Managing life in more than one country
Entrepreneurs and other wealthy individuals are increasingly global citizens. Rather than being confined to a particular location or country, their business interests, family and lifestyle may embrace 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 being diverse and stimulating, it increases your ability to identify diverse investment opportunities and develop the lifestyle you want. 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, with unwelcome pitfalls for the unwary.
In most areas, good 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 how they interact. Meanwhile individual countries may well have different rules about what constitutes residency. It is possible to be considered resident in two places at the same time and become liable for tax on all income in both.
Expensive to misread the rules
The repercussions of getting it wrong can be significant. In a recent case, a football manager lost a case against the British tax authorities over the question of whether he was a UK resident in a particular tax year. 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 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 minute detail of the residency rules of multiple countries, a few basic principles apply to the majority of jurisdictions. 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.
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 calculating how many days have been spent in a particular country in a calendar year (or its own financial year), or the average over a period of years. It is worth spending time to understand 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 days spent in the country but to other criteria, such as the possession of a permanent place of residence, the centre of economic interests, the State where the individual carries on a trade, business or profession.
Taxation is likely to be the biggest headache for those who aspire to be truly global citizens. There is no international harmonisation of tax rules, meaning people straddling borders may find themselves subject to different tax years and payment dates, under widely varying rules.
They may have liabilities in more than one country, at different times. Double taxation avoidance treaties usually relate to income and wealth tax, sometimes inheritance tax and rarely gift tax. These tax treaties exist in order to shield individuals or companies from being taxed on the same income twice, but in practice these 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 instance, a country’s social security coverage is financed out of general taxation or has an independent income-related funding mechanism.
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); US citizens are subject to US income tax whether or not they reside there, and irrespective of where the income is sourced.
The position is usually clear-cut in areas such as personal income tax, which for employees is often deducted at source. Capital gains tax and inheritance tax can be murkier. For inheritance tax, residents of a particular country will usually pay tax on their worldwide assets, but they would also be liable for French tax on property inherited in France, to give one example.
Tax treaties, when in force, are designed to ensure that such levies are not paid twice, but residents of civil law countries, including most of continental Europe, also need to consider compulsory inheritance rules earmarking shares for children. The UK has complex rules governing its unique 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 achieve 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 standing for election.
It can also offer protection against changes in residency rules. Many EU citizens may not have considered it worth applying for citizenship in another member state until the experience of Brexit illustrated that seemingly permanent rights and arrangements are not immutable. British expatriates 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 country.
Citizenship usually takes time. The rules in France are typical: individuals have to be resident for at least five years, have sufficient and stable financial resources, demonstrate integration into French society, values and way of life, and pass a language test.
The rules in Spain are easier: those who have been legally resident for 10 years can apply with no further tests. There are also 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, though only after a period of time (four years in the case of France).
Matrimonial property regimes, forced heirs, parental responsibility are subject to change while moving abroad.
Changing residency may not only affect taxes but also civil aspects
Matrimonial property regimes, forced heirs, parental responsibility are subject to change while moving abroad. Most of the civil law jurisdictions have integrated in their legislation the concept of forced heirship regime with forced heirs, meaning certain individuals are entitled to inherit the wealth and property of the deceased. While moving abroad, forced heirs can change and the proportion of their rights as well.
A famous example can be found in the case of the French singer Johnny Hallyday who moved to the USA, where no forced heirship regime applies. In application of local rules, he excluded two of his elder children from his US will. On the year of his death, he however appears spending a significant amount of time residing in France (and this could be proven by referring to his social media activities). Therefore, after a long court case he was requalified as an “habitual resident” in France and the French law was applied to his succession. The French rules of the “reserved portion” were applied and 18.75% of his estate was due to each of his children.
As another example, as United Arab Emirates become a place where many European citizens are moving, parents must know that their rights and responsibilities regarding their child are not equally shared under local Islamic family law. The married father is the personal/legal guardian of the child and guardian of the child’s property. If a divorce or death occurs the mother may have no rights on her children as a result.
Fortunately for non -Muslim foreign nationals living in the UAE, arrangements can be agreed in order to be in line with the norms of their home countries.
Becoming an international citizen has much to recommend it, but it’s vital to stay on top of the rules, or run the risk of an uncertain legal status or owing tax in multiple jurisdictions. It can offer options on where and how to pay tax, and perhaps how much, but expert advice is always vital.