Tax planning and moving to Canada

Tax planning and moving to Canada

The Importance of Tax Planning when moving to Canada

For anyone planning to immigrate to Canada, or former Canadian residents preparing to return after a period of non-residency, it is worth taking the time to do some pre-immigration tax planning. It may well be that the Canadian tax environment is a lot more aggressive than where you’re coming from. If you wait until after you arrive to start arranging your affairs, it will be too late. Each personal or family situation will be unique and will benefit from bespoke professional advice, but this note will outline a few things that a prospective new/returning Canadian should bear in mind before making their move.

Canada imposes tax on the basis of residency, so once you become a Canadian resident you will be subject to Canadian taxation on your worldwide income, including foreign investments, foreign trusts, foreign rental properties, proceeds of the sale of foreign properties, and any other income from any source, anywhere in the world.  Foreign tax credits may apply to reduce your Canadian tax burden to some extent on foreign sources of income to avoid “double” tax on such amounts.

The Canada Revenue Agency (CRA) actively investigates foreign income and has information exchange treaties with many other countries (including automatic exchange of information treaties that provide for easy, fast, automated sharing), so your assumption should be that the CRA will be able to find or verify any foreign income you may have. It is your responsibility under Canadian law to voluntarily report it – if the CRA has to seek it out, you will be subject to interest and penalties.

Certain income earned before you arrive in Canada, but which you receive after you arrive (i.e., become “resident” in Canada) are taxed in Canada, so make sure you receive as much income as possible prior to your arrival and do not leave amounts accrued and unpaid.

The deemed tax cost (i.e., the adjusted cost base) of your capital assets (worldwide) for Canadian tax purposes will be their fair market value as of the date you become a Canadian resident. This is a benefit because when you dispose of any such assets, you pay tax only on the capital appreciation over and above the adjusted cost base of the asset, so the higher it can be, the better. You should obtain third-party valuations of your material capital assets shortly before or after you become a resident and keep this information on file, as you will need it.

Consider arranging for the establishment of one or more trusts which can help reduce your Canadian tax burden during life and upon succession. Canadian tax laws apply various so-called attribution rules and deemed residency rules for non-Canadian trusts, which operate to severely restrict offshore planning opportunities. Other rules do the same for corporate entities that hold property for a Canadian resident (attributing passive income directly to the individual shareholder). There is greater opportunity to implement effective structures without falling afoul of these rules prior to becoming a Canadian resident.

The same is true of a restructuring of existing trusts, that will become Canadian resident trusts when you move to Canada. The rules are complex and professional advice is necessary before attempting to implement any structures or changes.  The consequences of poor planning can be disastrous from a tax perspective, and such consequences are often avoidable.

Note in particular that even some actions taken prior to residency will come under the scrutiny of the CRA. For instance, if a foreign trust has been settled, or contributed to within the 5-year period prior to Canadian residency, the trust could be deemed to be Canadian resident, including retroactively to the time of the contribution. It depends on who made the contributions and how.

For trusts which do become Canadian resident when you do, note that those trusts will be taxable from January 1 of that year (even if you only became resident later in the year). If you can arrange for those trusts to receive payments prior to January 1 of the year you will become a Canadian resident, you should do that (such as paying out dividends to the trust on shares it holds).

Where a Canadian resident is a beneficiary of an offshore trust, and if the trust has been established in a manner that successfully avoids application of the Canadian attribution or deemed trust residency rules, it is possible to receive payments from such trusts on a tax-free basis. To achieve this, payments need to be made out of trust capital, not income, but this is not difficult to arrange with trusts that are established in jurisdictions that do not impose income tax on trusts. Such payments still need to be reported to the CRA as income received from a foreign trust on form T1142, but Canadian income tax is not payable on such amounts.

