What tax matters are important when emigrating?

What tax matters are important when emigrating?

What tax matters are important when emigrating from Canada?

When you take up residence in another country, have you obtained advice on tax matters both on departure and on any risks of having continuing connections with your former residence?

While it is possible with proper planning to minimize tax on expatriation to another country, it is equally important to reduce exposure to the risk of continued residence-based taxation in the former country.

When my client Michael told me he was planning to leave Canada and needed tax advice, I prepared to give him some advice he was not expecting. He had heard from some friends that they had emigrated to The Bahamas because there is no income or estate tax there. But Michael’s wife was pushing him to go to England where their teenage children might get a superior education.

He was surprised to find out that on leaving Canada he will be deemed to have disposed of all of his assets, subject to certain exceptions, for proceeds of disposition equal to the then fair market value of each such asset, resulting in capital gains tax (at a rate of 25%, effectively).  Some have called this Canadian rule, “Golden handcuffs”. Several other countries have adopted similar departure taxes, including Spain and South Africa.

When Michael explained that he wanted to support the arts from his new home, I suggested a plan that could accomplish his goal and save tax on departure. I suggested we register a private charitable foundation with the Canada Revenue Agency, which he could run from his new home.

The object of this charity to support the arts was one that the CRA has found acceptable in the past. He could then make a tax-free gift of his publicly-listed securities to this foundation, which would reduce the value of his assets on departure. He would also be entitled to a donation tax credit based on the value of the donated securities, which in turn could be used to shelter taxable income for his year of departure.

While he liked the idea of going to The Bahamas and not to have to worry about paying local income tax or estate tax, I explained that he should not forget about his connections with Canada and the special risks associated with those continuing connections. When Michael said that he liked the summers in Canada and so would retain his cottage here, I cautioned him about his Canadian tax exposure.

The Income Tax Act (Canada) (the “ITA”) would deem Michael to be a resident of Canada if he sojourned in Canada for more than 183 days in any year, even though he may have acquired a residence for tax purposes elsewhere.

Under Canada’s tax treaties with ninety-four other jurisdictions, including the U.K. but not with The Bahamas, [ As Canada considers The Bahamas to be a tax haven, it does not have a double tax treaty with that country, but it does have a Tax Information Agreement that provides for tax information to be exchanged between The Bahamas and Canada.

In addition, the Agreement provides that a Canadian multinational with a subsidiary that carries on an active business, such as a hotel, in The Bahamas, is able to repatriate profits by way of tax-free dividends.

However, the Agreement does not provide Bahamian individuals with relief in the area of exposure to Canadian tax residence. ] there is a set of “tie-breaker rules” to determine if a person is a dual-resident, and which jurisdiction has the right to tax him/her on worldwide income on the basis of his/her having the closer connection with that jurisdiction.

In addition, I explained that the courts have broadly interpreted the rule in the ITA that a reference to a person resident in Canada includes a person who was at the relevant time ordinarily resident in Canada. In other words, the question is where the person in his/her settled routine of life regularly, normally or customarily lives.

One must consider the degree to which the person in mind and fact settles into, maintains, or centralizes his/her ordinary mode of living, with its accessories in social relations, interests and conveniences, at or in the place in question.

I told Michael that if he keeps the cottage in Canada and habitually returns to it from a non-treaty jurisdiction like The Bahamas, he is likely to be found to be a resident of Canada. In contrast, if he lives in England and maintains his “centre of vital interests” there and not in Canada, he is likely not to be found to be a resident of Canada under the Canada-U.K. Income Tax Convention.

In the end, Michael moved to England; we set up the foundation; and he uses the liquid funds in the charity to support the arts in Canada and elsewhere. https://www.grllp.com

RFF Lawyers is a tax law “boutique” firm in Portugal, specialized in tax and business law, both for corporate and institutional entities and individual clients. Rogério and his team at RFF Lawyers seek to foster lasting relationships - of confidence and trust - and to provide the proper legal solutions meeting the specific needs of each client, whether individual or corporate. 

Rogério Fernandes Ferreira

Rogério Fernandes Ferreira

RFF Lawyers

rfflawyers.com

Tax residency in Germany – An Unpleasant Surprise!

Tax residency in Germany – An Unpleasant Surprise!

Tax residency in Germany

Germany is an attractive place to live in the center of Europe and the EU. It is safe, relaxed and highly developed. Its political system is stable and reliable, while its powerful economy is the largest in Europe. Known for its long and rich cultural history, Germany offers a very high standard of living. All these reasons make Germany a favorite destination for foreigners from inside and outside of the EU.

