A short introduction to the NTTR: Spain’s Gateway to Tax Efficiency for Expats

A short introduction to the NTTR: Spain’s Gateway to Tax Efficiency for Expats

The Spanish Special Regime for New Temporary Tax Residents (“NTTR”)

Widely known in the market as “The Beckham regime”, and formally referred to as, following a literal translation, “Special Tax Regime applicable to employees, independent professional contractors, entrepreneurs and investors expatriated into Spain” -no wonder the shortcut-, I have opted to have it abbreviated as the NTTR, for convenience and for lack of rights to use the famous footballer’s name. Hope it sticks, but fine if it does not!

This, the NTTR, is the Spanish “competitor” to the Portuguese Non-Habitual Resident (NHR), the UK non-domiciled regime, the Italian or Swiss forfait fiscal or lump-sum, and other analogous creatures that have sprung over the years to lure overseas taxpayers of various profiles to come onshore in each respective jurisdiction.

Nowhere is that competition felt more openly than in international tax conference panels where advisors of the competing jurisdictions read the audience through residency grids, evoking those of longer tradition about holding company locations. Like in these, for which the requirements of substance, including functions and business rationale, have grown more stringent over the years in response to the proliferation of regimes, one could expect some reaction aiming at curtailing the same trend in the proliferation and perceived increasing abuse of those.

Substance Over Form: The Residency Test

But this is a very different test, I believe. Whilst the substance of companies must be contractually added given their “ethereal” nature, residence is typically much more tied to worldly circumstances. The most widely shared test of residency pivots around counting days of presence, and that is a fact: anyone knows where a day is spent. True, some jurisdictions count a day of presence with merely touching their soil or spending only a few hours there, what allows for having a single same day shared among various countries, but once all rules factored in, one could easily distribute the days of a year along the various countries visited.

Typically, only in those where the person owns a place that he or she can call home, a place that is readily available at his or her discretion, would qualify to become the jurisdiction of tax residence, thus, excluding all those other temporarily visited for business or pleasure travels.

Hence, if one has a home in, say, Spain and spends significant time in this country, the qualification as a Spanish resident taxpayer would be unarguable. There is no more substance required. Some could reproach that person for having settled in Spain with the sole or main intention to lower his or her tax bill, but that could not be done beyond morally subjective boundaries, without an impact on the legal realm.

Navigating International Tax Agreements

What the “departing jurisdiction”, or any other competing one where the taxpayer had a home (or other ties) and spent significant time, could do against such tax- motivated move would never be to disallow it or to deny residency in the other country, but could be to apply stricter rules or residency tests. And this is what happens in practice when taxpayers applying these special regimes are not granted access to the protection of Double Tax Agreements (“DTA”).

The bar in this respect is not at the same level in all competing jurisdictions. Both Italy and Switzerland regard taxpayers under their forfaits as tax residents for all purposes, and grant certificates of tax residency for treaty purposes. The basis for that is that they tax income no matter the source, albeit applying “special” rules to calculate the tax base or the effective tax rate.

One could call that “the trick” rather than “the basis”, but that’s what we’ve got. The UK also treats them as tax residents for DTA purposes, evidence of which is that in some concrete DTAs, such as that with Spain, relief of tax at source is conditioned on remittance and actual taxation. Portugal also issues such certificates for their NHRs.

And Spain… well, Spain, as we all know, is different. In this matter we could say that it is more loyal to her peers and has decided that such certificates will not be issued. Hence, taxpayers coming to enjoy the NTTR will have to break ties with their home or departing jurisdictions at a higher bar, without the right to rely on the Treaty tie- breaker rules.

Possibly we Spaniards think that our country is so much worth coming onshore that those closer ties and connections will be easily established. Practice will tell. But let’s move onto setting about the main features of the NTTR.

Key Features of the NTTR

The “N” for “New” in the NTTR refers to the requirement that the taxpayer has not been tax resident in Spain in the preceding five years. This period has been brought

down from ten in the amendments that were introduced with effect from January 1, 2023 (“the Amended Regime”), bringing about a wave of brain return balancing off the brain drain we suffered post our dramatic financial crisis and real estate bubble burst.

The first “T” stands for “Temporary” and refers to the fact that the special regime applies for the first year of tax residency and the following five, i.e. totaling six (more on that later). This is a bit of a showdown when compared to its competitors: the Portuguese 10-year limit, the 15-year Italian, the same 15 year in the UK, and the no- limit Swiss. Each of these showcases unique characteristics tailored to attract individuals from across the globe, highlighting the diverse approaches countries adopt to enhance their appeal to international talent, wealth, and investors.