Even after Canadian residency is obtained, there remains many very good tax and non-tax reasons to make use of trusts in estate and succession planning, and they remain a central tool to the Canadian wealth planning community. However, there are unique and potentially very beneficial opportunities available to non-residents; be sure to take full advantage of them. http://www.afridi-angell.com

tax planning

James Bowden

Afridi & Angell
Why is Belgium tax residence appealing for HNWI?

Why is Belgium tax residence appealing for HNWI?

Given its excellent location and its favorable tax system, high net worth individuals find Belgium to be the perfect operating base. High net worth individuals will find Belgium so attractive, because of the absence of net wealth tax and capital gains tax, as well as the low flat rates on personal investment income. Furthermore, the low gift tax on movable assets offers great opportunities for estate planning.

Why is the Belgian tax system so attractive?

The Belgian tax system is highly attractive for high net worth individuals:

  • Income tax liability is linked to residency;
  • Personal investment income is taxed at low flat rates;
  • Conditionally, there is no tax on capital gains; and
  • Belgium does not levy a net wealth tax!

The flexible gift tax system for movable assets provides for excellent estate planning opportunities, in combination with foundations or trusts.

General introduction to Belgium

Belgium is strategically located at the heart of Europe, between The Netherlands, Germany, France and The United Kingdom. Its High Speed Rail network links Brussels to Amsterdam, Frankfurt, Paris and London (Brussels-Paris in 1h25; Brussels–London in 2h).

Belgium is multi-lingual in every sector, and has a rich culture and excellent cuisine.  It may be a small country, but it has a rich variety in its communities, an excellent, high quality housing stock and a secure and agreeable life-style.

Belgium also has a highly attractive tax regime for wealthy individuals. Belgium is one of the few remaining European countries that does not levy a net wealth tax:

  • Capital gains on shares (also applicable to a controlled company 1) can be free of tax;
  • Capital gains on real estate are generally not taxable, nor is rental revenue from private real estate;
  • Dividend and interest income is generally taxed at a flat rate of 25%.

The Belgian tax system provides excellent estate-planning opportunities. Gift tax rates for donations of movable assets are extremely low (basically 3% or 3,3%). Donations of movable assets can even be made without paying any gift tax at all!

Three Belgian regions

Belgium is divided into three regions. The region of Flanders in the North has Dutch as its official language. In the region of Wallonia, in the Southern part of the country, the official language is French. The third region, in the center, is the region of the Capital, Brussels, officially bi-lingual (Dutch-French), in fact multi-lingual by virtue of its strategic location.

The regions were granted autonomous power to introduce their own tax rates as far as gift taxes and inheritance taxes are concerned.

How to become a Belgian tax resident?

In the Belgian tax system, Belgian residents are subject to tax on their worldwide income. An individual is considered a resident of Belgium if his/her principle residence or his/her centre of personal and economic interests is in Belgium. An individual is presumed to be a resident of Belgium when he/ she is registered in the civil register.

The assumption of residence based on the registration is, however a rebuttable assumption. Married persons are deemed to be residents of Belgium if their household is located in Belgium. The assumption of residence based on establishment of household is an irrefutable assumption.

How is personal investment income taxed in Belgium?

  • Interest and dividend income is generally taxed at a flat rate of 25%.
  • Interest and dividend revenue received on a foreign bank account, must be declared in a Belgian resident’s annual income tax return.

No Belgian wealth tax

One of the main reasons why the Belgian tax system is so appealing to high worth individuals, is that personal wealth is not taxed. There is no obligation to declare one’s wealth. In the annual income tax return, only taxable income needs to be declared.

However, tax payers need to report whether (or not) accounts are held in their names at banks  outside Belgium. The names of the countries in which the foreign banks are located must also be reported in the annual tax return.

Additionally, tax payers must report whether (or not) insurance contracts have been subscribed with  insurance companies outside Belgium. The names of the countries in which the insurance companies are located need to be reported.

Finally, tax payers are obliged to report the existence of any trust of which they, their spouses, or underage children, are either settlors or (to their knowledge) beneficiaries, regardless of the manner or time at which the advantage is conferred. The reporting obligation also extends to potential beneficiaries.

