1.2Residence 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 OECD3 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.
1.3Change 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 later on that taxpayer returns to the same country. Complicated and costly arguments can emerge with the tax authorities, during which the taxpayer often loses. Even if the facts are quite clear and in favor of the tax payer, and a tax lawyer may insist that they have a “good case”, tax authorities, once on the case, often win simply because if it goes to court, in most cases the courts rule in their favor. With tax authorities in high-tax countries coming under increased pressure to collect more revenue, it is likely that they will scrutinize even more carefully cases worth their while.
For wealthy individuals moving their tax residence from one country to another, it is extremely important to plan a move carefully, and to anticipate possible issues later on depending on what the intention is in a few years’ time. It is also critical that all laws and regulations are carefully observed, and that one’s life can be properly organized around those rules without it being uncomfortable and impairing one’s quality of life.
Besides tax residence, of course, other factors such as the impact on your matrimonial property regime, or the inheritance law applicable if you pass away, are important. Here, if habitual residence were the sole connecting factor, your matrimonial, property and inheritance rights would be subject only to the legal system of the country where you happen to be resident. In many instances, however, this is not the case: matrimonial property regimes may remain the same, either by law or by express choice (for example by a notarized marriage contract concluded between the spouses in order to establish the law applicable on their marriage and in particular their matrimonial property regime).
Due to the significant impact on a person’s estate, it is essential to determine one’s domicile, especially if the person is effectively connected to and resides in more than one country. Moreover, each country has its own tax laws and regulations which will establish the tax liability if considered a tax resident. Therefore, when a person wishes to change tax residence status, it is important to ascertain what will constitute domicile or habitual residence in the eyes of the particular jurisdiction.
Factors to take into consideration may include the number of days spent in the country, the location of the main family home, family and business connections, and nationality.
In some countries, having accommodation available for use in that country after moving abroad may deem you resident in that country. It is generally advisable not to have accommodation readily available in such jurisdictions, which include countries like Germany, Sweden and many others.
Tax liability always arises with the number of days spent in the jurisdiction, for example, 183 days a year or more spent in the UK makes a person resident for the purpose of tax. But very often, a much smaller number of days is sufficient (in Switzerland, for example, if you spend more than 30 days there in a year and are deemed to pursue an economic activity, you are considered resident for tax purposes unless a tax treaty applies and provides otherwise).
Small efforts such as cancelling licenses and memberships; amending the electoral register to show that one is voting abroad; transferring the main bank account outside the country; and moving any business operation out of the country will show the local authorities that the person has no intention of being resident in the country.
In the end, it is a combination of several hard factors (such as number of days spent in a country, availability of accommodation, etc.) and soft factors (memberships in clubs, social and business connections and activities) which will determine the successful outcome of your international residence planning. This can range from very clear situations where all relevant hard and soft factors are in your favor, to borderline situations with a considerable risk of being deemed tax resident in more than one country and having to engage in lengthy discussions and arguments with tax authorities in one or several countries.
1.4Factors to consider when choosing a new residence
The decision to move to another country must not be taken lightly as there are many factors that will affect an individual and his family. It is recommended to undertake a thorough analysis of the country that you may consider as your new main place of residence and possibly your new domicile of choice.
There are significant aspects such as business environment and tax that must be considered but there are also seemingly minor aspects that one initially does not pay