The first step in optimizing your tax and estate planning situation is to identify all those countries to which you are linked in some way. This involves two key factors: the location and nature of your property - and your place of residence.
Sophisticated tax laws and anti-avoidance legislation worldwide make it more and more difficult to find tax-efficient structures for clients who are resident in high-tax countries. A change of residence to a suitable low-tax country is therefore an increasingly important aspect of international solutions to tax and estate planning for private clients.
For some individuals and families, a change of residence is a very sensible proposition. This is particularly the case for clients who live in high-tax countries with limited options for tax and estate planning, and for those who live in countries with an unstable political or economic situation where an alternative residence is also a means to increase personal security and achieve a better quality of life as well as offering the possibility to acquire a second citizenship.
Domicile and Residence
Whereas residence simply means living in a particular place, domicile means living there with the intent to make it a fixed and permanent home. Legal domicile is an important concept because it often controls jurisdiction with respect to taxation, mainly with regard to inheritance taxes. Even after a client has become resident in another country for income-tax purposes, he may still be considered domiciled in the previous country of residence for inheritance and gift-tax purposes. This is particularly the case in countries such as the United Kingdom, which rely on this concept to impose inheritance tax on their citizens even if they are no longer resident in the country.
Income Tax Based on Residence
Most countries use residence as the key criterion for personal income taxation. Normally, various tests are applied to determine a person's tax residence, for example physical presence, available accommodation or centre of vital interests. If an individual leaves a country and establishes bona fide residence in another country, the former is generally no longer able to tax the emigran's worldwide income.
Income Tax Based on Citizenship of US Citizens
There is one important exception to the rule of taxation based on residence. Citizens of the United States of America pay taxes to the United States federal government regardless of their place of residence. Therefore, if US citizens move their residence abroad this does not terminate their US tax liability. The only way for US citizens to terminate their US tax liability is to relinquish their citizenship, i.e. to become expatriates.
Inheritance Taxes and Estate Planning
A change of residence may not only reduce a person's income-tax burden significantly, it usually also has a major impact on their inheritance-tax situation. However, proper planning and advice is particularly important with regard to inheritance taxes, as the distinction between residence and domicile, and in some cases extended inheritance tax legislation, needs to be kept in mind. A client may well be tax resident in a jurisdiction which levies no inheritance tax, but upon his death another country may claim that he was in fact still domiciled in that country and consequently subject his worldwide estate to inheritance taxes.
Emigration / Exit Taxes
A growing number of countries have introduced specific measures to discourage the emigration of individuals through various forms of taxation. Such emigration taxes may have considerable implications for the tax aspects of a client's relocation plans.
Tax Treaties and Tie-breaker Rules
Tax treaties can be highly relevant to finding solutions to the tax problems associated with moving from one country to another. Tax treaties normally include a tie-breaker rule which determines the country that 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 respective 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 which is therefore given the right of taxation.
Health Insurance
Health insurance is a small but important element in residence planning that is often overlooked by both clients and their advisers. If someone moves abroad, their current health insurance policy will in most cases not be continued. So they are 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. Indeed, one of the first steps in a planned change of residence is to obtain worldwide health cover which ensures the necessary international flexibility. A specialized Henley & Partners group company, Swiss Insurance Partners AG, provides the necessary advice and assistance in this area.
Business and Family Situation
It is essential that a client's international tax and estate planning follows his business and personal situation, and not vice-versa. It cannot be stressed enough that a client should never be advised to relocate mainly for tax reasons. Not only will clients be unhappy in their new environment, but experience shows that they will very often act in a way that will sooner or later jeopardize the tax situation which made them change their residence in the first place. Nevertheless there are many situations where a change of residence fits in well with a client's business and family situation, and in these cases a change of residence becomes a key element of his tax and estate planning.
