The Global Residence & Citizenship Handbook. Christian H. Kälin
is important to distinguish between temporary stays such as vacationing in a country, visiting on business - or actually living there. Temporary visits can give a skewed perspective on a place. Each individual will have their own particular reason for changing residence; however, it is important to be mindful of the potential pitfalls to consider when making the decision to change your residence and establish a new main base in your life.
Obtaining an alternative residence is a significant, very personal and multifaceted decision for any individual. Whilst this decision may have a direct impact on the applicant’s business interests, a range of social, political, economic and personal issues should also be considered to determine the best jurisdiction in which to reside or hold a residence permit for reasons of security or personal flexibility. Therefore it is important to understand the advantages of different options and how they best serve your needs. Some important criteria to consider when looking at an alternative country of residence include its geographical location and access via air, road, rail and sea; its political and economic stability; its banking facilities and business environment; its legal system; its tax system and any double taxation treaties with your country of origin; if you are married or live with a partner, the implications for any (pre-) nuptial agreements or other arrangements and the impact on your matrimonial property regime; if you have school-aged children, the education system and availability of private schools; visa-free travel possibilities as a residence permit holder; residence and other requirements for obtaining citizenship; and of course the overall cost of obtaining and maintaining a residence permit.
There are many different aspects which are relevant to consider. The following gives an overview of some of the most important.
Personal situation
It is essential that your tax and estate planning follows your business and personal situation, and not vice-versa. You should never relocate mainly for tax reasons. Unless you are happy in the new environment from a personal, family and lifestyle point of view, experience shows that very often you would then act in a way that will sooner or later jeopardize the tax planning which made you change your residence in the first place. Nevertheless, there are many situations where a change of residence fits in well with an individual’s personal, family or business situation, and in these cases a change of residence becomes a key element of international tax and estate planning. Indeed, the increased mobility made possible by modern technologies, logistics and efficient transport links means that persons of talent and means have an increased range of options with regard to where to reside and from where to conduct their business.
Education and schooling
An important such personal aspect is the schooling of children. If you have children of school age, careful planning is required when you consider relocating to new country. Besides the obvious priorities of whether the school environment is right for the child, language barriers, education systems, and a general idea about the education options available in the country need to be weighed.
It can be traumatic for a child to move to a new country where everything is unfamiliar. Therefore it is paramount that one considers the education choices carefully.
International schools can be a good option as the curriculum is usually in English and based on an international standard, recognized worldwide. Children will often be integrated more easily as the school is geared towards foreigners. The downside is that your children will not integrate with the locals as much.
An alternative is to send your children to a boarding school in a country with exceptional educational institutions such as Switzerland or England.
As each child will have different academic needs, the choice of school is a personal decision but it is important to consider the language and the credentials of the school. Is the curriculum recognized by international universities? Will the child easily adapt to the environment?
It is recommended to investigate the options in advance so that one has enough time for the application process. Also, it is important to settle prior to the new school year begins so the child feels more comfortable with his new surroundings.
Change of residence and domicile
Whereas residence simply means living in a particular place, domicile means living there with the intent to make it a fixed or permanent home. Legal domicile is an important concept in many countries with a legal system based on the tradition of Anglo-Saxon common law, with important implications in tax law. This is particularly relevant with regard to inheritance taxes. As explained herein, even after you have become resident in another country for income-tax purposes, you may still be considered domiciled in your previous country of residence for purposes of inheritance tax. It may be desirable or necessary to acquire a domicile of choice, which in turn will likely require more planning and more robust indicators that your connection to the new country of choice goes beyond a simple residence.
Tax residence
Most countries use residence as the key criterion for subjecting you to personal income taxes and other taxes such as capital gains or net wealth taxes. Normally, various tests are applied to determine a person’s tax residence, for example the number of days of physical presence in the relevant territory, having accommodation at your disposal, or your predominant personal and business interests. If an individual leaves a country and establishes bona fide residence in another country, however, the former is generally no longer able to tax the emigrant’s worldwide income.
Taxation based on citizenship
There is one important exception to the rule of taxation based on residence. Citizens and long-term permanent residents (Green Card holders) of the United States of America pay taxes to the United States regardless of their place of residence, i.e. even if they move their residence outside the USA. Therefore, the mere emigration of U.S. citizens does not terminate their U.S. tax liability. The only way for U.S. citizens and long-term permanent residents to terminate their unlimited U.S. tax liability is to relinquish their citizenship, i.e. to expatriate, or to give up their Green Card. The relinquishment of U.S. citizenship or a U.S. Green Card usually trigger special taxes, and specialist U.S. tax advice is required to ensure full compliance with the relatively complex rules applying to expatriating from the U.S.2
There are only a few other countries which have similar tax provisions to the USA. In the Netherlands, for example, inheritance tax applies for ten years after leaving the country as long as one remains a Dutch citizen, and only the relinquishment of Dutch citizenship would end the extended inheritance tax liability before this ten year period.
Exit taxes
Although taxation based on citizenship and long-term residence is unique to the USA (and a small number of other countries), a growing number of countries have introduced specific measures to discourage the emigration of individuals through various forms of taxation. Such exit or emigration taxes may have considerable implications for the tax aspects of your relocation plans.
In the coming years, larger, high-tax countries with sovereign debt problems need to increase their tax revenue substantially; this is difficult to achieve beyond a certain point of tax burden on individuals and businesses. However it is politically acceptable to tax wealthy people, and to prevent them or tax them even more if they try to leave the country. It is expected that countries will try to introduce different forms of exit taxes to prevent the exodus of lucrative taxpayers. From this point of view, if you are contemplating to move to another country, you need to carefully observe the developments on that front so as to possibly pre-empt a move by the legislator by your move abroad sooner rather than later.
Family law and inheritance law
If you are married or live together with a partner, or if you have or plan to have children, you also need to concern yourself with the impact a change of residence may have with regard