Читать книгу Global Residence and Citizenship Handbook - Christian H. Kälin - Страница 14
Оглавление1
Residence Planning
Chapter Summary
Residence Planning is the process of finding solutions to the complex range of considerations involved in moving your residence to another country, or obtaining residence rights in more than one country. This aspect of private wealth planning is growing in importance to optimize business and personal planning.
Improving your international tax situation is one of the key benefits of an alternative residence, alongside protecting your financial privacy and structuring matrimonial and inheritance interests in an advantageous manner. It also helps those who, due to political instability or other unfavourable elements, need to find a safe place to reside.
It is necessary to ensure that the country can accommodate all of your family, business, taxation and legal needs, and that the areas of infrastructure, physical environment, business and economy, and culture and lifestyle suit you.
Each country judges whether a person should be subject to taxation on a range of different factors. Residence Planning can help you achieve a reduction in your tax burden, whilst ensuring that you meet the exact requirements for that country.
The move from one country to another can itself trigger tax implications, and all financial calculations must take into account exit taxes and extended income tax regimes. The timing of any move is also critical and can have a sizeable impact on taxation.
International health cover is one of the most important elements to have in place when thinking of moving abroad. Cover must be maintained both during the time of the move and upon settling in the new country. When moving countries, one of the key factors will also be the selection of a new home. While an emotive decision, there are many important factors to consider when selecting property, besides the obvious question of location. The decision should also include analysis of whether it would be advantageous to use a holding structure such as a company for fiscal and succession planning.
The term residence planning was coined by Henley & Partners in the 1990s. At the time, most international lawyers did not consider it necessary for their clients to look at alternative residence solutions, or to conduct the relevant planning for their clients. Rather, obscure and often illegal structures were devised to essentially hide assets, which were then typically parked in “secure” jurisdictions such as the UK, the US, Switzerland, Luxembourg or many of the small island states and territories around the world.
Today the situation is different and many clients and advisors on all continents are working with this important aspect of private wealth planning. The political and legal climate means that the only sensible advice is to: “comply, or move out”.
1.1 Why become resident in another country?
Whatever your situation, there are many reasons why you should consider becoming a resident of another country, or holding a residence permit from more than just one. However, anyone thinking seriously about moving their main residence abroad, or obtaining residence rights in more than one country, faces a series of questions which are not always easy to answer. Residence Planning analyzes those questions, reasons and possibilities.
Historically, since the invention of agriculture led to more permanent settlements, it was not easy for people to move their place of residence, and immigration as we know it today was not possible. Generally only natives of the land had full rights, and various rules prevented the movement of people even from one district to another. Only wars, extraordinary abilities or contributions to society and other special factors enabled people to move within a societal structure, and across territorial borders.
In today’s globalized world, moving from one’s native country to another, possibly more attractive, country has become increasingly easy and commonplace. Although language differences continue to be a barrier, the global dominance of English provides a linguistic infrastructure that parallels the technological infrastructure of the cosmopolitan era we live in1. The advances in communications and computer technology have made it possible for “knowledge workers” to work and live almost anywhere, and for entrepreneurs and investors to operate and supervise their businesses and investments 24 hours a day from virtually anywhere in the world. In this borderless global economy, capital and to some extent also labor, has lost its link to individual countries.
Particularly for wealthy individuals and families, and business owners and investors with an international lifestyle, today’s globalized world offers tremendous opportunity to optimize personal and business planning. This includes in particular tax and estate planning, increasing international freedom of travel, and diversification not just of business, but also on a personal level, by having multiple residences and possibly multiple citizenships.
Moving to a more attractive country of course means different things to different people: for refugees, this may mean bare survival, personal safety and escape from war, violence and starvation; for an economic migrant, more job opportunities; business opportunities for entrepreneurs who are looking beyond their country’s borders; investment opportunities for international investors looking to diversify not only their assets but also their life and family ties geographically; or retirement and lifestyle options, combined ideally with tax and other benefits, for wealthy individuals and families with a global outlook. In Asia for example, since the 1960s, ethnic Chinese from Hong Kong and throughout Southeast Asia have sought residency rights in Western countries – in particular Canada, the US, Australia and the UK – to escape political discrimination and anticipated upheavals that could disrupt their businesses and threaten family security. With the rising affluence of Asian countries and the relative decline of the West, however, they increasingly found that economic opportunity and personal security are not both available in the same location, or even in the same part of the world.2
An alternative residence is also an effective tool for international tax planning, and facilitates more privacy in investment and banking as many reporting and exchange of information requirements are based on (tax) residence. This can be very relevant for Europeans, who increasingly move their place of residence within Europe: wealthy families from the Netherlands move to Belgium, Germans move to Switzerland, French move to the UK and to Switzerland, British high-income earners move to Switzerland, Monaco and Portugal, and so on.
Depending on your current position, an alternative residence can also mean a better quality of life for your family, a good education for your children, and a safe haven in times of political instability in your home country. In fact, political instability in many countries now leads to a need for wealthy individuals and families to seek a safe place outside their home countries in which to establish an alternative residence for reasons of security and personal flexibility. Canada, Dubai, Singapore, Switzerland and the UK, for example, play an important role as bases for such wealthy people to establish a safe second residence, which may well become the primary residence for some family members.
In view of the increasingly aggressive fiscal and regulatory environment in some otherwise reasonably stable high-tax countries such as Canada, France, Germany, the Netherlands, the UK, the US and others, a move of residence to a country with a milder tax regime is an attractive option for many who feel they have to pay more than their fair share, and who do not like the constant erosion of their privacy.
In fact, often the only way to reduce the tax burden and regulatory restrictions legally and in a significant manner is to move.
In Germany, for example, the Government has direct access to all bank accounts of all taxpayers. This intrusion in privacy is rather uncomfortable. Whenever there is access to information, such information is prone to leaks, to the information being sold to anyone interested and offering sufficient money in exchange for the information (for example kidnappers, who are already a serious problem in many countries around the world). The only way to avoid this is to move your residence to another country with a less invasive environment, providing more personal privacy.
In the US the erosion of privacy has reached even further, and especially if you are an entrepreneur and investor with international exposure, your tax return can become very complicated, to the point where you are never really sure whether you have complied with all the rules and regulations. You have to employ expensive tax lawyers to ensure you do not become a criminal merely by overlooking the filing of the right form.
In many countries, rules and regulations are mushrooming and so the legal environment is becoming increasingly vague, leaving lots of room for interpretation by the authorities and thereby leaving you vulnerable. This leads to a situation where effectively everyone is potentially a criminal because there are so many different tax laws, regulations and rules that it is practically impossible to comply with all of them. This is already the case in countries like Italy, where it is impossible to run a small business and comply with all the regulations imposed by the state because the burden and cost of compliance is so high. Therefore, practically all smaller and medium-sized businesses, and most large ones as well, operate in some kind of grey zone. This is hardly a good environment to thrive in.
However, you should never move for tax reasons alone. Even if the tax and other burdens are heavy, you should look at your overall life situation: where your friends are, the environment you feel comfortable with, etc. Therefore, it only makes sense to consider residence planning if you already have a sufficiently international situation, lifestyle and outlook.
If your life is already international, then of course a change of residence may not only reduce one’s income-tax burden significantly, it usually also has a major impact on the inheritance tax situation.
Effective planning and advice is particularly important with regard to inheritance taxes, as in many countries the distinction between residence and domicile is relevant here. The person may well be tax resident in a jurisdiction which levies no inheritance tax, but upon their death their former country of residence (for example the UK) may claim that they were in fact domiciled in that country and consequently subject their worldwide estate to inheritance taxes. Furthermore, inheritance and gift taxes can also apply to heirs and beneficiaries of gifts (as in Germany), or to the property that is transferred (as almost always in the case of immovable property if not placed in an appropriate structure), and may thus be levied irrespective of the residence and domicile of the deceased. Trusts, foundations or life insurance structures may be used in such cases to mitigate adverse consequences.