The latter “TR” denotes Tax Residents, and indeed, this regime treats taxpayers as residents, albeit with the right to make an election to be taxed under the Non- Residents’ Income Tax Act. This is the main feature of the NTTR regime: with one sole exception, only Spanish sourced-income and Spanish-situs assets shall be reportable and taxable. This is a very powerful factor of attraction for wealth creators and owners who can enjoy a few years in Spain without bringing onto the Spanish tax net their existing wealth and income, most likely situated in other territories.

The sole exception is income deriving from employment and dependent work. This is taxed always, no matter the source albeit at a significantly lower rate as compared to ordinary residents (24% fixed for a band up to €600K), but with a reduced access to international double tax relief.

The loyalty to their international peers is not seen only in the aforementioned lack of granting of certificates of residency for treaty purposes, and in the lower-than- average time period of application, but, very importantly, in the criteria for eligibility. Merely spending enough time in Spain is not sufficient; there must be a reason, as we will see in the following section, connected with creating economic value in the country and only in a specified set of circumstances.

Eligibility and Inclusivity of the NTTR

Since the inception of the regime, eligibility was limited to employees relocating to Spain. Within these were included those coming to serve as directors of companies so long as they did not hold a percentage stake in those companies equal to or greater than 25%.

The Amended Regime has widened the scope of eligible taxpayers to include, besides employees:

  1. Investors and business owners who come to Spain to serve as directors of entities which do not qualify as merely passive asset-holding, without the previous 25%-stake limitation. Noteworthy that the entity does not need domiciled, incorporated/created or resident in Spain, although this will likely be the norm given the causal relationship between the appointment as director and the relocation.
  2. Entrepreneurs who come to Spain to undertake a certified qualifying business activity.
  3. Highly qualified professionals who come to Spain provide any type of services to certain defined start-ups or to provide certain limited services to any client (training, research, development and innovation).
  4. And, within the subset of employees, those who come at their own initiative to continue to work remotely for their non-Spanish employers by telematic means.
  5. Also relevant is the novelty that spouses and under-25 children, with certain limitations, can benefit from the NTTR on the back of the qualifying taxpayer.

And like before the Amendment, the NTTR remains closed to, not eligible for those individuals who in their own name undertake an independent economic activity, other than those of letters b) and c) above, from a permanent base in Spain. Because business activities can be undertaken through companies, this restriction is effective in practice only for independent professionals, typically of regulated professions, who, even if working in collective firms, are deemed to continue carrying out independently their profession.

Elements of uncertainty and potential controversy

Let us pause for a moment in the used wording “who come to Spain to”. This is an intentional test; the exact drafting of the Law is that “the relocation to Spain must be the consequence of”.

We must admit this is bringing about undesired uncertainty in the numerous conversations we are having with investors and business owners. Leaving aside the start-up, R&D and innovation contexts, the only available route for them is that referred to under letter a) above. Because there is not a legal requirement to be Spanish resident to become director of a Spanish entity (needless to say of a non- Spanish one), this requirement must be in our view read and construed in the sense that management duties of that director position must be of a nature that undertaking them requires a substantial presence in Spanish territory.

Now, the primary motivation of many of them is to relocate away from the countries where they are currently living for a variety of reasons, including unacceptable levels of insecurity, longing for spending some time in a sunny country, and wishing to lower their tax dues for a limited period. And only when they consider Spain amongst other possible locations, and they legitimately give regard to the tax environment alongside other elements of comparison, it is that they begin considering creating anew that position of director.

We do not think that this order in the sequence of motivations, per se, makes it impossible to access the NTTR. However, the need to come to Spain to discharge those particular director management duties must be clear. If the assumed business role has little to do with Spain or does not require much engagement from the individual, relatively to other occupations he or she may have outside Spanish territory, the cause-effect relationship –“as a consequence of”- may be challenged.

It can be seen that this is a rather subjective test, intention-based, where one can only advise care and prudence.

The level of relative engagement admits though considerations of personal motivations. One can maintain an important level of activity abroad, as well as significant business undertakings in other countries, and yet place a significant value in a business venture connected with the Spanish territory, so significant, even if non-monetary terms, that make the relocation worthwhile, especially if the non- Spanish interests can be remotely managed.

To be clear, the potential controversy and conflict we are pointing at here is not originated by the application of general or special anti-avoidance provisions established in our legislation. We are not talking here of simulation or of tax-motivated artificial arrangements. The relocation to Spain is real, and so is the appointment as director. The conflict shall arise around the assessment of how strong the need is to come to Spain to take that position.

