Global Residence and Citizenship Handbook. Christian H. Kälin
tax burden, depending on the jurisdiction. It is therefore imperative to establish the tax implications prior to changing residence. Interesting scenarios could arise that one would not ordinarily be aware of. Most sensibly, one should consult a tax advisor who is versed in the tax laws of both countries.
A trend which we see with tax authorities around the world is that they check not only how long you are resident in a particular country, but also whether you may be spending more days in their country than in any other single country. In other words, even if you spread out your presence globally across several jurisdictions, and say you are spending your year in 6 different countries with 80 days, 70 days, 60 days, 75 days, 10 days and 65 days in each, then it could be that the tax authorities of the country you spend 80 days could still deem you tax resident (in practice of course only if you have some other connection there), even if you are well below the normal threshold for that country but simply because you spent even less time elsewhere.
Day counting
If you spend more than 183 days in any country, you are normally tax resident in that country, unless the presence there is of a strictly limited, temporary nature. If you spend no time at all in a country, you cannot be deemed tax resident.
Between zero and 183 days lies a wide range of possibilities, although normally there are some minimum thresholds of number of days below which you are “safe”.7
You also need to be aware of what constitutes a day spent in any particular country. Is it a full 24 hours? Is it just being present in any given day, even if just for half an hour in transit? Furthermore, the year in which the days are counted may correspond to a different period than the calendar year, depending on the country’s “tax year”.
Some countries rely on a territorial (or source) based tax system8 which has no impact on whether one is resident or non-resident as all income derived in that country is subject to tax, while income derived outside the country remains tax free.9 Most countries, however, have taxation on world-wide income.
Therefore (tax) residence status becomes highly relevant as most countries use residence as the key criterion for subjecting one to personal income taxes and other taxes such as capital gains or net wealth taxes. Normally, various tests are applied to determine one’s tax residence. In most countries this is determined by the number of days of physical presence in the country, in combination with other factors.
The tax authorities will also establish whether the individual has accommodation readily available and family and business interests in the country. For former countries of residence, it is important for the individual to prove that he has left permanently to establish residence in another country as this confirms bona fide residence in the new jurisdiction so that the former country will no longer tax the emigrant’s worldwide income. In some countries, this change of residence is confirmed by way of exit taxes.
The emigration of US citizens does not terminate their world-wide tax liability under Federal tax law, even if they are permanently resident in another jurisdiction. In such cases, the only way to legally relinquish US tax liability is to give up US citizenship and obtain an alternative citizenship.10
The discrepancies between the tax systems of different countries can also be used to one’s advantage in the course of changing residence. Indeed, an important element in cross-border planning is to coordinate the timing of the tax events and the taxpayer. For example, the tax treatment of income derived from activities performed before or after a person gives up his residence, and the different qualification of such income in different countries, may lead to tax savings through carefully chosen timing of a change of residence.
Finally, it is important to be aware that a change of residence will not only have an impact on one’s personal tax situation but that one’s inheritance tax situation will also be effected. Even if one is not deemed tax resident in the jurisdiction, owning real estate in that jurisdiction may be a factor and in most countries where such taxes exist will still have local inheritance tax implications.
Exit taxes and extended income taxes
One problem with moving your tax domicile to another country, especially to one with low taxation, is that several high-tax countries have taken steps to discourage such moves, namely by introducing a form of exit tax or an extended income tax regime, or a combination thereof.
Exit taxes can be classified as general and limited taxes which are levied on income or capital gain that has accrued but not yet been realized; or as unlimited or limited extended income tax liability, which applies on income or capital gains arising after emigration.
Also a claw back of tax deductions could be invoked – for example whereby a previously tax deductible accrual would be revoked.11
In Germany, for example, the extended limited tax liability can apply for a period of 10 years after emigration which can be very burdensome for the individual. More and more countries are drafting special tax rules to make moves abroad fiscally less attractive.12
Many high tax countries already impose such regimes to discourage fiscal emigration.13 It is sometimes possible to mitigate – or in some cases even completely bypass – such taxation by appropriate structuring before, during and after a move abroad. However, this almost always requires the taxpayer to make a clean break with the former country of residence and to strictly avoid any links with it such as maintaining a second home there, making frequent visits or longer stays on its territory etc. These conditions can be tough for many expatriates and should be carefully weighed against the tax advantages such a radical change in one’s life will bring.
Tax treaties
Bilateral agreements to avoid double taxation of persons resident in contractual states exist between many countries. Tax treaties delimit the tax-imposition rights between two countries and takes precedence over national legislation.
Whereas ownership of real estate abroad usually implies limited tax liability as a result of ownership of this property in the foreign country, a move abroad always affects tax residence and has considerable consequences on tax liabilities. Therefore tax treaties can play an important factor in limiting such tax exposure.
Inheritance and gift taxes, which depend primarily on the testator’s last residence, may also be relevant. If a taxpayer who moves abroad has considerable income and assets, experience shows that the tax authorities concerned are particularly interested in the deceased’s last tax residence, as this leads in most countries to unrestricted tax liability on his or her estate. However, relatively few tax treaties concern inheritance and gift taxes; generally when speaking about double tax treaties, these relate to income and possibly wealth taxes only.
It may happen that two countries – according to their respective tax laws – simultaneously consider a particular taxpayer as fiscally resident and unrestrictedly tax liable. This could result in him being taxed on his global income and possibly also on his assets by both countries on the basis of their domestic tax regimes. But if a double taxation agreement exists between the two countries, it will help to determine where the taxpayer is fiscally resident and thus liable to unrestricted taxation, and which country is to merely apply restricted taxation – namely on any assets or income located within its territory.
Residence in one of the two contractual states is normally the precondition for the application of the relevant double taxation treaty and all claims on its protection. The treaty formulates precise rules to determine in which of the two contractual countries a taxpayer is deemed to be fiscally resident. They are known as tie-breaker rules and in the majority of double taxation treaties they follow the OECD model treaty.
Accordingly, most double taxation agreements define the country of tax residence as the place where the taxpayer has his main permanent home. If he has homes in both countries, the crucial point is where his personal and/or economic activities are centered. His habitual place of living is then in third place, and citizenship is considered only in fourth place. If the tax residence cannot be determined on the basis of these criteria, it is decided by mutual agreement between the countries concerned.
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