A change of residence is a significant, very personal and multifaceted decision for any individual or family. Whilst this decision may have a direct impact on one’s business interests, a range of social, political, economic and personal issues should also be considered to determine the best jurisdiction in which to reside or hold a residence permit for reasons of security or personal flexibility. Therefore it is imperative to understand the advantages of different options and how they best serve your specific needs.
1.2 Residence and domicile
The concepts of residence and domicile have far-reaching effects on a person’s private life as they concern issues like marriage status, inheritance position in terms of applicable law and taxation, and tax status.
Residence simply refers to living in a particular place. Often expatriates who have moved to another country for work for a period of time are considered resident in that country. This is usually referred as habitual residence.
Domicile is an important concept in many countries where the legal system is based on the tradition of Anglo-Saxon common law. Domicile means to live in a place with the intention to make the place a fixed and permanent home – the person’s ‘real’ home. Domicile is distinct from nationality or citizenship, although a person’s nationality or citizenship may be a determining factor, too. A person can only have one domicile at any time, and the domicile may be a different place from the place of residence.
Ordinarily the country in which a person is domiciled will govern how the individuals’ property is dealt with i.e. in case of divorce or upon death. It is imperative to determine one’s status, especially if the person has more than one place of residence in different countries.
An individual will usually acquire the domicile of their parents, usually the father, at the time of birth. This will be the domicile of origin. Such can be changed to domicile of choice by taking up permanent residence in another country, with no intention of returning to the country of origin. However, an individual may still be considered domiciled in their previous country of residence and the country of domicile of origin, regardless of whether they have become resident in another country – this can have devastating effects, for example, on inheritance tax. Thus, there have been many cases where individual taxpayers left the UK years ago and lived abroad, were resident there continuously until their death, but their domicile was still considered the UK and therefore their estate became subject to UK inheritance tax.
Given that many people move from one country to another, it is essential to have a means of establishing which system of law applies to their situation, as each jurisdiction will have a different effect on their civil status (such as marriage and divorce) and some aspects of their property (such as applicable matrimonial property regimes and inheritance laws and taxation).
Although domicile is used as the fundamental connecting factor in the UK and most Commonwealth countries; in Brazil, Denmark, Ireland, Norway, the US and others, different connecting factors, and in particular habitual residence, are preferred.
Habitual residence, a concept used also in international (income) tax treaties based on the OECD3 model treaty, is the generally accepted main factor to determine a person’s tax residence, at least for income tax purposes, but also in many other cases and increasingly so for inheritance tax purposes. Critics argue that the connection is not strong enough to give sufficient weight to the individuals’ civil rights and affairs in any given country, i.e. habitual residence as a concept can be problematic where a person is working or living abroad for a longer but essentially temporary period of time.
1.3 Change of tax residence
Even in countries which base their tax residence determination mainly or only on habitual residence, tax authorities begin to take note when (wealthy) taxpayers move abroad – or “arrive”, i.e. start to spend a considerable amount of time in the country without necessarily declaring themselves as resident.
It can well be that even a change of residence abroad for two to three years may no longer be sufficient to “get rid” of the tax residence status if later on that taxpayer returns to the same country. Complicated and costly arguments can emerge with the tax authorities, during which the taxpayer often loses. Even if the facts are quite clear and in favor of the tax payer, and a tax lawyer may insist that they have a “good case”, tax authorities, once on the case, often win simply because if it goes to court, in most cases the courts rule in their favor. With tax authorities in high-tax countries coming under increased pressure to collect more revenue, it is likely that they will scrutinize even more carefully cases worth their while.
For wealthy individuals moving their tax residence from one country to another, it is extremely important to plan a move carefully, and to anticipate possible issues later on depending on what the intention is in a few years’ time. It is also critical that all laws and regulations are carefully observed, and that one’s life can be properly organized around those rules without it being uncomfortable and impairing one’s quality of life.
Besides tax residence, of course, other factors such as the impact on your matrimonial property regime, or the inheritance law applicable if you pass away, are important. Here, if habitual residence were the sole connecting factor, your matrimonial, property and inheritance rights would be subject only to the legal system of the country where you happen to be resident. In many instances, however, this is not the case: matrimonial property regimes may remain the same, either by law or by express choice (for example by a notarized marriage contract concluded between the spouses in order to establish the law applicable on their marriage and in particular their matrimonial property regime).
Due to the significant impact on a person’s estate, it is essential to determine one’s domicile, especially if the person is effectively connected to and resides in more than one country. Moreover, each country has its own tax laws and regulations which will establish the tax liability if considered a tax resident. Therefore, when a person wishes to change tax residence status, it is important to ascertain what will constitute domicile or habitual residence in the eyes of the particular jurisdiction.
Factors to take into consideration may include the number of days spent in the country, the location of the main family home, family and business connections, and nationality.
In some countries, having accommodation available for use in that country after moving abroad may deem you resident in that country. It is generally advisable not to have accommodation readily available in such jurisdictions, which include countries like Germany, Sweden and many others.
Tax liability always arises with the number of days spent in the jurisdiction i.e. 183 days a year or more spent in the UK makes a person resident for the purpose of tax. But very often, a much smaller number of days is sufficient (in Switzerland, for example, if you spend more than 30 days there in a year and are deemed to pursue an economic activity, you are considered resident for tax purposes unless a tax treaty applies and provides otherwise).
Small efforts such as cancelling licenses and memberships; amending the electoral register to show that one is voting abroad; transferring the main bank account outside the country; and moving any business operation out of the country will show the local authorities that the person has no intention of being resident in the country.
In the end, it is a combination of several hard factors (such as number of days spent in a country, availability of accommodation, etc.) and soft factors (memberships in clubs, social and business connections and activities) which will determine the successful outcome of your international residence planning. This can range from very clear situations where all relevant hard and soft factors are in your favor, to borderline situations with a considerable risk of being deemed tax resident in more than one country and having to engage in lengthy discussions and arguments with tax authorities in one or several countries.
1.4 Factors to consider when choosing a new residence
The decision to move to another country must not be taken lightly as there are many factors that will affect an individual and his family. It is recommended to undertake a thorough analysis of the country that you may consider as your new main place of residence and possibly your new domicile of choice.
There are significant aspects such as business environment and tax that must be considered but there are also seemingly minor aspects that one initially does not pay any attention to which may later become a source of discontent. It is important to distinguish between temporary stays such as vacationing in a country, visiting on business – and actually living there. Temporary visits can give a skewed perspective on a place. Each individual will have their own particular reason for changing residence; however, it is important to be mindful of the potential pitfalls when making the decision to change your residence and establish a new main base in your life.
Obtaining an alternative residence is a significant, very personal and multifaceted decision for any individual. Whilst this decision may have a direct impact on the applicant’s personal situation and business interests, a range of social, political, economic and family issues should also be considered to determine the best jurisdiction in which to reside or hold a residence permit for reasons of security or personal flexibility. Therefore, it is important to understand the advantages of different options and how they best serve your needs. Some important criteria to consider when looking at an alternative country of residence include its geographical location and access via air, road, rail and sea; its political and economic stability as well as the stability of the region in which it is situated; its banking facilities and business environment; its legal system; its tax system and any double taxation treaties with your country of origin; if you are married or live with a partner, the implications for any (pre-) nuptial agreements or other arrangements and the impact on your matrimonial property regime; if you have school-age children, the education system and availability of private schools; visa-free travel possibilities as a residence permit holder; residence and other requirements for obtaining citizenship; and of course the overall cost of obtaining and maintaining a residence permit.
There are many different aspects which are relevant to consider. The following gives an overview of the most important of these aspects.
