When optimizing taxes and real estate planning, it is critical to identify all the countries with whom you have ties. It involves two key main points: the location and nature of your property - as well as your place of residence.
Complicated tax laws and anti-avoidance legislation around the globe are making it more and more difficult to find tax-efficient structures for individuals who are resident in high-tax countries such as Europe and North America. Therefore, an increasingly important aspect of international solutions to tax and estate planning for private clients is the change of residence to a better low-tax country.
For some high net worth individuals, this decision to change country of residence becomes an interesting and viable proposition when it does not disturb their current lifestyle. Also, for people living in countries with an unstable political or economic situation, this solution is probably the best and provides them with an alternative residence to increase personal security and achieve a suitable quality of life. The potential to acquire a second citizenship offers a multitude of benefits, the importance is in the suitable choice given taxes and real estate options.
Domicile & Residence, The Difference
Residence in a country simply means living in a particular place, however the domicile means living there with the intention to make the territory or country a fixed and permanent home. The concept of legal domicile is a dominant one as it most of the time controls jurisdiction when talking about taxation system. This is specifically true for inheritance taxes. When a client became resident in another country for income-tax purposes, to his origin country, his domicile is often still considered in the previous country of residence for both income tax and inheritance tax purposes. For example, the UK relies completely on this concept to impose inheritance tax on their citizens. This is the case even if the individuals are no longer resident in the country for already a couple of years.
The use of the term residence as the key criterion for personal income taxation is the one mostly used by countries. The government will apply different tests to determine a person's tax residence. This can be physical presence, available accommodation or centre of vital interests. When an resident leaves a country and decides to establish himself (and his family) bona fide residence somewhere else, the individual is normally no longer able to be taxed in term of the emigrant's worldwide income.
US Citizenship & Income Tax
The exception to the rule about taxation based on residence applies to citizens of the United States of America. They pay taxes to the United States federal government regardless of their place of residence. If a US citizens move their residence abroad this does not end their US tax liability. If a US citizens wishes to terminate their US tax liability the only way is to renounce their citizenship and become expatriates. This option is often preferred by US Citizen who favour a tax free country such as the ones in the Caribbean and opt for a 10 year visa in the USA.
Emigration / Exit Taxes
It is important to keep in mind that recently a growing number of countries have introduced targeted laws to discourage the emigration of individuals through elaborate forms of taxation. These so called emigration taxes can have considerable implications for a client's relocation plans and needs to be weighted when taking the decision to emigrate.
Sometimes, a change of residence does not only reduce a person's income-tax burden significantly, but also has a major impact in term of inheritance situation. Careful analysis is particularly important with regard to inheritance and estate planning; the distinction between residence and domicile needs to be kept in mind. While a client may be a tax resident in a jurisdiction which has no inheritance tax, upon his death it is not uncommon that another country may claim that he was in fact still domiciled in that country. Consequently this subject can be quite complex and his worldwide estate to inheritance taxes is something to be carefully considered when acquiring a new residence.
Tax Treaties and Tie-breaker
Tax treaties in between countries can be highly relevant when finding residence solutions. Moving from one country to another can be associated with many tax problems. Usually, tax treaties include a tie-breaker rule. A tie-breaker rule determines which country has the right to residence tax an individual out of two countries at the same time by their own respective domestic rules. There are multiple tests which are applied in stages to assess which country has the closest connection for the individual. This country will be therefore given the right of taxation.
Often overlooked, health insurance planning is an important element in term of residence planning by private clients. When moving abroad, the current health insurance coverage of the previous country will in most cases be discontinued. The solution lies in the choice of finding new coverage in the present country of residence or turning to an international health insurer. Obtaining appropriate health insurance is important, regardless of age. When planning a change of residence for a country that allow travelling without visa restrictions, a critical element is to obtain worldwide health insurance which ensures the necessary international coverage.
Your Business And Family
An individual’s international tax and estate planning must align with his business and personal situation. This is why we need to consider many criteria and sit down with the client to assess the best possible solution. A client should never be advised to relocate mainly for tax reasons. This is because not only will clients be dissatisfied in their new environment, but also experience shows that may jeopardize the tax situation root of the change their residence in the first place. However, there are many cases where a change of residence fits in very well with a client's business and family situation. In this case, a change of residence becomes an obvious key element of his tax and estate planning relocation.