However, there is no free lunch! Moving to Germany triggers very often some unexpected tax consequences, which everyone should consider carefully before coming to Germany. It is very easy to become tax resident in Germany! However, German tax residency very often does not fit to the individual’s carefully planned tax setting.

Prerequisites for becoming tax resident in Germany pursuant to German domestic law

Pursuant to German domestic law, an individual becomes subject to German resident taxation, if the individual

  • either stays in Germany for more than 6 consecutive months in a year with only minor interruptions (habitual abode or “gewöhnlicher Aufenthalt“), or
  • holds a dwelling in Germany under circumstances indicating that the individual intends to keep and use it (residence or “Wohnsitz“).

Thus, a residence does not require necessarily the actual or regular use of the dwelling. It is sufficient that the individual can use such dwelling whenever the individual wishes to do so. An individual could have different residences in Germany and/or abroad. It is in particular not required that such residence is the individual’s center of vital interest. A tax residency in Germany in particular does not require that the individual is a German citizen.

Consequences of being tax resident in Germany pursuant to German domestic law

An individual’s tax residency in Germany means in particular that such person

  • becomes subject to German income taxation with his/her worldwide income (subject to applicable double taxation treaties) at an income tax rate up to 47.475 % (including solidarity surcharge) depending on the amount of the taxable income;
  • is obligated to file annual income tax returns with the responsible German tax office regarding his/her worldwide income;
  • becomes subject to German exit taxation if he/she has been subject to German resident taxation for at least 10 years and ceases to be tax resident in Germany;
  • becomes subject to German gift taxation as a donor in case of a donation to anybody elsewhere in the world with respect to the donor’s worldwide estate at a gift tax rate between 7 % and 50 % depending on the value of the donation and the degree of relationship between the donor and the donee;
  • becomes subject to German gift taxation as a donee (subject to applicable double taxation treaties) at a gift tax rate between 7 % and 50 % depending on the value of the donation and the degree of relationship between the donor and the donee;
  • is obligated to file gift tax returns with the responsible German tax office in case of a donation to (i) anybody elsewhere in the world with respect to his worldwide estate and (ii) the individual tax resident in Germany irrespective from the fact whether the donated asset is located in Germany;
  • triggers the German inheritance tax liability of the deceased individual’s heir and/or legatee with respect to the deceased individual’s worldwide estate at an inheritance tax rate between 7 % and 50 % depending on the value of the estate and the degree of relationship between the decedent and the heir and/or legatee;
  • triggers the heir’s and/or legatee’s obligation to file inheritance tax returns with the responsible German tax office irrespective from the fact whether (i) the heir and/or the legatee is tax resident in Germany, too, or (ii) the estate is located in Germany;
  • becomes subject to taxation both in Germany and in other countries with respect to the same income or donation subject to applicable double taxation treaties or unilateral law granting tax exemptions or tax credits for mitigating the double taxation;
  • triggers the heir’s/legatee’s taxation with inheritance tax and the donor’s taxation with gift tax in Germany besides other countries with respect to the same estate or donation

Please note that this applies irrespective from the individual’s tax liability in another country according to this country’s domestic law applicable.

Please note that an applicable double taxation treaty might hinder Germany from taxing such individual person fully, but has no impact on this person’s obligation to file its tax returns fully and completely with the German tax authorities. While Germany has agreed upon a large number of double taxation treaties dealing with income taxes, Germany has agreed only on six double taxation treaties dealing with inheritance and gift taxes (United States of America, Switzerland, Denmark, France, Greece and Sweden). Thus, one should not rely on the protection by double taxation treaties only!

Finally, please note that an individual person’s residency in Germany could also result in a foreign company’s resident tax liability in Germany with its worldwide income. This happens if e.g. the individual person’s residence in Germany also qualifies as the company’s place of actual management. This is the case if the individual person acts as an organ representative of a foreign company also from his/her dwelling in Germany.

Worried about Tax Residency in Germany? Prepare in advance.

Before an individual person establishes his/her residency in Germany, the consequences resulting therefrom need to be analyzed in advance very thoroughly for avoiding disadvantageous legal and tax consequences.

An individual could establish such tax residency very easily by acquiring or renting a dwelling or by simply using a dwelling more or less exclusively without having acquired or rented it. For a tax residency in Germany, a German passport or a permit of residence is not required. Thus, a thorough analysis and adaptation of the respective individual’s current tax setting prior to establishing an individual’s tax residency in Germany helps to avoid unpleasant surprises. We are prepared to assist you! https://schmidt-taxlaw.de

We are prepared to assist you!

Michael Schmidt

Michael Schmidt

Schmidt Taxlaw