Managing life in more than one country

It’s increasingly common for entrepreneurs and other wealthy individuals to become global citizens. Rather than being confined to a particular location or country, their business interests, family and lifestyle may generate ties to multiple jurisdictions. What are the factors they need to take into consideration – from nationality and residence rules to the inevitable complexity of multi-jurisdictional taxation?

An international lifestyle, involving property and business interests in different countries, has its advantages. As well as offering diversity of experience and being stimulating, it increases your ability to identify a wide range of investment opportunities and develop the lifestyle you desire. It might even help you pay less tax – although it could also result in having to pay more. However, there’s no doubt that it will increase complexity. Citizenship, residency and taxation rules can be a minefield, and unwelcome pitfalls await the unwary.

In most areas, sound expert advice is a prerequisite. It is almost impossible for an individual to keep track of what may be quite different tax and residency rules, and the complexity of how they interact. Particular countries may have different rules about what constitutes residency. It is possible to be considered resident in two places at the same time and to become liable for tax on all income in both.

Expensive to misread the rules

The repercussions of getting it wrong can be significant. In June 2022, minor league football manager Ernie Batten lost his appeal against a decision by tax authority HM Revenue & Customs over the question of whether he was a UK resident in a particular tax year (he claimed to be resident in Gibraltar). As a result, he became liable for capital gains tax on the sale of 34 properties in Britain; it can be very expensive to misread the rules. And the UK’s exit from the European Union in 2021 has only added to the potential complications.

Residency rules generally affect how much tax you pay and the extent to which you are entitled to government benefits, such as state pensions or medical care.

Without going into the fine detail of the residency rules of multiple countries, a few basic principles apply to most jurisdictions. Residency rules generally affect your liability for tax and your eligibility for public benefits, such as statutory pensions or medical care.

Residency is an official status that allows an individual to stay in a country for a fixed, or open-ended, period of time. It can be temporary or permanent and may need to be renewed periodically to remain valid. A residence permit may allow an individual to live and work in the country, be a factor in buying property (although not always), use the health service and enrol children in the education system. It can offer privileges outside the country itself, such as the EU’s freedom of movement principle.

Complicated residency calculations

But the rules on what constitutes residency for tax purposes are often more complicated. They may involve counting how many days – or nights – have been spent in a particular country in a calendar year (or its own financial year – Britain’s runs from April 1 to March 31, but its tax year is from April 6 to April 5), or the average over a period of years. It is worth devoting time to understanding the rules for every country in which you spend more than short periods of time, since it is possible to be deemed a resident of a country for tax purposes without realising it.

Some states do not link residency to the number of days spent in the country but to other criteria, such as the possession of a permanent place of residence, a centre of economic interests, or the state in which an individual conducts a trade or profession, or owns a business.

Taxation is in most cases the biggest headache for those who aspire to be truly global citizens. There is no international harmonisation of tax rules, so people whose lives straddle borders may find themselves grappling with different tax years and payment dates, and subject to widely varying rules.

They may have tax liabilities in more than one country, at different times. Double taxation avoidance treaties usually relate to income and wealth tax, sometimes inheritance tax but rarely gift tax. These tax treaties exist to shield individuals or companies from being taxed twice on the same income, but in practice the treaties and their application are often imperfect.

Double taxation avoidance treaties exist in order to shield individuals or companies from being taxed on the same income twice, but in practice these are often imperfect.

If tax rates are higher in one country, you might be required to make top-up payments there; but the situation may be complicated by whether, for example, a country’s social security coverage is financed out of general taxation (like the UK) or has an independent income-related funding mechanism (as in Luxembourg and France).

Citizenship- and residence-based taxation

There are few elements that hold true everywhere. Taxation usually kicks in when someone becomes resident. While non-residents may only pay tax on money earned in that particular country (and in some cases not even then), residents are normally required to pay tax on their worldwide income.