Personal situation
It is essential that your tax and estate planning follows your personal and business situation, and not vice-versa. You should never relocate mainly for tax reasons. Unless you are happy in the new environment from a personal, family and lifestyle point of view, experience shows that very often you would then act in a way that will sooner or later jeopardize the tax planning which made you change your residence in the first place. Nevertheless, there are many situations where a change of residence fits in well with an individual’s personal, family or business situation, and in these cases a change of residence becomes a key element of international tax and estate planning. Indeed, the mobility made possible by modern technologies, logistics and efficient transport links means that persons of talent and wealth have an increased range of options with regard to where to reside and from where to conduct their business.
Education and schooling
An important such personal aspect is the schooling of children. If you have children of school age, careful planning is required when you consider relocating to a new country. Besides the obvious priorities of whether the school environment is right for the child, language barriers, education systems, and a general idea about the education options available in the country need to be weighed up.
It can be traumatic for a child to move to a new country where everything is unfamiliar. Therefore it is paramount that one considers the education choices carefully.
International schools can be a good option as the curriculum is usually in English and based on an international standard, recognized worldwide. Children will often be integrated more easily as the school is geared towards foreigners. The downside is that your children will not integrate with the locals as much.
An alternative is to send your children to a boarding school in a country with exceptional educational institutions such as Switzerland, England or the US.
As each child will have different academic needs, the choice of school is a personal decision but it is important to consider the language and the credentials of the school. Is the curriculum recognized by international universities? Will the child easily adapt to the environment?
It is recommended to investigate the options in advance so that one has enough time for the application process. Also, it is important to settle prior to the school year beginning so the child feels more comfortable with his/her new surroundings.
Change of residence and domicile
Whereas residence simply means living in a particular place, domicile means living there with the intent to make it a fixed or permanent home. Legal domicile is an important concept in many countries with a legal system based on the tradition of Anglo-Saxon common law, with important implications in tax law. This is particularly relevant with regard to inheritance taxes. As explained herein, even after you have become resident in another country for income tax purposes, you may still be considered domiciled in your previous country of residence for purposes of inheritance tax. It may be desirable or necessary to acquire a domicile of choice, which in turn will be likely to require more planning and more robust indicators that your connection to the new country of choice goes beyond a simple residence.
Tax residence
Most countries use residence as the key criterion for subjecting you to personal income taxes and other taxes such as capital gains or net wealth taxes. Normally, various tests are applied to determine a person’s tax residence, for example the number of days of physical presence in the relevant territory, having accommodation at your disposal, or your predominant personal and business interests. If an individual leaves a country and establishes bona fide residence in another country however, the former is generally no longer able to tax the emigrant’s worldwide income.
Taxation based on citizenship
There is one important exception to the rule of taxation based on residence. Citizens and long term permanent residents (Green Card holders) of the US pay taxes there regardless of their place of residence, i.e. even if they move their residence outside the US. Therefore, the mere emigration of US citizens does not terminate their US tax liability. The only way for US citizens and long-term permanent residents to terminate their unlimited US tax liability is to relinquish their citizenship, i.e. to expatriate, or to give up their Green Card. The relinquishment of US citizenship or a Green Card usually trigger special taxes, and specialist US tax advice is required to ensure full compliance with the relatively complex rules applying to expatriating from the US.4
There are only a few other countries which have similar tax provisions. In the Netherlands, for example, inheritance tax applies for 10 years after leaving the country as long as one remains a Dutch citizen, and only the relinquishment of Dutch citizenship would end the extended inheritance tax liability before this 10 year period.
In early 2012, during the French presidential elections, Nicholas Sarkozy introduced proposals to base French tax laws on citizenship, in addition to a citizen’s place of residence. Hence French citizens living abroad who pay less tax than they would do in France would have to pay the difference to the French government, or else give up French nationality. Since Sarkozy did not retain power, these proposals may have lost their immediacy, but it is unlikely that they will be forgotten. In the light of the global economic downturn, many governments will see this as a potential way to raise additional funds. This threat has already caused some French citizens to review their citizenship situation, and will continue to influence decisions before any such laws are passed.
Exit taxes
Although taxation based on citizenship and long-term residence is unique to the US (and a very small number of other countries), a growing number of countries have introduced specific measures to discourage the emigration of individuals through various forms of taxation. Such exit or emigration taxes may have considerable implications for the tax aspects of your relocation plans.
In coming years larger, high-tax countries with sovereign debt problems need to increase their tax revenue substantially; this is difficult to achieve beyond a certain point of tax burden on individuals and businesses. However it is politically acceptable to tax wealthy people, and to prevent them or tax them even more if they try to leave the country. It can therefore be expected that countries will try to introduce different forms of exit taxes to prevent the exodus of good taxpayers. From this point of view, if you are contemplating a move to another country, you need to carefully observe the developments on that front so as to possibly pre-empt a move by the legislator by your move abroad sooner rather than later.
Family law and inheritance law
If you are married or live together with a partner, or if you have or plan to have children, you also need to concern yourself with the impact a change of residence may have with regard to family law. The UK, and in particular London, for example, attracts many wealthy foreigners as a place of residence; however, many do not realize that London is also the divorce capital of the world. One reason for this is that it has a divorce law that favours the poorer partner in a marriage – often the woman. This can mean nasty surprises, particularly for rich foreign men whose wives file for divorce in Britain. Even marriage contracts or prenuptial agreements that were concluded before moving to London may simply be disregarded by English courts.
The impact on the matrimonial property regime applicable is also relevant if your marriage remains intact, as it can have considerable consequences in case of death of one of the spouses, up to the point of preventing common children from inheriting anything until the death of the remaining spouse.
On the other hand, the applicable inheritance law may also become an issue: in many countries, especially in continental Europe, forced heirship rules prevail and you may no longer be able to easily leave your property to whom you deem it most appropriate, but rather the law may dictate, for example, that each of your children as well as your spouse must inherit a certain portion of your wealth. This is also applicable on real estate in certain countries, for example in France, where, if you hold the property in your name, French inheritance law and forced heirship rules apply, and a choice of law is not possible – even if you live outside of France.
Inheritance taxes and estate planning
A change of residence may not only reduce one’s income tax burden significantly, it usually also has a major impact on the inheritance tax situation. However, proper planning and advice is particularly important with regard to inheritance taxes, as in many countries the distinction between residence and domicile is relevant in this case. You may well be tax resident in a jurisdiction which levies no inheritance tax, but upon your death your former country of residence may claim that you were in fact still domiciled in that country and consequently may subject your worldwide estate to inheritance taxes. Furthermore, inheritance and gift taxes can also apply to heirs and beneficiaries of gifts (for example in Germany), or to the property that is transferred, and may thus be levied irrespective of the residence and domicile of the deceased. In the case of real estate, generally the country where the property is located will tax it. If you own US securities, however, the US imposes taxation upon the death of their owner even if there is no other connection to the US than the fact that the securities (the shares, bonds etc.) are issued by US entities. Trusts, foundations, companies or life insurance structures may be used in such cases to mitigate adverse exposure.
Tax treaties and tie-breaker rules
Tax treaties can be relevant in finding solutions to the various tax problems associated with moving from one country to another or with having multiple residences in different countries.
Nearly all tax treaties include tie-breaker rules that determine which country has the right to tax an individual who is deemed to be resident for tax purposes in two countries at the same time by their domestic rules. The tie-breaker tests are applied in stages in order to determine the country with which the individual has the closest connection and is therefore granted the right of taxation. The current version of the OECD model treaty makes the following provisions for an individual who is considered to be a tax resident in two countries with double tax treaties:
1. He shall be deemed to be a resident only of the country in which he has a permanent home available to him; if he has a permanent home available to him in both countries, he shall be deemed to be a resident only of the country with which his personal and economic relations are closer (centre of vital interests)
2. If the country in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either country, he shall be deemed to be a resident only of the country in which he has a habitual residence
3. If he has a habitual residence in both countries, or in neither of them, he shall be deemed to be a resident only of the country of which he is a citizen
4. If he is a citizen of both countries or of neither of them, the competent authorities of both countries shall settle the question by mutual agreement
In reality, mutual settlements between countries are rare and a solution is usually found earlier, either with the tax authorities in the country where the dispute about tax residence has arisen, or in the courts of that country if no agreement could be reached with the tax authorities.
