What Happens When Expat Tax Residence Is Assessed Retrospectively

Most organisations only discover they got their expat tax residence assumptions wrong months after the fact — when the tax authorities tell them.

Employers in fact often assume expat tax residence is something they can determine proactively — a clean, forward‑looking assessment based on expected days, expected ties, and expected working patterns.

But tax authorities rarely assess expat tax residence that way.

Expat tax residence: facts vs intentions

Tax residence is often determined retrospectively, based on what actually happened — not what the employer (or the expat) planned, documented, or believed at the time.

The OECD Commentary on Article 4 focuses on factual connections — such as permanent home, centre of vital interests, and habitual abode — rather than forward‑looking expectations.

Where intentions may still be relevant for determining expat tax residency

While some jurisdictions do consider intentions as part of their expat tax residence assessment, such as:

– Canada: where “to determine your residency status, all of the relevant facts in your case must be considered, including residential ties with Canada and the length of time, purpose, intent and continuity of the stay while living inside and outside Canada”

– USA: where intention is relevant for Lawful Permanent Residence and Closer Connection Exception claims

– Australia: the “resides test” includes intention to reside

– UK: the Detached Duty Relief (DDR), although not strictly an expat tax residence test, explicitly relies on expected duration of duties abroad being no more than 24 months in duration to allow the provision of certain specific travel, accommodation, and subsistence fringe benefits, tax free.

the OECD framework emphasises what actually happens in practice.

This is where the real risk lies and even more so with countries aligning to the OECD framework.

In the UK for instance, from 6 April 2025, under the new FIG regime rules, the previous residence, domicile and remittance rules, which included subjective intent tests, have been eliminated as a factor for income tax and capital gains tax.

The Consequences of Retrospective Expat Tax Residence Assessments

When expat tax residence is assessed retrospectively, the consequences are immediate, expensive, and often contentious:

• back taxes
• penalties
• employer liabilities
• employee disputes
• denied treaty relief
• shadow payroll corrections
• social security mismatches
• corporate tax implications

This article focuses on timing risk — the gap between when an expat tax residence actually changes and when the employer realises it has changed.

It’s not about explaining expat tax residence rules. It’s about what happens when you get the timing wrong.

This issue is particularly acute when individuals sit in the grey area between business travellers and assignees, the so-called “accidental expats”.

The Timing Problem No One Talks About

Most organisations treat expat tax residence as a forward‑looking decision:

• “You won’t be resident because you’ll be under 183 days.”
• “You’ll remain resident because your centre of vital interests stays at home.”
• “You’ll become resident on 1 January because that’s the start of the year.”

But tax authorities as already mentioned, rarely assess residency based on intentions or forecasts.

They assess it based on:

• actual days
• actual ties
• actual behaviour
• actual working patterns
• actual family movements
• actual accommodation use

HMRC’s Statutory Residence Test (SRT) is built around day counts and factual connections. While expectations and intentions may influence certain tax treaty dual residence tie‑breaker scenarios, the SRT ultimately relies on what the individual actually does during the tax year.

This creates a timing gap — a period where the employee is already tax resident, but the employer is still operating payroll, shadow payroll, and reporting as if they are not.

That gap is where the damage happens.

What this means for you

• The expat tax residence may have changed months before you realised

• Payroll may already be wrong

• Treaty relief may already be denied

• Social security may already be misaligned

Why Retrospective Expat Tax Residence Assessments Happen

1. Travel patterns shift without anyone noticing

Employees travel earlier, stay longer, or return more frequently than planned. This is especially common in international assignments managed by the decentralised organisations.

2. Business travellers accumulate days faster than expected

This is the classic accidental expat problem — the same issue described in business travellers becoming accidental expats.

3. Assignment dates don’t match reality

Employees often:

• arrive early
• stay late
• extend informally
• work remotely abroad before the assignment starts

This is one of the most common timing failures in assignment letters creating tax risks.

4. Remote work blurs the timeline

Employees begin working abroad before HR or Tax is informed — a pattern more and more common post-Brexit and post-Covid as explored in cross‑border remote working arrangements.

5. Residency ties change mid‑year

Family moves, accommodation availability, and personal circumstances shift unexpectedly.

6. Employers rely on forecasts instead of data

Expat tax residence is often assessed based on:

• planned days
• expected travel
• intended behaviour

But tax authorities, as explained earlier, assess based on actual behaviour.

What Happens When An Internationally Mobile Employee Tax Residency Is Assessed Retrospectively

This is where the real consequences begin.

1. Back Taxes for the Employee

If the cross-border employee became tax resident earlier than expected, the tax authority may assess:

• full‑year tax
• partial‑year tax
• tax on worldwide income (including on income and assets which have nothing to do with their employment relationship)
• tax on equity events
• tax on bonuses allocated incorrectly

This often leads to:

• unexpected tax bills
• denied treaty relief
• double taxation
• employee frustration (which in some cases can spill into full blown legal actions and/or out-of-court settlements)

2. Back Taxes for the Employer

If payroll was operated incorrectly during the timing gap, the employer may owe:

• under‑withheld income tax
• employer social security
• late payment interest
• penalties

This is particularly common when a shadow payroll should have been operated earlier but, for whatever reason, was not.