No Belgian capital gain tax

Capital gains on shares sold by Belgian individual residents, as part of the normal management of their private assets, remain free from personal income tax in Belgium, e.g. capital gains from the sale of shares (including substantial shareholdings in controlled companies) to a third party.

Belgian inheritance tax

Belgian inheritance tax is levied on the worldwide net property of a deceased Belgian resident. The latter’s nationality is of no relevance. The fiscal residency and the nationality of the heirs have no bearing either. It is the place of residence of the deceased which triggers liability to inheritance tax.

  • If a Belgian resident inherits from a non-Belgian resident, no inheritance tax is due in Belgium.
  • Foreign inheritance taxes paid on real estate located abroad owned by a deceased Belgian resident can be deducted from Belgian tax payable if certain formalities are met.
  • Heirs and legatees, resident or non-resident, are taxable persons for the purpose of inheritance tax.

The taxable estate includes all gifts made within a period of 3 years prior to death and on which no Belgian gift tax has been paid. The risk of having to pay inheritance tax on a gift for which no gift tax has been paid can be covered by subscribing an insurance policy.

The amount payable depends on the inheritor’s relationship to the deceased, the deceased’s region of fiscal residence (Flanders, Wallonia or Brussels) and the market value of the part of the estate inherited.

In Wallonia and Brussels the applicable rates vary from 3% up to 30% (above 500,000 EURO) for parents and (grand)children. In Flanders the maximum rate is 27% (above 250,000 EURO) for parents and (grand)children. The rates for spouses and partners are identical.

No/low Belgian inheritance tax for shares in E.U.-companies

The three regions have adopted specific regimes under which shares in companies, whose registered offices are in an E.U.-member state, can be inherited at an extremely low flat rate of 3% (Flanders, Brussels) or even at 0% (Wallonia), if certain conditions are met.

Low Belgian gift tax

In the Belgian tax system, gift tax is triggered by the registration of a written document (such as a notary public’s deed) giving effect to a gift made by a Belgian resident.

Real estate located in Belgium cannot be donated without payment of Belgian gift tax. For the transfer of property to be valid vis-à-vis third parties, the deed of transfer needs to be recorded with the Land Registry (i.e. the official and public list of owners of real estate). At the Land Registry, only registered deeds, certified by a Belgian notary public, are accepted for notification.

A Belgian notary public is legally obliged to register all his deeds at the relevant tax office. The registration of the deed triggers the levy of gift tax, which is one of the taxes in the Belgian code of registration taxes.The amount of the gift tax payable on donation of real estate depends on the relationship of the beneficiary to the donor, on the donor’s region of fiscal residence (Flanders, Wallonia or Brussels) and on the market value of the gifted property.

In all three regions (Flanders, Wallonia and Brussels) the applicable rates on the donation of real estate vary from 3% up to 30% (above 500,000 EURO) for parents and (grand)children. The rates for spouses and partners are identical.

  • Movable assets can be formally donated without payment of Belgian gift tax by a deed of transfer before a foreign notary public. There is no legal obligation to register the foreign deed in Belgium. Voluntary gift taxes are only due if the foreign deed is registered in Belgium.
  • Certain movable assets can be informally donated, “from hand to hand”, without payment of Belgian gift tax . Substantiating documents can be drawn up, but gift taxes would only be voluntarily due if those documents were to be registered in Belgium.
  • Gift taxes are due when movable assets are donated in a formal way before a Belgian notary public

Each region has adopted flat rates for gifts of movable assets, regardless of the value of the object of the gift.

Flanders and Brussels have established a flat rate of 3% for gifts between parents and (grand)children. In Wallonia, a flat rate of 3,3% is applicable for gifts between parents and (grand)children. In all three regions, the rates for gifts between spouses and partners are identical.