Acquisition of real estate
To acquire property in attractive locations and in particular in the new country of residence contributes to the quality of life, satisfies prestige needs, and to some extent also constitutes an investment. It is, however, a good idea to consider renting before purchasing a property as this is the best way to become familiar with an area before committing to a purchase. Obviously, there are many factors to take into account when acquiring property, besides tax and legal issues. It is usually advisable to appoint qualified professionals to assist with the acquisition and to navigate through the pitfalls of buying in a foreign country. Also, consideration needs to be given whether to own the property directly or through a structure, and how easy it may be to sell again in the future.
Although most countries, including Canada, the UK and the US, do not impose any restrictions on acquisition of real estate, there are countries such as Austria, Croatia, Greece and Switzerland5 that restrict foreign persons from buying property there. It is imperative to check that there are no restrictions applicable that will pose a problem or that could affect resale.6
Timing
As generally in life, timing is important also in the context of tax and estate planning, and in particular regarding residence planning.
Specifically, the discrepancies between the tax systems of different countries can sometimes be used in the course of changing residence. Indeed, an important element in cross-border planning is to synchronize the timing of the tax events and the taxpayer. For example, the tax treatment of income derived from activities performed before or after a person gives up his residence, and the different qualification of such income in different countries, may yield tax savings through the carefully chosen timing of a change of residence. The same goes for vesting of shares and share options, the receipt of commissions, proceeds from the sale of certain assets such as the main family home, where in many countries special tax exemptions apply, the date of signing of agreements which have significant value, the timing regarding the establishment of trusts and foundations, and so on.
Health insurance
Arranging adequate health insurance is an important element in international residence planning – yet it is often overlooked. If someone moves abroad, their current health insurance policy will normally expire. One is then usually left with a choice of finding another local insurer in the new country of residence or turning to an international health insurer. It is highly advisable to take out an appropriate health plan at a younger age and before the first signs of ill health manifest. Even if you are very wealthy and think you do not need health insurance at all, you need to think again: a private health policy with an internationally recognized insurer and arranged through a competent specialized consultant,7 which gives you access to a 24 hour assistance service and a kind of medical family office can be extremely useful. It can even be critical if you have an accident in a remote part of the world and if the closest adequate hospital needs to be found in an instant, or to help you find and select the best doctor or clinic for a particular medical problem. Indeed, one of the first steps in a planned change of residence should be to obtain worldwide health cover which ensures the necessary international flexibility.
Checklist: Moving to another country
The following table provides an overview of some of the questions to ask when moving to another country.
| Infrastructure | |
| Transport and accessibility | How good is general accessibility in the country including public transportation, train connections, domestic air travel, and condition of the roads? How good are the travel connections by road, air, rail or sea to other countries? |
| Utilities | Are the cost, access, quality and reliability of electricity, gas, water and waste services satisfactory? Is public water clean/safe to drink? |
| Telecommunications, IT, Internet | Are the telephone systems, mobile phone networks, broadband internet access up to date? Are the quality and availability of IT-support services acceptable? |
| Access to services | How good is access to standard services such as local banks, post office, grocery stores, shopping malls, etc.? |
| Medical facilities | Are there reliable and modern hospital facilities? Is there free access to medical services? Are there any waiting times? What is the access to medical specialists? Are private medical facilities available and is access restricted? |
| Social security | Is there a mandatory social insurance scheme? What is the contribution level and is it in fact an additional tax? Is there a mandatory health insurance scheme? |
| Civic facilities | Are there civic facilities such as parks, playgrounds, city halls or public libraries available? |
| Entertainment | What entertainment, cultural, sport and outdoor activities are available? Is there a good choice of cinemas, restaurants, bars, clubs etc.? Are there recreational clubs such as golf, sailing, polo and tennis? |
| Education | What is the reputation of local schools and universities? Is private education readily available? Are there international schools? How do the education system and the schools rank globally? |
| Child care | Are there good public day nurseries/after-school care facilities? Are private nannies and au-pairs easily available? |
| Physical Environment | |
| Geographic location | Is your new home centrally located in the region; is there a larger city in the vicinity? If your home is in a large city, are green spaces and recreational areas easily accessible? Are there any issues/problems with neighboring countries that could lead to conflict or war? |
| Climate | Is the climate to your liking? Number of sunshine hours per year? Average temperatures (summer/winter)? Is the area prone to winds and changeable weather? |
| Pollution | How clean is the environment and what are the levels of pollution of air, water, soil etc.? |
| Natural hazards | Is the place susceptible to flooding, hurricanes, tornadoes or other storms, earthquakes, heat waves, avalanches, landslides or heavy snow? |
| Industrial hazards | Are there any nuclear power or chemical plants in your area? Are there other factories or production sites that may affect you? (Industrial smells, dust, hazardous products etc.) Is your new home located in the flight paths of nearby airports? |
| Business and Economy | |
| Currency and capital restrictions | Stability of local currency, exchange controls? Are there export-of-capital restrictions? |
| Government and political stability | Is there a stable government and political environment? What is the political culture like? Are there frequent protests? Strikes? |
| Cost of living | What is the cost of living? Are import duty exemptions possible? |
| Banking and financial services | Are high-level banking services easily available? Can the local banking and financial services industry support your personal investment and business requirements? |
| Trade restrictions | Are there trade restrictions that could hamper international business dealings (i.e. repatriation of capital restrictions)? |
| Copyrights and patents | Is there a robust protection for copyrights and patents? |
| Company governance | Is it easy to incorporate and operate a company? Are corporate laws, regulations, taxes etc. mature and efficient? Are minority shareholders’ rights protected? |
| Public and private corruption | Is there any public or private corruption? Is it difficult to do business legally without having to bribe or use other illegal means? |
| People, Culture and Lifestyle | |
| Language | What is the local language? Do people speak English, or which other languages? |
| People | Are you moving to an open and liberal society? Are the people friendly and welcoming, non-discriminatory? Are there social tensions or harmony between different ethnic or other groups in the society? |
| Culture and religion | Is there uniformity or diversity in the community with regard to religion, ethnicity? Are there places of worship particular to your religion in the country? Is there discrimination against your own culture/religion? |
| Gender and minority issues | What is the status of women in society? Are there restrictions in public life for women or for people of certain ethnicity, religion, sexual orientation, etc? |
| Civil rights and freedoms | Is there freedom of speech, religion, language, press, political expression, information etc.? |
| Quality of living | What is the overall quality of living in the main cities and the countryside? How do the main cities and the country compare globally in terms of quality of living? |
| Residence Permits | |
| Application procedure | What are the minimum time and requirements to apply for a residence permit? |
| Ease | Is it easy to become a legal resident? Are there many steps required, interviews, visits to the country? |
| Physical presence | Are there any minimal physical presence requirements to maintain legal residence status? |
| Time to Permanent Residence status | What are the conditions and the minimum time required to obtain Permanent Resident status? |
| Cost | What is the cost to obtain and maintain the residence permit (including tax considerations)? |
| Visa-free travel | As a resident, are there any visa-free travel benefits irrespective of citizenship? |
| Status | Does residence in the country provide international social status benefits? |
| Revocation | Under what circumstances can residence permits be revoked/not renewed? |
| Citizenship | |
| Time | What is the minimum time of residence required to apply for citizenship? |
| Ease | Is it easy to become a citizen or restrictive? Does the country traditionally welcome new citizens (e.g. Canada) or is it restrictive (e.g. UAE)? |
| Language | Are there strict language requirements? |
| Other restrictions | Are there other restrictions on becoming a citizen (e.g. sub-national restrictions, cultural, ethnic, etc.)? |
| Visa-free travel | Do citizens enjoy good visa-free travel? |
| Cost | What is the cost to obtain and maintain citizenship? |
| Obligations | Does citizenship come with burdensome obligations (e.g. military service, taxation)? |
| Status | Does citizenship provide national or international social status benefits? |
| Revocation | Under what circumstances can citizenship be revoked? |
| Legal and Tax | |
| Taxation | What is the taxable base and rate of taxation of the following?– Income and capital gains taxes– Net wealth and property taxes– Inheritance and gift taxes Are there good tax planning options? |
| Matrimonial and divorce law | Will pre-nuptial agreements be recognized in this country? What impact does residence in the country have on a possible divorce filing? |
| Real estate market | What is the state of the real estate markets (residential, commercial)? What is the availability of residential real estate for rent and purchase? |
| Real estate acquisition | Is it easy to acquire property? What are the transfer duties payable? Are there any restrictions on buying or selling? |
| Estate planning | Are there forced heirship rules? Can you use trusts or foundations? Do you need to adjust your will and other instruments of succession planning? |
| Licensing, business permits | How easy is it to set up a business? Are there license and permit rules that one must abide by, i.e. license for carrying out a profession, driver’s license, boat license etc? |
| Law enforcement and courts | How effective is the local law enforcement?Is there a reliable legal system?Can claims be effectively pursued in court? |
1.5 Tax residence: considerations and implications
To determine if a person should be subject to taxation, countries generally use the following criteria:
• Residence: a country may tax the income of anyone who lives there, regardless of citizenship or whether the income was earned in that country or abroad
• Source: a country may tax any income generated there, regardless of whether the earner is a citizen, resident, or non-resident
• Citizenship: a country may tax the worldwide income of their citizens, regardless of whether they reside in that country or not
For the internationally mobile, the tax position across different countries will be an important concern. But the amount of tax they pay is also of interest to the relevant tax authorities. The simple rule is, the more you pay, the more interesting it becomes – for both sides.