3. Penalties for Incorrect Reporting

Tax authorities may impose penalties for:

• late withholdings
• inaccurate payroll filings / reporting
• failure to operate shadow payroll
• failure to report benefits correctly
• failure to pay employer’s social security contributions

Penalties often apply even when the employer acted in good faith.

4. Treaty Relief Denied

Treaty relief is often denied when:

• days exceed thresholds
• economic employer rules apply
• expat tax residence changes earlier than expected

The OECD Commentary on Article 15 reinforces that taxing rights depend on actual working patterns, not planned ones.

This is especially common in jurisdictions that apply the “economic employer” concepts aggressively — such as the UK, where short‑term business visitor compliance risks are well‑documented.

5. Social Security Mismatches

If an expat tax residence changes earlier than expected, social security may also need to change.

This may create:

• contribution gaps
• incorrect A1 or CoC coverage
• employer liabilities
• employee disputes

EU social security coordination rules assess coverage based on the employee’s habitual working pattern. While planned arrangements can be considered when issuing A1 Certificates or Certificates of Coverage, tax authorities ultimately rely on the individual’s actual work pattern if it differs from what was expected.

This is why understanding A1 certificate requirements for short trips is critical.

6. Corporate Tax Exposure

If the employee’s activities in the host country were more substantial than expected, retrospective residency assessments can trigger:

• Permanent Establishment (PE) reviews
• corporate tax filings
• transfer pricing questions

This mirrors the issues described in short‑term assignments creating PE exposure.

The OECD’s BEPS Action 7 guidance also emphasises that PE risk depends on the employee’s actual activities and authority in practice, rather than job titles or contractual descriptions.

7. Employee Disputes and Reputational Damage

Employees often argue:

• “No one told me I could become resident.”
• “I didn’t know my weekend travels counted.”
• “I thought the company handled this.”
• “I shouldn’t have to pay this.”
• “How can my personal assets also be impacted”

This leads to:

• internal disputes
• escalations to senior leadership
• requests for employer reimbursement
• strained employee relations
• legal threats and out-of-court settlement
• actual court cases rulings
• employees leaving for other jobs

A Realistic Expat Tax Residence Scenario (Based on Common Patterns)

The situation

A senior manager travels frequently to France for a project. HR classifies them as a business traveller. Tax assumes they will stay under 183 days. Payroll operates home‑country withholding only.

What actually happens

• The employee travels earlier than planned.
• The project overruns.
• The employee works remotely from France for several weeks.
• Travel days accumulate faster than expected.
• No one updates the tax residency assessment.

The outcome

The French tax authorities review travel data and determine:

• the employee became tax resident months earlier
• shadow payroll should have been operated
• French social security contributions are due (no A1 Certificate applied)
• Employee needs to regularise their position by filing a French tax return as taxable in France on their worldwide income

The consequences

• back taxes, interest and penalties for the employee
• back-dated employer liabilities (including penalties and interest)
• employee dispute resulting in out-of-court settlement and employee eventually leaving the company
• reputational damage (both with the French authorities and online where the employee negatively reviewed their former employer on various job sites platforms)

This is not unheard of. It happens more often than most people think.

Why Timing Risk Is So Dangerous

Timing risk is dangerous because:

• it is invisible until it is too late
• it affects multiple tax years
• it impacts both employer and employee
• it creates cascading compliance failures
• it is rarely monitored proactively

Most organisations do not have systems that detect:

• early arrivals
• informal extensions
• remote work abroad
• unexpected travel patterns
• mid‑year changes in ties
• clear tax policies on cross-border working

This is why retrospective expat residence assessments are so common — and so costly.

What Head of Tax Should Do

1. Implement a tax residency monitoring framework

This includes:

• triggers
• thresholds
• escalation paths
• documentation requirements

2. Integrate travel tracking with tax

Not calendars. Not expense reports. A real system.

3. Review residency mid‑year

Not annually. Not at year‑end. Mid‑year.

4. Align payroll with actual behaviour

Not planned behaviour. Actual behaviour.

5. Educate managers and employees

They need to understand:

• travel counts
• remote work counts
• early arrivals count
• informal extensions count

6. Review assignment letters for timing risk

This is where many timing mismatches originate — assignment letters can and do create tax risks.

Final Thoughts: Expat Tax Residence Is a Timing Issue, Not a Technical One

Most expat tax residency failures are not caused by misunderstanding the rules. They are caused by misunderstanding the timing.

Employees become tax resident earlier than expected. Employers realise it later than they should. Tax authorities assess it retrospectively.

The result is:

• back taxes
• penalties
• employer liabilities
• employee disputes

One reason these scenarios persist is that organisations often rely on advisers whose remit is limited to reporting obligations, rather than identifying structural exposure as it develops.

Clarifying whether support is coming from cross border tax accountants focused on compliance, or from advisers providing broader cross-border tax and accounting insight, can determine whether accidental expat risks are prevented or merely documented after the fact.

P.S. if you would like to understand whether your organisation has timing risks in its expat tax residence assessments, we can map it for you.