Global Residence and Citizenship Handbook. Christian H. Kälin

is recommended to investigate the options in advance so that one has enough time for the application process. Also, it is important to settle prior to the school year beginning so the child feels more comfortable with his/her new surroundings.

      Change of residence and domicile

      Whereas residence simply means living in a particular place, domicile means living there with the intent to make it a fixed or permanent home. Legal domicile is an important concept in many countries with a legal system based on the tradition of Anglo-Saxon common law, with important implications in tax law. This is particularly relevant with regard to inheritance taxes. As explained herein, even after you have become resident in another country for income tax purposes, you may still be considered domiciled in your previous country of residence for purposes of inheritance tax. It may be desirable or necessary to acquire a domicile of choice, which in turn will be likely to require more planning and more robust indicators that your connection to the new country of choice goes beyond a simple residence.

      Tax residence

      Most countries use residence as the key criterion for subjecting you to personal income taxes and other taxes such as capital gains or net wealth taxes. Normally, various tests are applied to determine a person’s tax residence, for example the number of days of physical presence in the relevant territory, having accommodation at your disposal, or your predominant personal and business interests. If an individual leaves a country and establishes bona fide residence in another country however, the former is generally no longer able to tax the emigrant’s worldwide income.

      Taxation based on citizenship

      There is one important exception to the rule of taxation based on residence. Citizens and long term permanent residents (Green Card holders) of the US pay taxes there regardless of their place of residence, i.e. even if they move their residence outside the US. Therefore, the mere emigration of US citizens does not terminate their US tax liability. The only way for US citizens and long-term permanent residents to terminate their unlimited US tax liability is to relinquish their citizenship, i.e. to expatriate, or to give up their Green Card. The relinquishment of US citizenship or a Green Card usually trigger special taxes, and specialist US tax advice is required to ensure full compliance with the relatively complex rules applying to expatriating from the US.²

      There are only a few other countries which have similar tax provisions. In the Netherlands, for example, inheritance tax applies for 10 years after leaving the country as long as one remains a Dutch citizen, and only the relinquishment of Dutch citizenship would end the extended inheritance tax liability before this 10 year period.

      In early 2012, during the French presidential elections, Nicholas Sarkozy introduced proposals to base French tax laws on citizenship, in addition to a citizen’s place of residence. Hence French citizens living abroad who pay less tax than they would do in France would have to pay the difference to the French government, or else give up French nationality. Since Sarkozy did not retain power, these proposals may have lost their immediacy, but it is unlikely that they will be forgotten. In the light of the global economic downturn, many governments will see this as a potential way to raise additional funds. This threat has already caused some French citizens to review their citizenship situation, and will continue to influence decisions before any such laws are passed.

      Exit taxes

      Although taxation based on citizenship and long-term residence is unique to the US (and a very small number of other countries), a growing number of countries have introduced specific measures to discourage the emigration of individuals through various forms of taxation. Such exit or emigration taxes may have considerable implications for the tax aspects of your relocation plans.

      In coming years larger, high-tax countries with sovereign debt problems need to increase their tax revenue substantially; this is difficult to achieve beyond a certain point of tax burden on individuals and businesses. However it is politically acceptable to tax wealthy people, and to prevent them or tax them even more if they try to leave the country. It can therefore be expected that countries will try to introduce different forms of exit taxes to prevent the exodus of good taxpayers. From this point of view, if you are contemplating a move to another country, you need to carefully observe the developments on that front so as to possibly pre-empt a move by the legislator by your move abroad sooner rather than later.

      Family law and inheritance law

      If you are married or live together with a partner, or if you have or plan to have children, you also need to concern yourself with the impact a change of residence may have with regard to family law. The UK, and in particular London, for example, attracts many wealthy foreigners as a place of residence; however, many do not realize that London is also the divorce capital of the world. One reason for this is that it has a divorce law that favors the poorer partner in a marriage - often the woman. This can mean nasty surprises, particularly for rich foreign men whose wives file for divorce in Britain. Even marriage contracts or prenuptial agreements that were concluded before moving to London may simply be disregarded by English courts.

      The impact on the matrimonial property regime applicable is also relevant if your marriage remains intact, as it can have considerable consequences in case of death of one of the spouses, up to the point of preventing common children from inheriting anything until the death of the remaining spouse.

      On the other hand, the applicable inheritance law may also become an issue: in many countries, especially in continental Europe, forced heirship rules prevail and you may no longer be able to easily leave your property to whom you deem it most appropriate, but rather the law may dictate, for example, that each of your children as well as your spouse must inherit a certain portion of your wealth. This is also applicable on real estate in certain countries, for example in France, where, if you hold the property in your name, French inheritance law and forced heirship rules apply, and a choice of law is not possible – even if you live outside of France.

      Inheritance taxes and estate planning

      A change of residence may not only reduce one’s income-tax burden significantly, it usually also has a major impact on the inheritance-tax situation. However, proper planning and advice is particularly important with regard to inheritance taxes, as in many countries the distinction between residence and domicile is relevant in this case. You may well be tax resident in a jurisdiction which levies no inheritance tax, but upon your death your former country of residence may claim that you were in fact still domiciled in that country and consequently may subject your worldwide estate to inheritance taxes. Furthermore, inheritance and gift taxes can also apply to heirs and beneficiaries of gifts (for example in Germany), or to the property that is transferred, and may thus be levied irrespective of the residence and domicile of the deceased. In the case of real estate, generally the country where the property is located will tax it. If you own US securities, however, the US imposes taxation upon the death of their owner even if there is no other connection to the US than the fact that the securities (the shares, bonds etc.) are issued by US entities. Trusts, foundations, companies or life insurance structures may be used in such cases to mitigate adverse exposure.

      Tax treaties and tie-breaker rules

      Tax treaties can be relevant in finding solutions to the various tax problems associated with moving from one country to another or with having multiple residences in different countries.

      Nearly all tax treaties include tie-breaker rules that determine which country 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 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 is therefore granted the right of taxation. The current version of the OECD model treaty makes the following provisions for an individual who is considered to be a tax resident in two countries with double tax treaties:

      1. He shall be deemed to be a resident only of the country in which he has a permanent home available to him; if he has a permanent home available to him in both countries, he shall be deemed to be a resident only of the country with which his personal and economic relations are closer (centre of vital interests)

      2. If the country