Most countries use residence and/or source when determining if a person should be subject to taxation. The US, and to a lesser extent some other countries,8 are notable exceptions.
The place of residence for tax purposes or tax residence is therefore important in determining how you are taxed. If you have connections with, and spend long periods in, more than one country, there may be uncertainty about whether such connection or time spent in different jurisdictions does not make you tax resident in more than one place. The question of tax residence is very important for internationally active people, because getting it wrong can be expensive and time-consuming to resolve.
Other than the number of days spent in a country – which is perhaps the most important factor – a wide range of personal, business, property, economic and social connections must also be considered to determine ‘tax residence’.
In many countries, the laws and regulations are ambiguous, except for minimum thresholds (i.e. below a certain number of days of presence in the country – with anywhere between 10 and 90 days a year, you are generally safe and would normally not be deemed resident for tax purposes, depending on the country), and there is generally no clear guidance on the relevant weight of each factor.
Factors that can play a role include:
• Where your spouse lives (if you are married)
• Where your children live (if you have children)
• Where you have accommodation available for your use (i.e. where you own or rent homes)
• Whether or not you were tax resident in previous years
• Whether or not you carry out full-time work somewhere outside the country (i.e. you have a full-time job and workplace outside the country)
• Whether you are doing any work in the country (even if just a few days per year)
• Whether you spend more days in the country in any tax year than in any other single country
• What social ties you have in the country, memberships in clubs and societies etc
By choosing a country with a mild tax climate for a main residence, a taxpayer can considerably reduce his burden legally and effectively without the need for complex tax planning. Belgium, Croatia, Hong Kong, Malta, Monaco, Singapore, St. Kitts and Nevis, Switzerland, and the UK, to name a few, are attractive destinations in this respect. So a change of residence may well be worthwhile not only as a lifestyle choice but also from the standpoint of taxation.
A move will either have tax advantages and tax savings or it can create a greater tax burden, depending on the jurisdiction. It is therefore imperative to establish the tax implications prior to changing residence. Interesting scenarios could arise that one would not ordinarily be aware of. Most sensibly, one should consult a tax advisor who is versed in the tax laws of both countries.
A trend which we see with tax authorities around the world is that they check not only how long you are resident in a particular country, but also whether you may be spending more days in their country than in any other single country. In other words, even if you spread out your presence globally across several jurisdictions, and say you are spending your year in 6 different countries with 80 days, 70 days, 60 days, 75 days, 10 days and 65 days in each, then it could be that the tax authorities of the country you spend 80 days could still deem you tax resident (in practice of course only if you have some other connection there), even if you are well below the normal threshold for that country but simply because you spent even less time elsewhere.
Day counting
If you spend more than 183 days in any country, you are normally tax resident in that country, unless the presence there is of a strictly limited, temporary nature. If you spend no time at all in a country, you cannot be deemed tax resident.
Between zero and 183 days lies a wide range of possibilities, although normally there are some minimum thresholds of number of days below which you are ‘safe’.9
You also need to be aware of what constitutes a day spent in any particular country. Is it a full 24 hours? Is it just being present in any given day, even if just for half an hour in transit? Furthermore, the year in which the days are counted may correspond to a different period than the calendar year, depending on the country’s ‘tax year’.
Some countries rely on a territorial (or source) based tax system10 which has no impact on whether one is resident or non-resident as all income derived in that country is subject to tax, while income derived outside the country remains tax free.11 Most countries, however, have taxation on world-wide income.
Therefore (tax) residence status becomes highly relevant as most countries use residence as the key criterion for subjecting one to personal income taxes and other taxes such as capital gains or net wealth taxes. Normally, various tests are applied to determine one’s tax residence. In most countries this is determined by the number of days of physical presence in the country, in combination with other factors.
The tax authorities will also establish whether the individual has accommodation readily available and family and business interests in the country. For former countries of residence, it is important for the individual to prove that he has left permanently to establish residence in another country as this confirms bona fide residence in the new jurisdiction so that the former country will no longer tax the emigrant’s worldwide income. In some countries, this change of residence is confirmed by way of exit taxes.
The emigration of US citizens does not terminate their world-wide tax liability under Federal tax law, even if they are permanently resident in another jurisdiction. In such cases, the only way to legally relinquish US tax liability is to give up US citizenship and obtain an alternative citizenship.12
The discrepancies between the tax systems of different countries can also be used to one’s advantage in the course of changing residence. Indeed, an important element in cross-border planning is to coordinate the timing of the tax events and the taxpayer. For example, the tax treatment of income derived from activities performed before or after a person gives up his residence, and the different qualification of such income in different countries, may lead to tax savings through carefully chosen timing of a change of residence.
Finally, it is important to be aware that a change of residence will not only have an impact on one’s personal tax situation but that one’s inheritance tax situation will also be affected. Even if one is not deemed tax resident in the jurisdiction, owning real estate in that jurisdiction may be a factor and in most countries where such taxes exist will still have local inheritance tax implications.
Exit taxes and extended income taxes
One problem with moving your tax domicile to another country, especially to one with low taxation, is that several high-tax countries have taken steps to discourage such moves, namely by introducing a form of exit tax or an extended income tax regime, or a combination thereof.
Exit taxes can be classified as general and limited taxes which are levied on income or capital gain that has accrued but not yet been realized; or as unlimited or limited extended income tax liability, which applies on income or capital gains arising after emigration.
Also, a claw back of tax deductions could be invoked – for example whereby a previously tax deductible accrual would be revoked.13
In Germany, for example, the extended limited tax liability can apply for a period of 10 years after emigration which can be very burdensome for the individual. More and more countries are drafting special tax rules to make moves abroad fiscally less attractive.14
Many high tax countries already impose such regimes to discourage fiscal emigration.15 It is sometimes possible to mitigate – or in some cases even completely bypass – such taxation by appropriate structuring before, during and after a move abroad. However, this almost always requires the taxpayer to make a clean break with the former country of residence and to strictly avoid any links with it such as maintaining a second home there, making frequent visits or longer stays on its territory etc. These conditions can be tough for many expatriates and should be carefully weighed against the tax advantages such a radical change in one’s life will bring.
