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Tax Implications of Changing Domicile

Thursday, 27 June 2024

By Achille Deodato, CEO of Indigita SA

and Romain Potet, CEO of BRP Tax SA

In today's age, where increased mobility and political change are influencing financial investment decisions, it's essential to understand the tax implications of moving home. Governments are adopting a variety of approaches to tax policy. Some countries are abolishing advantageous regimes or certain tax niches, while others are introducing incentives to attract wealthy individuals, known as High Net Worth Individuals (HNWI). Recently, for example, the UK is planning to abolish its special regime for non-domiciled residents (UK RND), and Portugal has put an end to its advantageous tax regime for non-habitual residents (RNH), notably for pensioners. Conversely, countries such as Italy, Greece and the United Arab Emirates are actively courting HNWIs with favorable tax regimes. In view of these developments, it is crucial to consider various tax criteria when changing domicile to ensure optimal financial results and compliance with local laws.

Changing your domicile, or principal residence, can have significant tax implications. Domicile generally refers to the place where a person takes up residence with the intention of settling there permanently. When planning a change of domicile, it is crucial to consider various tax aspects to avoid unexpected risks. Each country has its own criteria for determining tax residency and taxing an individual on an unlimited basis. Tax residency is a de facto concept, generally based on physical presence in a country. In principle, it is determined by objective criteria such as presence in the country for more than six months, location of family, professional or business activity, principal place of residence, center of economic interests, or nationality. The authorities examine all the facts and circumstances. Without careful planning of the change of residence, a person may be recognized as a tax resident in several countries, and double taxation of income can only be avoided by the application of a bilateral tax treaty (DTT) in force between the two countries. While it is often advisable to clearly sever ties with the old country and demonstrate a clear connection with the new one, the treaty network of the new country of residence must also be taken into account.

Most governments finance their spending through taxation. For individuals, these include income tax and sometimes wealth tax. Income tax rates vary considerably from country to country, and can be either fixed or progressive. 

However, there are many low-tax regimes, and even tax-free jurisdictions. While tax is generally levied on worldwide income, some countries only tax income generated on their territory.

When changing residence, it is also necessary to assess the tax consequences of realizing capital gains on the sale of securities or real estate. Generally speaking, taxation can be reduced depending on the gain realized or the type of investment, and tax deductions are allowed depending on the length of time the property sold has been held. Similarly, some jurisdictions exempt capital gains realized on private assets from taxation. It is advisable to plan sales in stages, with a pre-established chronology. For example, the sale of a principal residence after a move can be problematic, as the tax authorities will apply the same capital gains tax treatment as for nonresidents.

In addition, some jurisdictions may impose an "exit tax" on unrealized capital gains when taxpayers transfer their tax residence to another country. In this case, unrealized capital gains are calculated at the date of departure, and the appropriate tax rate is applied. In some cases, tax can be automatically deferred or waived if the taxpayer moves to a country that is not on the blacklist or is a member of an economic union.

On the other hand, if the country of emigration is blacklisted, a person may still be considered a tax resident in the country of origin for several years.

Many countries have incorporated anti-abuse rules into their domestic tax legislation to treat the income of certain entities as the personal income of the owners or controlling individuals. Entities that do not meet certain criteria, such as the existence of economic substance and a sufficient level of corporate taxation, are considered fiscally transparent. As a result, these tax laws adopt a "look through" approach for closely-held structures. This means that any income generated by these entities is distributed among the individuals associated with them, such as the shareholders of the company or the settlors and beneficiaries of a foundation or trust.

In addition, the transfer of assets free of charge by gift or inheritance may generate a tax event depending on the country of residence of the donor or deceased, or for certain jurisdictions, on the domicile of the donees or heirs. Many countries impose their own inheritance and gift taxes, with exemption amounts and rates varying according to degree of kinship. Specific planning is therefore required. In some cases, as with the new measures envisaged by the UK, inheritance taxes in the country of departure may follow for a fixed period, even several years.

Moreover, for existing financial investments, it is essential to consult a financial advisor to analyze their relevance in the tax context of the new country of residence and adjust the securities portfolio accordingly.

Indeed, some investments may involve unfavorable taxation with burdensome administrative obligations. What's more, many double-taxation treaties prohibit access to the benefits of the treaty for people benefiting from a special tax regime that exempts income. As a result, the country of the issuer of a financial product must be taken into account in the investment process, particularly in the case of withholding tax on the distribution of dividends or interest without the possibility of tax relief.

In conclusion, although changing residence can offer significant tax advantages, it requires careful long-term planning and a good understanding of the tax implications. Calling in a tax professional, skilled in both national and international tax law, can facilitate a smooth transition and guarantee legal certainty with efficient taxation. It is important to consider future sources of income, current contracts, pension plans and possible future legislative reforms when choosing a new domicile. This will optimize the financial situation and avoid costly surprises in the new country of residence.


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