We are afraid that many, not willing to fully immerse in a business activity, and wishing only to invest in real estate for rental or by acquiring shares in third-party businesses, both regarded, under certain conditions, as active trades and not merely passive asset-holding (recall the 25%-stake limitation), will find intolerable that level of uncertainty, especially as compared to other regimes, such as the Swiss or the Italian, where certainty is assured by way of advanced private binding rulings. For those willing to immerse in a business activity in Spain, the regime may indeed be an added incentive. https://kinshiplaw.com/en/home/

Pedro is co-founder and Managing Partner of Kinship. Coming from an international law firm, he has 30 years of experience in the world of law, with a special focus on international taxation.

Pedro is specialized in legal and tax advice to foreign families and companies that move to Spain to take up residence, work or start a business. His professional career is also characterized by having achieved a recognized position in advising and assisting foreign investors entering the Spanish real estate market, with special emphasis on the residential and hotel sector, as well as in the tax structuring of important operations. In addition to this specialization in the tax area, Pedro is characterized by his strong leadership skills in coordinating multidisciplinary teams. Pedro also has extensive experience in handling multi-jurisdictional cases, as a result of his extensive background and deep knowledge of the main private law and tax issues underlying these matters.

NTTR

Pedro Fernández

Kinship Law

kinshiplaw.com

Tax-Driven Changes in Residency

Tax-Driven Changes in Residency

Tax-Driven Changes in Residency

For those with sufficient assets, tax-driven relocations and changes in residency have become commonplace. They began to occur in earnest in the 1990s and have increased in popularity ever since. In the past 1-2 years in particular, the popularity of residency changes for tax reasons has seen a marked rise. This has been driven by several factors, which include: the steady reduction in other viable international tax planning strategies as the OECD continues to press aggressive reform, more mobile lifestyles brought about by COVID-19, and the expectation of an increased tax burden especially for the wealthy (also brought about by COVID-19, at least in part).

In short, more people have begun to enjoy more mobility, and the comparative tax advantages of relocating have never been greater. As we have stated in prior inBriefs, for Canadians, changing their country of tax residency is almost certainly going to be the single most effective tax planning strategy they can adopt, with both immediate and long-term benefits.

The opportunity to attract such mobile, wealthy people is also very appealing to potential recipient countries, who stand to gain economically from an influx of wealthy immigrants. Competition for economically beneficial immigrants is high. Many countries have established residency programs and tax incentives specifically intended to attract economic immigrants. Some of the most popular destinations in recent years have included the UAE, Portugal, Greece and Italy, among many others including some Caribbean nations.

The models adopted by these countries typically require the applicant to make an investment in the country, often in real estate, in exchange for medium- or long-term residency (and sometimes a path to citizenship over time), and access to a favourable tax regime.  The amount of the investment varies greatly from country to country (from EUR 200,000 to EUR 3,000,000). [There are other paths to residency aside from investment in some countries, such as through employment or establishing a business.  In the UAE, for example, you may establish a company for significantly less cost than the cost of investing in real estate, and arrange for the company to sponsor your UAE residency.]

The favourable tax regime will be one of two models: the requirement for an annual lump-sum payment of tax irrespective of actual income each year (e.g., Italy, Switzerland), or, access to a low or no tax environment without the lump-sum in exchange for having made an initial investment (e.g., Portugal, Greece, UAE).

Deciding where to seek your new residency can be complex and should take into account many factors, not only taxation. There are publicly available resources which help you to evaluate potential destination countries according, breaking down some of the more relevant factors on a country-by-country basis, and even offering rankings of countries by popularity for their tax residency offerings. [ For example, see the popular Henley & Partners indices and reports which rank investment immigration programs, and perceived quality of different residencies and citizenships:  Https://Www.Henleyglobal.Com/Publications ]

The conditions of residency and favourable tax treatment usually do not require significant “days in country”, so extensive travel is permitted, but you would need to avoid spending so many days in another country that you are deemed tax resident there as well. The residency status granted normally gives you and your family the ability to live, study, and work in the destination country (and, for EU destinations, these rights would apply anywhere in the Schengen region).