Citizenship generally makes no difference to taxation, except for the US (as well as Eritrea, and to a certain extent China); American citizens are subject to US income tax whether or not they reside there, and irrespective of where the income comes from.

The position is usually clear-cut in areas such as personal income tax, which for employees is often deducted at source, but with capital gains tax and inheritance tax the situation can be more complicated. For inheritance tax, residents of a particular country will usually pay tax there on their worldwide assets, but they would also be liable for French tax on property inherited in France, for example. French residents are liable for tax on inheritance of assets located in most countries, but not those in Britain.

Tax treaties are intended to ensure that inheritance duties do not have to be paid twice. However, residents of civil law countries, including most of continental Europe, also need to consider compulsory inheritance rules. The UK has complex rules governing its unique – and hard to understand – concept of domicile, which is independent of nationality and residence, and can affect liability to inheritance tax as well as the scope of income tax for UK residents. In short, it’s a minefield that makes expert advice essential.

Citizenship can be more complicated to achieve and in most cases will make little or no difference to the tax you pay.

Lessons from Brexit

Citizenship can be more complicated to obtain and in most cases will make little or no difference to the tax you pay. However, if you have made a country your home by living there permanently, you may want to ensure you can participate fully in local life – for example, by voting or even standing for election.

It can also offer protection against changes in residency rules. Many EU citizens might not have considered the value of applying for citizenship in another member state until the experience of Brexit illustrated that apparently permanent rights are not immutable. British expatriates resident in countries such as Spain and France have found their legal situation significantly altered – for example, losing the automatic right to settle or work in a different EU member state.

Acquiring citizenship usually takes time. The rules in France are typical: applicants must be resident for at least five years, have sufficient and stable financial resources, demonstrate integration into French society, values and way of life (including passing an exam on the country’s history, constitution and institutions), and pass a language test.

The rules in Spain are similar – those who have been legally resident for 10 years can apply once they have passed the cultural knowledge and language tests. There are exceptions for those with relatives in a country. Those whose parents were French or Spanish nationals can apply to become citizens through descent. Most European countries allow citizenship to be acquired through marriage, but only after a period of time (four years in the case of France).

Most EU countries allow dual nationality, at least for those holding citizenship of another member states, but Spain allows this only in certain limited cases – people of Spanish origin or from a Latin American country where Spanish or Portuguese is an official language, as long as applicants have historical and cultural ties with Spain; citizens of a handful of countries including Andorra, the Philippines, Equatorial Guinea, Portugal and France, and Sephardic Jews; and those with citizenship by origin in both the other country and Spain. All others must renounce their previous nationality on taking Spanish citizenship.

Matrimonial property, inheritance and parental responsibility regimes may be subject to change on moving abroad.

Tax and civil aspects of changing residency

Matrimonial property, inheritance and parental responsibility regimes may be subject to change on moving abroad. Civil law jurisdictions with compulsory inheritance rules impose minimum proportions of inheritance for certain categories of heir, essentially children and spouses, but the rules vary from country to country.

A celebrated example was the late French singer Johnny Hallyday, who moved to the United States, where there is no compulsory heirship regime, and excluded two of his elder children under his US will. By the year of his death, he was found to be spending a significant amount of time in France – evidenced by his social media activity. Following a long court case, he was reclassified as an habitual resident of the country and French law was applied to his estate, entitling each of his children to receive 18.75% of his assets.

In United Arab Emirates, which has increasing numbers of European residents, parents should be aware that their rights and responsibilities regarding children are not equally shared under Islamic family law. The married father is the personal and legal guardian of the child and guardian of the child’s property. In the event of divorce or death, the mother may have no rights regarding her children. However, UAE law permits arrangements to apply family law in line with the provisions in parents’ countries of origin.

If you aspire to be an international citizen, it’s vital to be aware of countries’ different rules and how they may intersect, or run the risk of uncertain legal status or unexpected tax liabilities in more than one jurisdiction. Always be aware of the need for expert advice.