Residents opt for gifts of their movable assets with payment of the 3% (Flanders and Brussels) or the 3,3% (Wallonia) gift tax in order to avoid the risk of payment of Belgian inheritance tax. For inheritance purposes the taxable estate includes all gifts made by a Belgian resident within a period of 3 years prior to death without the payment of Belgian gift tax.

The fact that movable assets can be donated without payment of gift tax or with payment of the 3% (Flanders and Brussels) or the 3,3% (Wallonia) gift tax provides for excellent estate planning opportunities. Often donations are combined with the setting up of a foundation or trust.

No/low gift tax in Belgium for shares in E.U.-companies

The three regions have adopted specific regimes under which shares in companies, which have their registered offices in an E.U.-member state, can be donated at an extremely low flat rate of 3% (Brussels) or even 0% (Flanders, Wallonia), if certain conditions are met.

No Belgian exit tax

No special taxes are levied upon the emigration of a resident. Once an individual is no longer a Belgian resident, he/she is no longer liable to tax in Belgium. There is no tax liability based on deemed residency. https://www.loyensloeff.com/

Saskia Lust

Saskia Lust

Loyens & Loeff
  1. Belgian tax law does not currently include CFC (controlled foreign company) rules[]
Declaration of foreign assets and income in Belgium

Declaration of foreign assets and income in Belgium

Already since tax year 1997, Belgian tax resident individuals have to declare the existence of foreign assets/accounts they hold with banks abroad. This declaration of foreign assets is to be made in the annual income tax declaration. This means that taxpayers have to “tick the box” to confirm that they hold a bank account abroad and that they have to mention the country where the bank account is held.

The tax administration can (subsequently) ask the taxpayer to provide her with all tax relevant information in relation to the declared bank account(s), allowing her to determine the amount of taxable income received on that bank account.

Declaration of foreign assets and income in Belgium

In practice, this legal obligation is not always known to Belgian resident individuals. Moreover, individuals who (recently) immigrated to Belgium in the past years are hardly ever aware of the compliance measure, while in particular these persons often hold bank accounts and have foreign assets in different countries following the international nature of their business and the location of their family and possible holiday houses. Nonetheless, these “international” individuals too have to comply with the Belgian reporting duties as soon as they settle as a Belgian tax resident.

The reporting duty applies regardless of the amounts held on the bank account and regardless of the fact whether the account generates income. Thus, also a small account (for instance an account held for the maintenance of the Chalet in Verbier) has to be reported. Self-evidently, the income received on the foreign bank account (i.e. usually dividend and interest income) also has to be declared in the income tax declaration.

Recently, the Belgian legislator moreover created two new legal obligations. Since tax year 2013, the taxpayer has to declare the existence of foreign life-insurance contracts abroad and starting from tax year 2014, the taxpayer will have to declare the existence of so called “private wealth structures” (trusts, foundations, off-shore companies,…) of which he is the founder or beneficiary.

Often the question arises, which legal consequences the taxpayer faces when he does not comply with his reporting duty (duties) and how non-reporting of foreign bank accounts ( and their foreign assets ) can be remedied as soon as the taxpayer becomes aware of the necessity thereof.

In general, non-complying with the reporting duty itself can only lead to an administrative fine of at most EUR 1.250,00. The tax administration may however perceive the non-declaration as a sign of tax evasion. In case foreign movable income has not been declared, the tax administration could claim tax increases up to 200%. When the tax administration retains tax evasion on behalf of the tax payer, the statute of limitations is moreover extended to 7 years. This means that non-declared income received in 2007 can still be taxed by the tax administration in 2014.

When the tax administration considers there is tax evasion on behalf of the taxpayer, she can also transfer the case to the public prosecutor. He could claim a criminal sanction following a violation of the income tax code with fraudulent intent. Moreover, he could claim a money-laundering offence on behalf of the taxpayer. Recent case law of the Belgian Constitutional Court (judgment April 3, 2014) however prohibits the culmination of administrative fines and criminal sanctions in tax cases. Nonetheless, it remains to be seen how the tax administration and the public prosecutor will apply this case law in practice.