Tax treaties
Bilateral agreements to avoid double taxation of persons resident in contractual states exist between many countries. Tax treaties delimit the tax-imposition rights between two countries and takes precedence over national legislation.
Whereas ownership of real estate abroad usually implies limited tax liability as a result of ownership of this property in the foreign country, a move abroad always affects tax residence and has considerable consequences on tax liabilities. Therefore, tax treaties can play an important factor in limiting such tax exposure.
Inheritance and gift taxes, which depend primarily on the testator’s last residence, may also be relevant. If a taxpayer who moves abroad has considerable income and assets, experience shows that the tax authorities concerned are particularly interested in the deceased’s last tax residence, as this leads in most countries to unrestricted tax liability on his or her estate. However, relatively few tax treaties concern inheritance and gift taxes; generally when speaking about double tax treaties, these relate to income and possibly wealth taxes only.
It may happen that two countries – according to their respective tax laws – simultaneously consider a particular taxpayer as fiscally resident and unrestrictedly tax liable. This could result in him being taxed on his global income and possibly also on his assets by both countries on the basis of their domestic tax regimes. But if a double taxation agreement exists between the two countries, it will help to determine where the taxpayer is fiscally resident and thus liable to unrestricted taxation, and which country is to merely apply restricted taxation – namely on any assets or income located within its territory.
Residence in one of the two contractual states is normally the precondition for the application of the relevant double taxation treaty and all claims on its protection. The treaty formulates precise rules to determine in which of the two contractual countries a taxpayer is deemed to be fiscally resident. They are known as tie-breaker rules and in the majority of double taxation treaties they follow the OECD model treaty.
Accordingly, most double taxation agreements define the country of tax residence as the place where the taxpayer has his main permanent home. If he has homes in both countries, the crucial point is where his personal and/or economic activities are centered. His habitual place of living is then in third place, and citizenship is considered only in fourth place. If the tax residence cannot be determined on the basis of these criteria, it is decided by mutual agreement between the countries concerned.
Double taxation agreements can also be useful in terminating tax residence in the country of emigration more quickly. If someone no longer wishes to count as a UK tax resident, for instance to avoid paying capital gains tax, UK domestic law stipulates that certain taxes apply up to five years even after moving abroad. But if he moves the tax residence to a country which has a suitable double taxation agreement with the UK, such as Belgium, he can bypass such domestic tax regulations and may be able to reduce the period during which certain UK taxes still apply after a change of residence.
In the absence of a double taxation agreement between the previous and new country of residence (such as when moving for example from the Netherlands to Monaco), only the respective domestic fiscal regulations apply. These are, as a rule, stricter – at least for high-tax countries – i.e. it is more difficult to terminate one’s former tax residence if you directly move to a no-tax jurisdiction and there is no tax treaty. In order to avoid continuing to pay tax on one’s global income and possibly assets too, often all links to one’s former country of fiscal residence must be severed, and even then extended taxation may apply for some time after emigration.
1.6 Financial planning and insurance
For many wealthy people, an alternative residence is an effective tool for international tax planning, but it also increases the financial planning options and facilitates more privacy in investment and banking.
Anyone who is transferring their residence to another jurisdiction will certainly have to revisit their financial and estate planning. It is implicit that the various parameters of the financial aspects of one’s estate will be affected. You may be familiar with the legal and fiscal situation and general framework conditions prevailing in your home country, but you must now become adept with a new framework.
It may make sense to retain investments in other currencies, for example if one moves from the US to Europe, where the local reference currency is the Euro. As a rule, however, a move of a person’s regular activities to a new currency area will also lead to different weighting of the currencies in their personal investment portfolio and will require a rethinking of their financial planning and asset management arrangements. It may be wise to consult a specialized investment advisor familiar with clients with cross-border issues.
It is also sensible to obtain advice from a tax advisor in the original jurisdiction, as there may be some interesting financial and tax planning options, or in a less favorable case, there may be exit taxes due that need to be calculated.
A move abroad also offers the opportunity for more flexible pension planning, as capital tied to government-regulated pension funds can often be released. Previous retirement provisions may have to be reorganized, liquidated or taken out prematurely (e.g. life insurance policies, pension claims, tied-up assurance funds etc.). It is particularly important to consider withholding taxes when receiving payouts from pension institutions and any tax concessions when drawing any benefits in the form of pensions or capital payouts. As a rule, different costs of living also change the provision requirement and usually make it necessary to adapt one’s cash planning.
A move will also require careful examination of previous estate or succession planning (partnerships, foundations, trusts, family holding companies and the like). Here too, considerable scope may be available for optimization depending on one’s destination. Thus, anyone moving, for example, to the Bahamas, Ireland, Malta, St. Kitts and Nevis or the UK can structure their assets by means of suitable succession structures so that they – or lifetime enjoyment thereof – are transferred without restrictions, and also often in tax-neutral form, to freely designated heirs. The situation will be quite different when moving to a country such as France or Spain, although here too various opportunities for optimization usually exist. In any case, existing estate-planning strategies should be checked and their adaptation to the new conditions and opportunities examined. Professional support is usually indispensable in this domain too.
It is also important to include the aspect of asset protection, especially in the US. In view of the peculiarities of the American legal system, which is characterized by a relatively low threshold of civil litigation, suitable measures to avoid excessive exposure of one’s personal assets are indispensable. But when moving to other countries, it may also make sense to structure at least part of one’s assets – perhaps including real estate – so that they are safe from seizure. Suitably designed asset protection trusts as well as specially structured Swiss annuities and life insurance policies are sensible options for this purpose.
1.7 International health insurance16
International health cover is a highly relevant topic for anyone thinking of moving abroad, and yet it is scarcely considered and hardly mentioned at all by advisors. Admittedly, it is not the job of a lawyer specializing in international inheritance law or an international tax advisor to know all about insurance as well – and especially about international health insurance. There is consequently relatively little specialist competence in this sector available to private clients. Most advisors and insurance brokers worldwide with such expertise merely represent a single insurer. Only very few offer more than a small number of products and are able to provide really comprehensive advice.
Trying to find ideal health cover is no easy task even without moving abroad, but it is of particular importance when moving to another country or even staying there for a limited period. The risks of sickness and accident must be covered comprehensively in an international context in order to avoid unpleasant surprises. A few important points must be considered in view of the wide choice of diverse solutions and different insurance products.
Anyone who lives or works abroad, runs a company or retires there should arrange insurance cover that is extensive and applicable around the world. Health insurance, in particular, should allow the patient to choose his preferred doctor and hospital with as few restrictions as possible, and ideally none at all.
A question of residence
In the event of a temporary stay abroad with no change of residence, basic state insurance usually assures at least minimum cover in emergencies. In addition, almost all local health insurers offer the option of comprehensive cover for sickness and accident via private supplementary policies, even for temporary stays abroad. Before moving abroad however, it is useful to check out the insurance options in detail, from free choice of doctor and hospital to medication cover. Previous health policies normally terminate with a move abroad, and continuing insurance cover must be assured during the actual process of moving.