From a tax planning perspective, it is crucial to carefully evaluate your assets and your expected sources of income before settling on a destination for tax residency, and to obtain professional advice as to how your specific assets and income will be taxed there. There are always exceptions to the favourable tax treatment offered by each jurisdiction. For instance, some may provide that only passive income from foreign sources will enjoy low/no tax, and only if there is a double taxation treaty in place with the foreign source country (in which case, income from assets located in offshore jurisdictions may not qualify, nor income you generate if you are working in your new country of residence). Also, assets located in the country you are moving away from may continue to impose tax on income and gains on those assets, despite your non-residency.

As such, the change of residency journey will almost always include a restructuring of your assets, and planning your sources of income, in order to achieve the desired tax-efficient result. As part of the planning, it can often be helpful to make use of trusts in low/no tax jurisdictions as a vehicle in which to hold appreciating or income-producing investments. Distributions from trusts can generally be structured in a manner which attracts little or no tax, depending on whether the distribution is out of trust income or trust capital.

International planning using trusts can be complex and requires cooperation among advisors in your new country of residence, your country of origin, the country in which the trust is established, and every country in which there is a beneficiary of the trust. Trust distributions to a beneficiary will be treated differently depending on where each beneficiary resides.  However, despite some complexity in the planning phase, trusts remain by far the most popular wealth planning vehicle for good reason, as the benefits of their use can be significant.  For example:

  • Tax efficient distributions: payments from a trust to its beneficiaries can be managed so as to attract less overall taxation, or no taxation, if the trust has been planned and structured properly. This can include tax-free distributions to Canadian resident beneficiaries, if properly planned.
  • Wealth accumulation: trusts in low/no tax jurisdictions often have very long lifespans, or are permitted to exist indefinitely. As such, they can accumulate investment gains with little or no tax over a long period, and can effectively preserve and grow capital. As such, capital can effectively be sheltered in the offshore trust indefinitely, with distributions made to beneficiaries as and when desired so that only those distributions are subject to tax when received (assuming the recipient is subject to tax).
  • Transition of wealth: for the above reasons, it is often very advantageous to structure an inheritance through an offshore trust, where the capital can be better preserved, grown and distributed much more efficiently than if the inheritance were given directly to beneficiaries.
  •  Creditor protection: trusts have long been a popular vehicle for asset protection. Since the trust legally owns the assets, the settlor’s creditors cannot seize them (subject to some exceptions where there are concerns around defrauding creditors).  And, since beneficiaries usually only have discretionary interests which are not vested, the creditors of the beneficiaries have nothing to seize either. Trusts are also a useful tool to keep wealth outside of the net of “family property” or similar definitions which determine what a spouse is entitled to upon separation, divorce or death.
  • Flexibility and control: trusts are flexible enough to allow you to transfer legal title to assets and grant beneficiaries economic benefits to or from the assets, without transferring control over the assets. This flexibility to retain control can be useful for many reasons, including in situations where beneficiaries may not be ready to responsibly manage the assets, or, in the context of a family business, where you may not yet know which child or children will be involved in the business upon succession. Often of most interest to settlors is the ability to continue to control the management of the trust’s investments, rather than handing over control to a trustee and institutional investment manager.
  • Estate planning benefits: trusts have a great many benefits in the context of an estate plan, including all of those noted above in this list, along with additional benefits such as the ability to place trust assets outside of the scope of a forced heirship regime, and the fact that trust assets will not be made subject to probate and estate administration procedures which are complex, time-consuming and sometimes expensive.

Once you have selected a destination and have considered how to structure your assets and income in order to achieve a tax-efficient result, you may also need to carefully plan your emigration from your current place of residency. For Canadian residents, there are tax consequences of ceasing to be a resident and there may be planning opportunities to reduce the impact upon your exit. Advance planning is especially important if you own shares in one or more private companies.

In light of the above, it is important that you select an experienced advisor who not only has local expertise along with an international network and capabilities, but who can also mobilize other professionals in your country and your new country of residence (and a suitable trust jurisdiction) in order to provide you with cohesive and complete advice. It is typical to require legal counsel and tax accountants in at least two countries, along with valuation experts and professional trustees, in order to provide complete advice on a tax-driven relocation.

If you would like to explore a change in residency and the potential tax advantages, please do not hesitate to contact us.

NTTR

James Bowden

Afridi & Angell
French tax residency and the stubborn myth of the 183-day rule

French tax residency and the stubborn myth of the 183-day rule

The dangers of assessing French tax residency by solely considering whether an individual is spending more than 183 days in France. Contrary to a popular belief, the French tax authorities and French tax courts do not uniquely assess French tax residence by considering the number of days spent in France; they also take into account the economic and social ties with France, potentially leading to significant tax exposure.