Off-course, each individual should have the opportunity to remedy potential tax violations or mistakes for the past. In Belgium, this remedy existed under the form of a separate voluntary disclosure procedure which entered into force with a law of December, 27, 2005 and existed until the end of 2013. A voluntary disclosure demand had to be filed with a separate Voluntary Disclosure Unit.

In this procedure, non-declared income was finally subjected to the normal tax rate (as it should have applied when the income was immediately declared in the annual tax declaration), in some cases increased with an additional tax-fine varying between 5% and 20%, depending on the nature of the income that was declared. Upon payment of the voluntary disclosure imposition, the taxpayer received an attestation granting him tax and criminal immunity.

Since by the end of 2013 the existing voluntary disclosure procedure has been abolished, no special procedure currently exists for the regularization of undeclared assets. This obviously does not mean that the taxpayer should continue non-declaring the existence of his bank account or (movable) income he receives on this account.

First of all, the taxpayer could simply start with declaring the existence of his foreign bank account(s) as from his next tax declaration over tax year 2014. As from declaration, it will no longer be possible to state that the taxpayer wants to hide or conceal these assets to the tax administration. Thus, at least for the future, the taxpayer can no longer be deemed to act in a tax fraudulent way. For the past, it remains to be seen whether the tax administration decides to further investigate the taxpayer. This can never be excluded, but practice shows that declaring the existence of a foreign bank account does not automatically lead to investigative measures.

Besides this approach, the taxpayer can opt to spontaneously contact his local tax administration in order to rectify tax breaches committed in the past. As opposed to the regime under the higher mentioned abolished voluntary disclosure regime, no clear legal basis exists for such approach. The tax administration did confirm this possibility in a tax circular of April, 1, 2010 and continues to allow it in practice. This approach nonetheless entails negotiations with the tax inspector regarding the number of tax years to be rectified, the applicable tax increase, interests for late payment,…and the result may vary depending on the location.

In any event, it is advised that taxpayers who hold undeclared assets on a foreign bank account, seek legal advice in this respect timely. International exchange of banking information is increasing rapidly and Belgium more and more approaches the prosecution of undeclared assets from a criminal point of view. Settling possible tax evasion committed in the past, is moreover necessary in case of further wealth planning of these (foreign) assets and to preclude that heirs or beneficiaries are confronted with a tax or criminal investigation in the future. https://www.tiberghien.com/

tax planning

Gerd D. Goyvaerts

Tiberghien
Is immigration to Switzerland still attractive to persons with no gainful activity in Switzerland?

Is immigration to Switzerland still attractive to persons with no gainful activity in Switzerland?

Is immigration to Switzerland still attractive to persons with no gainful activity in Switzerland? Switzerland is an attractive country and is granting substantial tax benefits to immigrating foreigners. The advantages of Switzerland include: (1) Residence permit granted to EU-citizens without major problems, (2) Purchase of real property possible, (3) Low tax rates in certain cantons, (4) Lump-sum taxation, (5) No inheritance tax for spouses and children in most cantons.

Is immigration to Switzerland still attractive to persons with no gainful activity there?

If a person thinks about leaving his home country permanently and taking up residence in Switzerland, he will have to think about his desires for life in the future at first and then about the legal requirements to be met and the taxation ramifications. When I am asked by potential immigrants about the best place in Switzerland to live from a tax point of view, I always recommend them to take a car and to drive through Switzerland. Then they should come back to me and tell me which place they like best. It will normally be possible to find acceptable tax solutions in most of the places in Switzerland.

In a second step, the following main issues need to be addressed:

  • Residence permit;

  • Purchase of property;

  • Taxation.

Residence permit in Switzerland

 As a general rule, only persons aged 55 and above who have a close association with Switzerland and are not gainfully employed in Switzerland can obtain a residence permit with non-employed status. They must have the necessary financial means at their disposal. As an exception, foreigners without a close association with Switzerland can be granted a residence permit since 2008 if they are of particular financial interest to the canton.