Comprehensive cover with a free choice of doctor and hospital worldwide is strongly recommended in most cases. This is because, even in many developed countries, the public healthcare system satisfies only minimum requirements and it is essential to seek out private hospitals to ensure competent medical treatment. There is no alternative to comprehensive insurance cover for anyone thinking of moving to, say, the US or the Caribbean, or Eastern Europe, or to a developing country. Many countries have good local private health insurers, and some of them also offer international cover and a free choice of doctor and hospital. Although such a local insurer usually represents the least expensive solution, it is rarely the best one. It should be stressed that practically all insurers with a local or national scope of activity in the relevant country will only accept policyholders who are actually resident in the country. Anyone who leaves the country again will normally lose his insurance cover, which can become an insoluble problem with increasing age. It is also difficult to obtain a truly international and unrestricted free choice of doctor and hospital in many places. So the ideal insurance policy will be independent of residence and duration of stay and will also guarantee fully comprehensive cover as far as possible. Most local insurers offer only unsatisfactory solutions, if at all, and very few offer private health insurance which can be concluded or retained even when the policyholder lives abroad. So it is vital to check these important aspects, and in most cases it is worthwhile consulting an independent insurance advisor specializing in international health insurance.
Free choice of doctor and hospital, worldwide cover
Although an extensive choice of private health insurance schemes with an international scope is available worldwide, only very few can really be recommended. When comparing the various offers, it is important to not only to look at a specific insurance product but also at the financial soundness and reputation of the insurer as well as the latter’s experience in international health insurance. The insurance product which best satisfies the individual requirements must then be considered.
Private health insurers are not obliged to accept you. So anyone who is over 55 years of age or is not perfectly healthy has little chance of obtaining private health insurance and still less comprehensive insurance with international cover. For this reason in particular, it is advisable to check out the insurance situation in detail before moving abroad. It may make sense to change over to an international health insurance scheme several years before a possible move abroad in order to be assured of the necessary flexibility later on. Even if no transfer of residence is planned, but one wishes to be optimally insured against sickness and accident, a detailed check of all options is worthwhile. It may even be of benefit to take out international health insurance in this case.
Anyone staying abroad frequently or planning to move to another country permanently should arrange insurance cover independently of residence and sojourn – i.e. inclusive of any subsequent moves or even a return to one’s home country at a later stage. Such cover will ideally permit an unrestricted choice of doctor and hospital worldwide.
Checklist: International health insurance
In selecting suitable health insurance, care should be taken to consider the following points, which are listed below in the form of a brief checklist:
• Worldwide cover at reasonable premiums. It is also important to consider premiums in higher age brackets
• Free choice of physician and hospital worldwide without restrictions
• No restrictions on the policyholder’s residence and duration of stay, even in the event of a later permanent return to the home country
• Guaranteed lifelong policy renewal, even in the event of a later change of residence, or illness of longer duration etc.
• Efficient processing in the event of a claim
• Multilingual emergency service manned around the clock throughout the year
• Insurance company that is well known and has a good reputation as well as broad experience in the domain of international health insurance
• Consult with an independent consultant who specializes in international health insurance
1.8 International residential real estate
One of the key factors when changing residence is the question of where one will physically reside. Ownership of real estate satisfies a basic human need, and to acquire a piece of property in an attractive location is equivalent to gaining a desired quality of life, and it is often also a sensible asset diversification.
However, it is recommended that initially you rent a comparable property in an area that could eventually be the location that you would settle. By renting, it gives you an opportunity to learn about the area before committing capital for the purchase.
Many countries allow foreign nationals to acquire real estate without restrictions. However, there are countries where permits are required to purchase property as a foreign national, or where property acquisition is limited to nationals of the country. The acquisition and ownership of real estate in a new country raises legal and tax issues that are often unsuspected by those concerned. Private acquisitions of real estate are frequently made without any accurate knowledge of the legal, tax and economic background particular to the country.
Value maintenance and capital growth will also play a vital role, so it is important to clarify these key factors before acquiring real estate in order to be protected from unexpected devaluation, legal and tax consequences. While this applies to real estate in general, it is particularly true for property located in a different jurisdiction, especially one with onerous legal systems and linguistic limitations.
It is generally an advisable risk-averse approach to appoint lawyers, tax experts, architects and trustworthy real estate agencies familiar with local expertise. The costs incurred will almost always be offset by the smooth and correct handling of the issues and procedures involved.
Other countries have different habits and different legal systems, especially in respect of real estate and tax law, which may assume very different forms in the various countries. So foreign acquirers of real estate should not let themselves be guided by their inherent feeling for what is right, but must inform themselves in an unprejudiced way about the circumstances prevailing locally. Still, the acquisition of real estate is safe in most countries as long as certain basic rules are observed.
Finding the right property
Although common knowledge, it is nevertheless worth remembering that location is the most important factor in the selection of any piece of real estate. Special care must also be taken to determine how the environment may change in the future. It is important to be aware of construction of projects for freeways, airfields, power lines, waste dumps or similar major developments that are planned in the area. One should also know in which construction zone the building plot and its surrounding plots are situated (might a neighbor add another level to his property and in doing so, obscure the marvellous lake view?).
The best way to gain certainty about these factors is to buy an existing property in surroundings which are already well developed and in which re-zoning is unlikely. If there are still many undeveloped plots of land around a property, it is hard to estimate how the surroundings and perhaps the entire appearance of the locality may change. Many location factors must be considered, above all the quality of the local municipality. The improvement of the location is critical for any future gain on the value of the property. Improvements to infrastructure such as transport links and shopping facilities will have a positive impact whereas construction of freeways will have a negative impact. In making an estimate of the future potential growth in value of a property, it is always worthwhile clarifying the planned and future development of the residential area in which it is located as well as any changes in local infrastructure prior to the purchase.
Also the quality of the location within the municipality where the property is situated is important as this will affect everyday life. Is the house located on a good street in a quiet area? Where are the nearest shops, banks, post offices, schools and kindergartens, high schools, location of evening classes, restaurants and sports facilities? Are there cultural facilities nearby? How easily can the property be reached by public transport? Where is the nearest national or international airport? Where is the nearest rail station? What are the connections like? How far is it to the nearest highway or freeway? How close is the nearest healthcare facility, and where are the nearest major hospitals?
Important aspects of the property itself are the size and shape of the plot, the orientation of the building and its exposure to sunlight, the view as well as the extent to which it is overlooked by neighbors.
Tranquillity is important – noise, especially from busy roads and airports, should not be underestimated. Intrusive odors also represent an important factor (proximity to paper factories, pig farms, food-processing establishments etc.). Exposure to wind plays a significant role in many areas (for example the Mistral in southern France or the Bora in Dalmatia). A secluded outside patio can be very attractive, but excessive exposure to wind can make conditions quite disagreeable outside the house, on the patio or in the garden.
Furthermore, pollution levels must be considered such as the extent of emissions and pollution from fumes. Therefore it is important to be far away from filling stations, covered car parks and busy roads. Likewise, one should be sufficiently far away from high-tension lines and mobile phone network antennas.
Where buildings are constructed on a slope, excessive water pressure and thus damp masonry may be a problem. Any danger of natural hazards must also be clarified. Landslides, avalanches, earthquakes, forest fires as well as flooding, tidal waves and tornadoes may present considerable risks in certain areas. The situation and construction of the property must be carefully considered to estimate the real risks.
Certain special features must be considered in the case of rural and agricultural real estate as well as of historical properties and houses located by rivers, lakes and close to the sea.
The buyer must also consider factors such as access and access authorization – is there a public road leading to the property? If there is only a private road, the buyer must be fully apprised of authorization access to the property as well as issues such as snow clearance in winter.
Another factor that should not be overlooked is security. The buyer should enquire as to the frequency of burglaries in the area where the property is located. If the house is very isolated, the buyer must consider the precautions that should be taken, such as the installation of a burglar alarm or the hiring of a private surveillance service. Perhaps there are neighbors and trustworthy persons who can keep an eye on the house when the owner is absent.
The following aspects must be considered with regards to the actual building: the size and configuration of the rooms and ancillary premises, the number of bathrooms, potential for additional fittings and extensions, construction quality of the building, heating insulation, energy consumption, heating and cooling systems (i.e. is the oil tank located in an environmentally safe place such as in a cellar or protective trough?); and communication accessibility (telephone, Internet, ISDN/ADSL, cable TV connections, a satellite dish). Furthermore, the buyer should also carefully examine these various installations and technical equipment and check whether the installations have been regularly maintained.
