A software company’s founder who works in the EU could easily spend the first quarter in Lisbon and the third quarter in Amsterdam. In this situation, each country has its own legal perspective on how the income is taxed and who claims it. Tax residency status tells the government which jurisdiction has the right to your worldwide earnings. This determines the legal status of your tax obligations.
Day count and the strength of personal ties are the primary factors. But the regulations may differ significantly for US citizens. The US Internal Revenue Service (IRS) charges taxes based on citizenship instead of residency, which isn’t how most countries operate.
Bona Fide Residence for US Expats
US citizens are federally taxed on worldwide income regardless of where they live, so the main thing most Americans are immediately interested in is which exclusions apply to this worldwide taxation. The main type of relief from this tax is called the Foreign Earned Income Exclusion, claimed on Form 2555, which lets qualifying expats exclude up to $130,000 of foreign earned as of 2025.
Two qualifying tests exist for this exclusion. The first is the Physical Presence Test, which requires 330 days in a foreign country during any rolling 12-month period. The bona fide residency for US expats test requires genuine foreign residency in a foreign country across a full US tax year. The IRS weighs up the following factors:
- Intent to stay indefinitely.
- Length of stay.
- Family location.
- Whether the taxpayer pays local income tax.
How Tax Treaties Break a Residency Tie
When two countries both claim residency, tax treaties based on the OECD Model Tax Convention apply. The tiebreaker in Article 4.2 works as a cascade for individuals, moving to the next step only when the current step fails to settle the question:
- Permanent home: Residency goes to the country where a permanent home is available to the person
- Centre of vital interests: If a home is available in both countries, residency goes to the country where personal and economic relations are closer, weighing factors such as family location and employment
- Habitual abode: If the centre of vital interests cannot be determined, residency goes to the country where the person usually lives
- Nationality: When someone habitually lives in both countries or in neither, residency goes to the country of nationality.
- Mutual agreement: If the person is a national of both countries or of neither, the competent authorities of the two countries settle the matter by mutual agreement.
Why Professional Advice Still Matters
Digital nomads who live and work across multiple countries have a more complicated tax situation, particularly for Americans who deal with the IRS regardless of residency. Tax residency simply relates to which country has jurisdiction over taxing your income. Usually, this is the country where you spend most of your time. However, even in regions like the European Union, where there is a unified legal structure, every country still does it somewhat differently.
So it’s important to get legal advice relating to your specific jurisdiction. And for Americans, it’s important to get advice about dealing with the IRS as well. If you’re interested in reading more about any similar topics, see our other blog posts for more.
