Income source is one of the aspects of international tax law that causes the most confusion, the most misunderstandings. In this article, I provide some clarification on how income source determination works.
Source determination
Source determination is a crucial aspect of tax law, it is the process used to attribute income to a specific jurisdiction, where it will be taxed if applicable.
For passive income, the source will usually be the location where the asset generating the income is located. For active income (employment, self employment, freelance etc), the source will usually be the location where work is performed (where you physically are when you work).
When it comes to active income, it is important to note that the location where your clients are located is not a factor when determining income source, nor is the jurisdiction of the business you are working through (if you are working through a legal entity).
Common cases
Example one: Rental income
The rental income generated from a property located in the UK will always be UK sourced and as such, liable to tax in the UK. Where the owner resides (or is registered if a legal entity) does not matter.
Example two: Investment income
The dividends received from US based companies will always be US sourced and liable to either US income tax if the owner of the shares is a US resident or US withholding tax if the owner of the shares is a non-resident.
Example three: Freelance and self employment income
The income generated from freelance work and self employment performed in Thailand will always be Thai sourced even if the worker is not a Thai tax resident, is working exclusively for foreign clients and is not transferring funds to Thai bank accounts.
Example four: Business income
The business income generated from work performed in Spain will always be Spanish sourced even if the business the work is performed for is registered abroad, the clients are located abroad and the worker is a non-resident. Do note that depending on the nature of the work, how permanent the arrangement is and a number of other factor, place of management rules may be a factor to take into consideration.