It is important to ensure sufficient sound insulation especially in apartments/condominiums and duplex villas. The best way to investigate these premises is to spend several days in the building or, if that is not possible, to have the sound insulation inspected by an expert who can accurately measure it.
From a legal perspective, it is very important to check before every acquisition whether the property to be acquired is encumbered with any easements, servitudes, charges, restrictive covenants, liens or mortgages. Such rights may be significant and may often greatly restrict the enjoyment or use of the property. The existence of such encumbrances may also have considerable effects on its value and future appreciation. The various rights and restrictions will differ in each jurisdiction, therefore even though it is usually noted in a land or ownership register or in the title deeds, it is important to have a local legal advisor investigate this properly.
Finally, when searching for a property, one should ideally already apply criteria which will be significant to future buyers when it comes to a resale.
Real estate holding structures
In some situations, it is sensible to use a holding structure such as a company for fiscal and succession planning or to avoid restrictions or licensing requirements. There are also other factors which will dictate whether a property should be held in a holding structure. In many cases, the decision will be determined by the specific country in which the individual is purchasing the property as each country’s specific regulations will have a different effect on their tax and succession planning. In addition to tax and succession planning aspects, it is also desirable, for confidentiality and asset protection purposes, to hold real estate via the intermediary of a company rather than directly, as this prevents the effective owner from appearing in the ownership or land register.
The more expensive the real estate, the more sense it makes to use a holding structure rather than place the asset in the individual’s name.
However, in some circumstances it is preferable to acquire the real estate directly in one’s own name. Firstly – for example in France – comprehensive regulations aim to prevent acquisition via the intermediary of companies and thus make such procedures more complicated – with the notable exception of the domestic SCI.17 Secondly, this can even have tax disadvantages, as companies are often liable to higher capital gains tax than directly owned properties at a resale. Furthermore, most companies (again perhaps with the exception of a French SCI) incur administrative costs. In many countries it therefore makes more sense to acquire properties in the lower to middle price range directly in one’s own name. However, careful planning is of particular importance in such cases, and includes drawing up a suitable will or possibly also acquiring the property in the name of your children.
The use of a holding structure has differing effects in the various jurisdictions. Therefore it is important to understand the implications of the residence status and the local tax and succession laws. Often, companies are usually set up in countries where company taxes are nil or limited and annual maintenance costs are low. Such jurisdictions include Anguilla, the BVI, Luxembourg, Nevis, Malta and Panama, where companies can be set up and maintained at low cost and with no or only limited local tax consequences. However, tax consequences may have to be taken into account depending on the country of residence of the company owner and the country from where the company is effectively managed. So it is essential to clarify all circumstances and tax consequences carefully – including in the country where the company owner is resident.
It is also worth noting that corporate and other holding structures (such as private foundations and trusts) are often recommended and also implemented despite failing to pass a thorough scrutiny by the relevant tax authorities – where such scrutiny takes place. Many countries have now extended their relevant tax laws with very extensive anti-abuse regulations. If more than 50% of a company’s assets consist directly or indirectly of real estate, that company will often be taxed just like real estate. Thus the capital gain from the sale is also taxed on the same basis (and cannot simply accrue tax free in a zero tax country) when the responsible tax authorities discover the true nature of the transfer. Ultimately, many company structures are based on the transfer of company shares without the notification of the tax authorities. Although it is often highly unlikely that the tax authorities will ever find out about the transaction, it cannot form the basis of a legal arrangement and sound planning.
In 2012, new rules relating to dwellings worth over GBP 2 million held by corporate structures came into force in the UK, making it essential to take professional advice if you own, or are considering investing in, valuable real estate in the UK.
Real estate transactions
The buyer generally bears the greater transaction risk, as is fittingly expressed by a principle of Roman law: Periculum est emptoris18, or in other words: Caveat emptor19. That is why certain precautions and clarifications are needed prior to every purchase in order to minimize the risks. As a long-term investment which usually ties up greater capital, the acquisition of real estate should be planned and carried out in a careful and rational manner.
Once the buyer has identified the target property, there are a number of practical and legal criteria that the buyer should observe thereby ensuring full and proper title to the property. Besides restrictions imposed by the country, there may be problems with the seller’s title, third party claims and other onerous issues that are not immediately apparent. It is imperative that the buyer investigates the title thoroughly and carries out the necessary due diligence, ideally with the help of a legal advisor.
The seller must ensure that he can produce all authorizations (e.g. consent of his spouse) needed for the purchase, as failure to do so would delay the transaction.
In most countries the seller is obliged to inform the buyer of any defects. As a rule, the seller must also inform the buyer of the existence of any preemption rights. Often, the seller is liable to a comprehensive obligation for information and disclosure and bears corresponding liability to the buyer. Accordingly, it is essential for the seller to settle all questions of liability in the agreement in a detailed manner. In general, it is recommended wherever possible to exclude all liability by the seller from the agreement (this is also common practice for re-sale property in most countries). This liability exclusion should be comprehensive and expressly include liability for legal and material defects, error and damage compensation, as far as this is permissible on the basis of the local law. In any case, care must be taken to ensure that the sales agreement contains no guarantees which the seller is unable to satisfy. If the seller makes any representations and warranties, a carefully drafted sales agreement will limit the warranties and representations to the period of time the seller has owned the real estate and exclude the periods of ownership by previous owners.
The seller should also note who is responsible for which fees – for example taxes and lawyers’ or notaries’ fees. In many cases, notaries’ fees and transfer taxes are divided on a fifty-fifty basis, but this division is ultimately a matter for negotiation. Lawyers’ costs are usually borne by the party commissioning the lawyer. However, the seller is always responsible for paying capital gains tax.
In most cases, the seller is also liable to pay the broker’s commission. This generally varies between 2% and 10% of the sale price in different countries and is usually subject to Value Added Tax (where such a tax exists).
The property acquisition taxes which are levied everywhere are as a rule borne by the buyer. However, if they cannot be collected from the buyer, they may in some countries be charged to the seller. This is particularly relevant when the seller remains resident in the same country. With regard to capital gains taxes it is exactly the reverse: they are payable by the seller but the buyer may be jointly liable if the seller doesn’t pay them – and the tax authorities may be entitled to put a lien on the property.
When apartments or houses belonging to an owner’s association (e.g. concerning the shared amenities of a condominium) are sold, the amount of any reserve or renovation fund must be determined, as this can have an effect on the sale price.
A property designed for private use should above all bring subjective pleasure to its users and not only maintain and increase its value in objective terms. Therefore, careful clarification of these factors is most important before closing the deal.
1 See Vertovec/Cohen (2008)
2 See Ong (1999)
3 Organization for Economic Cooperation and Development
4 For an overview of these rules, see Chapter 3
5 With the sole exception of Andermatt, where foreign residents can buy without any restrictions whatsoever; see www.henleyestates.com/andermatt
6 A more detailed overview of this important aspect is given in section 1.9
7 e.g. Swiss Insurance Partners, see www.sip.ch
8 E.g. the Netherlands, with regard to extended inheritance tax for citizens even if they have already left the country and are residing abroad
9 E.g. 10 days in the UK or 30 days in Switzerland
10 E.g. Hong Kong, Panama, Singapore
11 For a good discussion of these issues, see Betten (1998)
12 See Chapter 3
13 Betten (1998)
14 France has also recently introduced such a regime
15 E.g. Australia, Austria, Canada, the Netherlands
16 The author would like to thank Swiss Insurance Partners, Zurich/Dubai/Hong Kong, for their valuable input in compiling this section
17 Société Civile Immobilière
18 The purchaser runs the risk
19 Buyer beware