Assessing French tax residency

Pursuant to article 4B of the French tax code, an individual is considered to be a French tax resident if he/she has in France his/her (i) home (“foyer”), (ii) main place of abode, (iii) place of principal working activity or business (such criterion being deemed to be fulfilled by all managing executives of a French company whose turnover exceeds 250 million euros) or (iv) center of economic interest.

Nevertheless, when an individual is deemed to be a resident of two States (because he/she meets the domestic criteria of two Countries), tax residence must be directly assessed by looking at the criteria set forth in the relevant double tax treaty. In this respect, most French double tax treaties include the OECD model type clause according to which the residence is determined through the following alternative tests: (i) one’s permanent home, (ii) one’s center of vital interest, (iii) one’s habitual abode and (iv) one’s nationality.

As most of these domestic and international criteria are subjective and up to interpretation, most people only focus on the habitual abode one and consider that if an individual does not spend more than 183 days in France, this individual would escape French tax residence and thus French taxes.

This is however not true in practice and the 183-day rule must be referred to with caution:

  • This rule is not universal: it can only apply if a double tax treaty applicable to the situation at hand contains such 183-day rule. In some cases, a treaty can exist but may not be applicable (e.g., LOB clause when the individual is not taxed on any income in one of the concerned State, remittance basis in the UK, 10-year exemption in Israel, etc.);
  • This rule may not capture all taxes at stake: it definitely applies to income tax but this may not be true for social security contribution, wealth tax, gift tax, etc.;
  • Attention should be paid to the period retained to assess the 183-day rule: calendar year, 12-month rolling period, etc.

Even when relevant, this rule is not the sole tie-breaker and generally not the first one considered by French tax authorities and Courts.

Indeed, as illustrated by several recent decisions, French courts often rule that an individual is a French tax resident despite the fact that one spent less than 183 days in France by focusing on one’s economic and social ties with France. On the contrary, spending more than 183 days in France does not systematically triggers the recognition of French tax residence.

Even more, in particularly complex scenarios where the balance of interests of any kind binding an individual to France and another State is delicate, both the French tax authorities and French tax courts tend to use two or more criteria at the same time to strengthen their position considering every piece of connection with France.

For instance, French tax courts have recently ruled that a retired couple whose only source of income was a French retirement pension should be deemed French tax residents under French domestic law regardless of evidence supporting that they had been living in Madagascar for several years.

Similarly, where there were evidence supporting the effective presence of a couple both in France (e.g., secondary residence, spending 153 days in France, several French bank accounts, significant gas and electricity consumption) and in Switzerland (e.g., main residence with home staff, residence state of the couple’s daughters, regular running costs), it was finally ruled that they were residents of France on the ground that all their investments were French-sourced since they directly and indirectly owned several French operational and real estate companies.

In view of the diversity of factual criteria used by the French tax authorities and French tax courts to determine one’s tax residence, it is therefore necessary to pay particular attention to all the elements that would make it possible to demonstrate the existence of a connection to France and not to only focus on the 183-day criterion. This is especially important considering the different consequences resulting from being a French tax resident.

Consequences arising from French tax residence

Subject to the provisions of French double tax treaties, French tax residence triggers several distinct consequences relating to (i) income tax, (ii) wealth tax, (iii) inheritance tax and, as the case may be, (iv) trusts related filings.

Indeed, French tax residents are taxable in France on their worldwide income, contrary to foreign tax residents who are solely taxed in France on their French-sourced income.

French tax residents may also be liable to the French real estate wealth tax on all their real estate assets, and not only the ones located in France as for foreign tax residents, to the extent that the overall net value of said assets exceeds €1,300,000 as at 1 January of the given year.

Additionally, when a donor or a deceased or a beneficiary or heir is a deemed a tax resident, inheritance duties are payable on all movable or immovable property located in France or outside France which are transferred by him or to him.

Finally, trustees have a filing obligation for trusts related to France by the French residence of their settlor or beneficiary, or if any asset held by trust is located in France.

To avoid this kind of extended French tax liability alongside with its numerous regular filing obligations, and given the complexity and factual nature of the analysis establishing one’s tax residence, it is advisable to seek professional advice. In particular, when someone has ties to France but has not yet considered to be a French tax resident, we strongly recommend performing such analysis to (i) confirm one’s opinion and, as the case may be, regularize one’s situation, but also to (ii) assess any tax exposure that may result from reassessment in case of a French tax audit. http://www.whitecase.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

NTTR

Alexandre Ippolito

White & Case
NTTR

Estelle Philippi

White & Case
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
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.

[1]A “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