This means, in practice, that a minimum tax, which may range from CHF 400’000.00 to CHF 1 mio., always depending upon the canton of residence, is agreed and annually paid. According to NZZ (24 May, 2014), 389 such permits have been granted until present.

Due to the bilateral Agreement on the free movement of persons between Switzerland and the EU and a similar agreement between Switzerland and the EFTA (“the Agreement”), EU/EFTA-citizens are entitled to obtain a residence permit in Switzerland provided that:

  • they have sufficient financial resources; and
  • health and accident insurance equivalent to Swiss health and accident insurance.

It is accordingly rather easy for an EU/EFTA-citizen to be granted a residence permit in Switzerland at present.

The situation may, however, change due to an amendment of the Swiss Federal Constitution caused by a federal vote of the Swiss people on the so-called Mass Immigration Initiative. 50.3% of the votes were in favour of this initiative, which provides that Switzerland shall control the immigration of foreigners itself in the future.

The result of this vote is in contradiction to the Agreement. Under the Agreement, the EU has the right to cancel essential parts of the bilateral agreements with Switzerland, unless a mutual understanding can be found within the next three years.

For the time being, nothing has changed in practice. Immigration of EU/EFTA-citizens is still covered by the Agreement until Switzerland has released a law introducing limits to the immigration of EU/EFTA-citizens. The Swiss government hopes to be able to find a solution for continuing the bilateral agreements with the EU in the future.

Purchase of property in Switzerland

Switzerland had traditionally heavy restrictions on the acquisition of real property by foreigners. Some years ago, the restrictions in respect of the purchase of commercial property were abolished. Foreigners with no residence in Switzerland do, however, still need a permit for the purchase of private property in Switzerland. A permit will only be granted in special cases, e.g., vacation apartments in certain parts of Switzerland (maximum 200 m2).

A citizen of the EU/EFTA is entitled to acquire commercial and private real property without limits, if he is a resident of Switzerland. For other foreigners resident in Switzerland, certain restrictions apply until they have been granted a C-permit.

Taxation – Income and Net Wealth Tax – Lump-Sum Taxation

A person resident in Switzerland is subject to unlimited tax liability in Switzerland. He will have to pay income taxes at rates ranging between 20% and more than 40% as well as net wealth taxes ranging from 0.1% to 1% on his worldwide income and net wealth. Real estate and permanent establishments abroad are exempt from Swiss taxation.

The tax rate heavily depends upon the canton and commune of residence. Whilst the overall income tax rate in Wollerau, Canton of Schwyz, is at present 18.5%, cities like Zurich, Geneva and Lugano have maximum income tax rates between 40% and 46%.

A special tax system, the so-called lump sum taxation, can be elected by foreigners who, for the first time or after an absence of at least ten years, take up tax residence in Switzerland and do not engage in any gainful activity in Switzerland. Under this system, Swiss income tax is levied on the basis of the living expenses rather than on actual income. Under federal regulations, the living expenses must amount to at least five times the annual rent or rental value of the owned property at present.

Due to new legislation, this amount will be increased to seven times of the annual rent and must not be lower than CHF 400’000.00 for federal tax purposes. Whilst the new rules will come into force as of 1 January, 2016, persons who are already subject to lump sum taxation will be granted a grandfathering until 1 January, 2021.

Some cantons have, abolished the lump sum taxation for cantonal tax purposes (most importantly Zurich), whilst other cantons have introduced similar provisions as the Federation. In addition, a net wealth tax is levied by the canton, the basis of which is normally determined by a capitalisation of the taxable income at a rate of 5%.

For each year, a comparative calculation between the agreed lump sum tax and the tax on Swiss source income, foreign source income for which treaty benefits have been claimed and Swiss net wealth has to be made. The higher amount will be the basis for the annual tax.

