In view of the increasingly aggressive fiscal and regulatory environment in some otherwise reasonably stable high-tax countries such as Canada, France, Germany, the Netherlands, the UK, the US and others, a move of residence to a country with a milder tax regime is an attractive option for many who feel they have to pay more than their fair share, and who do not like the constant erosion of their privacy.
In fact, often the only way to reduce the tax burden and regulatory restrictions legally and in a significant manner is to move.
In Germany, for example, the Government has direct access to all bank accounts of all taxpayers. This intrusion in privacy is rather uncomfortable, particularly if you are doing everything correctly and earn an honest living. Whenever there is access to information, such information is prone to leaks, to the information being sold to anyone interested and offering sufficient money in exchange for the information (for example kidnappers, which are already a serious problem in many countries around the world). The only way to avoid this is to move your residence to another country with a less invasive environment, providing more personal privacy.
In the US the erosion of privacy has reached even further, and additionally if you are an entrepreneur and investor with international exposure, your tax return can become very complicated, to the point where you are never really sure whether you have complied with all the rules and regulations. You have to employ expensive tax lawyers to ensure you do not become a criminal merely by overlooking the filing of the right form.
In many countries, rules and regulations are mushrooming and so the legal environment is becoming increasingly vague, leaving lots of room for interpretation by the authorities and thereby leaving you vulnerable. This leads to a situation where essentially everyone is potentially a criminal because there are so many different tax laws, regulations and rules that it is practically impossible to comply with all of them. This is already the case in countries like Italy, where it is impossible to run a small business and comply with all the regulations imposed by the state because the burden and cost of compliance is so high. Therefore practically all smaller and medium-sized businesses and most large ones as well, almost operate in some kind of grey zone. This is hardly a good environment to thrive in.
However, you should never move for tax reasons alone. Even if the tax and other burdens are heavy, you should look at your overall life situation: where your friends are, the environment you feel comfortable with, etc. Therefore, it only makes sense to consider residence planning if you already have a sufficiently international situation, lifestyle and outlook.
If your life is already international, then of course 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.
Effective 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. The person may well be tax resident in a jurisdiction which levies no inheritance tax, but upon their death their former country of residence (for example the UK) may claim that they were in fact domiciled in that country and consequently subject their worldwide estate to inheritance taxes. Furthermore, inheritance and gift taxes can also apply to heirs and beneficiaries of gifts (as in the case of Germany), or to the property that is transferred (as almost always in the case of immovable property if not placed in an appropriate structure), and may thus be levied irrespective of the residence and domicile of the deceased. Trusts, foundations or life insurance structures may be used in such cases to mitigate adverse consequences.
A change of residence is a significant, very personal and multifaceted decision for any individual or family. Whilst this decision may have a direct impact on one’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 imperative to understand the advantages of different options and how they best serve your specific needs.
1.2 Residence and domicile
The concepts of residence and domicile have far-reaching effects on a person’s private life as they concern issues like marriage status, inheritance position in terms of applicable law and taxation, and tax status.
Residence simply refers to living in a particular place. Often expatriates who have moved to another country for work for a period of time are considered resident in that country. This is usually referred as habitual residence.
Domicile is an important concept in many countries where the legal system is based on the tradition of Anglo-Saxon common law. Domicile means to live in a place with the intention to make the place a fixed and permanent home – the person’s ‘real’ home. Domicile is distinct from nationality or citizenship, although a person’s nationality or citizenship may be a determining factor, too. A person can only have one domicile at any time, and the domicile may be a different place from the place of residence.
Ordinarily the country in which a person is domiciled will govern how the individuals’ property is dealt with i.e. in case of divorce or upon death. It is imperative to determine one’s status, especially if the person has more than one place of residence in different countries.
An individual will usually acquire the domicile of their parents, usually the father, at the time of birth. This will be the domicile of origin. Such can be changed to domicile of choice by taking up permanent residence in another country, with no intention of returning to the country of origin. However, an individual may still be considered domiciled in their previous country of residence and the country of domicile of origin, regardless of whether they have become resident in another country – this can have devastating effects, for example, on inheritance tax. Thus there have been many cases where individual taxpayers left the UK years ago and lived abroad, were resident there continuously until their death, but their domicile was still considered the UK and therefore their estate became subject to UK inheritance tax.
Given that many people move from one country to another, it is essential to have a means of establishing which system of law applies to their situation as each jurisdiction will have a different effect on their civil status (such as marriage and divorce) and some aspects of their property (such as applicable matrimonial property regimes and inheritance laws and taxation).
Although domicile is used as the fundamental connecting factor in the UK and most Commonwealth countries; in Brazil, Denmark, Ireland, Norway, the US and others, different connecting factors, and in particular habitual residence, are preferred.
Habitual residence, a concept used also in international (income) tax treaties based on the OECD1 model treaty, is the generally accepted main factor to determine a person’s tax residence, at least for income tax purposes, but also in many other cases and increasingly so for inheritance tax purposes. Critics argue that the connection is not strong enough to give sufficient weight to the individuals’ civil rights and affairs in any given country i.e. habitual residence as a concept can be problematic where a person is working or living abroad for a longer but essentially temporary period of time.
1.3 Change of tax residence
Even in countries which base their tax residence determination mainly or only on habitual residence, tax authorities begin to take note when (wealthy) taxpayers move abroad – or “arrive”, i.e. start to spend a considerable amount of time in the country without necessarily declaring themselves as resident.
It can well be that even a change of residence abroad for two to three years may no longer be sufficient to “get rid” of the tax residence status if