of a country with which the U.S. has an income tax treaty.

Are There any Exceptions to the Bona Fide Residence Test?

Yes, there are exceptions to the bona fide residence test. Individuals who have had to leave the country in which they were claiming bona fide residence due to civil unrest or war may be able to waive the time requirement if they can demonstrate that they would have remained in the country for the required amount of time if it were not for that dangerous situation.

Civilians who are working on the United States Naval Base at Guantanamo Bay, Cuba are also exempt from having to satisfy the bona fide residence test.

What are Some Common Related Tax Issues?

Tax issues may arise for numerous reasons. For example, the late filing of taxes as well as the failure to pay fines are some of the more common tax litigation issues.

It is important for an individual not to subject themselves to these issues. If an individual is facing an issue, they should consult with an attorney. Their attorney can identify exceptions in cases where tax penalties should not be imposed and can argue in court or negotiate a deal with the IRS to eliminate those penalties.

Another common tax law issue is the failure to keep copies of tax returns. Typically, an individual’s tax returns from the previous year are required when filing taxes.

They also serve as evidence that the individual did file their taxes and they may be referred to if the individual’s tax return needs to be amended. In addition, they may be referenced if an individual encounters any of the following:

• An IRS audit;
• A tax fraud investigation; or
• A tax dispute.

Individuals and businesses usually hire a tax attorney for the primary purposes of maintaining and storing records of their tax returns. A tax attorney who is hired for this purpose will also keep any financial documents associated with those records, such as receipts or property titles.

The IRS may penalize or sue a business for failing to keep good records of their expenses and tax deductions. It is also possible for a business to face fines or a lawsuit if they mix funds with personal expenses and attempt to deduct them.

Tax records should be kept in good condition. If an issue arises, a tax attorney can defend a business against lawsuits and penalties.

Do I Need a Lawyer if I Am Confused about the Test?

International law is a very complex area of law. An experienced tax lawyer can assist an individual if they have any questions about the bona fide residence test.

As discussed above, your tax lawyer can ensure that all of the necessary records related to your taxes are kept in good condition. If an issue or dispute arises related to your taxes, your attorney can defend you and represent you in court or before any governmental entity.