Several double taxation treaties concluded by Switzerland (Belgium, Germany, Italy, Canada, Norway, Austria and the US) only grant treaty benefits to a person resident in Switzerland, if such person is subject to the generally imposed income taxes in Switzerland with respect to all income from the respective state. As a consequence, Switzerland introduced the so-called modified lump sum taxation.

Under this system, which can be elected for each state separately, the income from sources of the respective state needs to be included in the aforementioned comparative computation with the result that such income is deemed taxed in Switzerland under the respective treaty. According to my experience, this method seems, however, not to work with the US. In case of US source income, it is, therefore, recommended to agree with the cantonal tax administration to have such income subject to ordinary Swiss taxes.

On 19 October, 2012 a federal initiative regarding the abolition of the lump sum taxation on the federal and cantonal level has been filed. It is expected that the vote on this initiative will take place in 2015.

Should the majority of the voting people and cantons accept this initiative and thereby cause an amendment of the Swiss Federal Constitution, a law concerning the abolition of the lump sum tax will have to be released within three years. The acceptance of this initiative would, therefore, mean that the lump sum tax system would be abolished in Switzerland in 2018. It is not yet known, whether there will be any grandfathering rules.

Social security contributions

Persons who are resident in Switzerland and do not exercise any gainful activity in Switzerland are subject to Swiss social security contributions until age 64 for women and age 65 for men. The annual contribution per person depends upon the living expenses and the net wealth of the individual and amounts for the time being to a maximum CHF 24’800.00.

Inheritance and gift tax

For the time being, inheritance and gift taxes are only levied by the cantons. In most of the cantons, spouses and descendants are exempt from inheritance and gift tax, whilst the tax rates can be higher than 50% for third persons.

The canton of the last residence of the testator is entitled to levy the inheritance tax from the heirs. The residence of the heirs is not relevant for Swiss inheritance tax purposes. If the testator lives, e.g., in Monaco and gives a large portfolio to his heir resident in Switzerland, Switzerland is not entitled to levy any inheritance tax. Should the testator, however, be a Swiss resident and the heir a Monaco resident, the heir in Monaco would be subject to Swiss inheritance tax.

In 2011, an initiative for an amendment of the Federal Constitution was launched according to which inheritances exceeding CHF 2 mio. and gifts exceeding CHF 20’000.00 per year and person shall be taxed on  the federal level at a rate of 20%. The competence of levying inheritance taxes would thereby be transferred from the cantons to the federation. This initiative is not family friendly at all due to the fact that descendants and third parties will pay inheritance taxes at the same rates. Only spouses shall be exempt from inheritance tax.

It is very difficult to foresee, whether this initiative will be accepted in the federal vote which will most likely only take place in 2019 due to several complex issues. https://allemann-recht.ch/

Possible Tax consequences for emigrating Mexican families

Possible Tax consequences for emigrating Mexican families

This topic will focus on the issues that emigrating Mexican families may face as a result of having members with dual or even multiple nationalities, such as United States or Spanish nationality, or from changing tax residency.

Emigrating Mexican Families

The closeness of Mexico to the United States, as well as the Spanish origin of many Mexicans, makes it each day more often to see Mexican families having members with double or even more nationalities. This has some advantages but also a downside especially when we are talking about taxes and estate planning.

It is a common practice for Mexican families to move to the United States to give birth to their children so these can have United States citizenship, regardless of the fact that they live all their lives in Mexico and are also Mexican nationals.

In the case of Spain, the nationality policy of Spain allows the decedents of Spanish emigrants to Mexico to obtain Spanish citizenship even if the person requesting this nationality has never been to Spain and regardless of the fact that his/her Spanish relative died many years ago.

Tax Issues with emigrating

Regarding the United States, tax laws require its citizens to file tax returns in that country regardless of their tax residency (in this case, in Mexico). However this is not known by most Mexicans also having United States citizenship, thus they may face problems at some point in time if for some reason the United States Internal Revenue Service decides to request the tax returns that have never been filed.

