The impact on the matrimonial property regime applicable is also relevant if your marriage is intact, as it can have considerable consequences in case of death of one of the spouses, up to the point of preventing common children from inheriting anything until the death of the remaining spouse.
On the other hand, the applicable inheritance law may also become an issue: in many countries, in particular in continental Europe, forced heirship rules prevail and you may no longer be able to easily leave your property to whom you deem it most appropriate, but rather the law may dictate, for example, that each of your children as well as your spouse must inherit a certain portion of your wealth. This is also applicable on real estate in certain countries, for example in France, where, if you hold the property in your name, French inheritance law and forced heirship rules apply, and a choice of law is not possible.
Inheritance taxes and estate planning
A change of residence may not only reduce one’s income-tax burden significantly, it usually also has a major impact on the inheritance-tax situation. However, proper planning and advice is particularly important with regard to inheritance taxes, as in many countries the distinction between residence and domicile is relevant in this case. You may well be tax resident in a jurisdiction which levies no inheritance tax, but upon your death your former country of residence may claim that you were in fact domiciled in that country and consequently subject your worldwide estate to inheritance taxes. Furthermore, inheritance and gift taxes can also apply to heirs and beneficiaries of gifts (for example in Germany), or to the property that is transferred and may thus be levied irrespective of the residence and domicile of the deceased. In case of real property generally the country where the property is located will tax it. In case you own U.S. securities, however, the U.S. imposes taxation in case of death of their owner even if there is no other connection to the USA than the fact that the securities (the shares, bonds etc.) are issued by U.S. entities. Trusts, foundations or life insurance structures may be used to a limited extent in such cases to mitigate adverse exposure.
Tax treaties and tie-breaker rules
Tax treaties can be relevant to finding solutions to the various tax problems associated with moving from one country to another or with having multiple residences in different countries.
Nearly all tax treaties include tie-breaker rules that determine which country has the right to tax an individual who is deemed to be resident for tax purposes in two countries at the same time by their domestic rules. The tie-breaker tests are applied in stages in order to determine the country with which the individual has the closest connection and is therefore granted the right of taxation. The current version of the OECD model treaty makes the following provisions for an individual who is considered to be a tax resident in two countries with double-tax treaties:
1. He shall be deemed to be a resident only of the country in which he has a permanent home available to him; if he has a permanent home available to him in both countries, he shall be deemed to be a resident only of the country with which his personal and economic relations are closer (centre of vital interests);
2. If the country in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either country, he shall be deemed to be a resident only of the country in which he has an habitual residence;
3. If he has an habitual residence in both countries, or in neither of them, he shall be deemed to be a resident only of the country of which he is a citizen;
4. If he is a citizen of both countries or of neither of them, the competent authorities of both countries shall settle the question by mutual agreement.
In reality, mutual settlements between countries are rare and a solution is usually found earlier, either with the tax authorities in the country where the dispute about tax residence has arisen, or in the courts of that country if no agreement could be reached with the tax authorities.
Acquisition of real estate
To acquire property in attractive locations and in particular in the new country of residence contributes to the quality of life, satisfies prestige needs, and to some extent also constitutes an investment. It is, however, a good idea to consider renting before purchasing a property as this is the best way to become familiar with an area before committing to a purchase. Obviously, there are many factors to take into account when acquiring property, besides tax and legal issues. It is usually advisable to appoint qualified professionals to assist with the acquisition and to navigate through the pitfalls of buying in a foreign country. Also consideration needs to be given whether to own the property directly or through a structure, and how easily it may be possible to sell again in the future.
Although most countries such as Great Britain, Canada or the USA, do not impose any restrictions on acquisition of real estate, there are countries such as Switzerland, Austria, Greece and Croatia that restrict foreign persons from buying property there. It is imperative to check that there are no restrictions applicable that will pose a problem or that could affect resale.3
Timing
As generally in life, timing is important also in the context of tax and estate planning, and in particular regarding residence planning. Specifically, the discrepancies between the tax systems of different countries can sometimes be used in the course of changing residence. Indeed, an important element in cross-border planning is to synchronize 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 yield tax savings through carefully chosen timing of a change of residence. The same goes for vesting of shares and share options, the receipt of commissions, proceeds from the sale of certain assets such as the main family home, where in many countries special tax exemptions apply, the date of signing of agreements which have significant value, the timing regarding the establishment of trusts and foundations, and so on.
Health insurance
Arranging adequate health insurance is an important element in international residence planning – yet it is often overlooked. If someone moves abroad, their current health insurance policy will not normally expire. One is then usually left with a choice of finding another local insurer in the new country of residence or of turning to an international health insurer. It is highly advisable to take out an appropriate health plan at a younger age and before the first signs of ill health manifest. Even if you are very wealthy and think you do not need health insurance at all, you need to think again: a private health policy with an internationally recognized insurer, ideally arranged through a competent specialized consultant,4 which gives you access to a 24-hour assistance service and a kind of medical family office can be extremely useful. It can even be critical if you have an accident in a remote part of the world and if the closest adequate hospital needs to be found in an instant, or to help you find and select the best doctor or clinic for a particular medical problem. Indeed, one of the first steps in a planned change of residence is to obtain worldwide health cover which ensures the necessary international flexibility.
1.5 Overview of key criteria: moving to another country
The following table provides an overview of some of the questions to ask when moving to another country,