FATCA makes this situation even more complex, since now United States citizenship might also expose Mexicans with this to suffer the effects of FATCA (i.e. withholdings from banks, deeper Know Your Client controls, sharing of information with the United States authorities or even a refusal to open bank accounts in the United States), even though they are also Mexican nationals.

Change of Tax Residency

Other adverse effects can also arise in Mexico if Mexican children move from Mexico to another country leaving his/her family in Mexico. These effects are mainly triggered as a result of changing the state of residency rather than as a consequence of dual nationality. Conversely if a foreign resident becomes Mexican tax resident no step up on his/her assets basis occurs but the original tax cost is considered for taxation purposes.

Mexican tax law follows a tax residency criterion, which means that residents in Mexico are taxed on a worldwide basis regardless of nationality. There are strict tie-breaking rules in Mexican domestic tax legislation that allows the tax authorities and taxpayers to know whether they are tax residents in Mexico or not.

The main criterion to be considered as a Mexican resident for tax purposes is the case of individuals having a dwelling in Mexico. If an individual also has a dwelling in another country he/she is considered a Mexican resident if he/she has his/her center of vital interests in Mexico. This is so, when for instance more than 50% of his/her total income during the year is obtained in Mexico or when his/her center of professional activities is located in Mexico.

If a Mexican individual moves its dwelling abroad, as a general rule he/she are no longer taxpayers in Mexico thus are not subject to fulfill tax obligations. However if the individual moves to a country that has no a treaty for information exchange in force with Mexico (“TIE”), and in that jurisdiction is entitled to apply a preferential tax regime (régimen fiscal preferente)1 the tax residency will remain in Mexico for that year and the following three years, provided that a tax notice of change of residency is properly filed.2

It is important to mention that there is no an “exit tax” for individuals moving abroad, thus wealthy individuals are entitled to change its tax residency to a country with a more favorable tax regime with no tax implications, provided that the appropriate conditions are met. In these cases, before moving abroad it is important to determine the type of assets that the individual has, since in some cases foreign residents are subject to higher taxes than Mexican residents at the disposal of certain assets, such as real estate located in Mexico.

Estate Tax

If a member of a family (child) moves his/her tax residency abroad, that circumstance must be considered for the estate planning of the parent, since the tax circumstances may suffer a dramatic change.

Although Mexico does not have a particular estate or inheritance tax, the Income Tax Law (“ITL”) taxes any income obtained by foreign residents from a source of wealth located in Mexico, even as a  result of inheritance.  For example, if a foreign resident (regardless if he/she has Mexican nationality) inherit shares of a Mexican company or a property located in Mexico, the income obtained by the foreign resident (considering the fair market value of the assets at that time) is taxed in Mexico at a 25% rate without allowing for deductions.

Notwithstanding the above, in the case of Mexican residents (regardless if they are nationals or citizens of another country), the ITL exempts the income derived as a result of inheritance, provided that such income is declared on the annual tax return. However, this exemption is not available to foreign residents (including a Mexican national who has moved his/her tax residence abroad).

Nevertheless, in the case of foreign residents, the ITL does not tax all income, but only certain specific items, such as income derived from the sale of shares, real estate and securities that represent the ownership of real estate. Therefore, the inheritance of cash, movable property (i.e. cars), jewelry, and goods different from the above mentioned are not taxed in Mexico regardless of the fact that they are located in Mexico. In the case of shares, real estate, and securities, these are taxed at 25% of the gross, without allowing any deduction.

Considering the burden of income tax in this regard, there are estate planning opportunities for parents looking to leave these types of assets to their children living abroad, such as a gift of property during the lifetime, directly or even through trusts, and the granting of bare title while keeping the right to use.

1A “preferential tax regime” is deemed to exist if the income obtained by the individual is not subject to tax in the other country or the tax to be paid is less than 75% of the tax that should be triggered and paid in Mexico.

2 If no tax notice is filed, the tax residency could remain in Mexico indefinitely. https://basham.com.mx/en

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