IX. SUMMARY OF OTHER COUNTRIES' TAXATION OF CITIZENSHIP A. Summary of Other Countries' Taxation of Citizenship Relinquishment, Overview The Joint Committee staff surveyed other countries' taxation of citizens and residents." While not an exhaustive survey, this survey reveals that most nations generally tax the worldwide income of their residents, whether citizens or noncitizens, but only the domestic source income of their nonresidents, whether citizens or noncitizens. Hence, unlike in the United States, the criterion of residence rather than citizenship is central to the liability to tax in most countries. In general, it appears that a limited number of countries attempt to tax former residents and that a smaller group impose a tax on expatriation (an exit tax). Several European countries impose income tax on their former citizens or residents for some period of time after they become nonresidents. In some cases, the country in which the former resident chooses to claim residency determines whether the individual retains an income tax liability in his or her former country of residence. Australia, Canada, and Denmark impose an exit tax when a resident permanently leaves the country. The Danish departure tax generally is less expansive than those of Australia or Canada. Also, it is generally the case that among those countries that tax capital gains, the gain is taxed upon realization by a resident taxpayer, regardless of whether some part of that gain may have accrued to the individual prior to his or her immigration to such country. Australia, Canada, Denmark, and Israel are exceptions to this general rule. The relevant provisions relating to taxation of former residents, exit taxes, and the taxation of immigrants' accrued gains are described below." 467 466 The Joint Committee staff conducted this survey with the assistance of the staff of the Law Librarian of the Library of Congress. The Joint Committee staff also consulted primary sources, secondary sources, and outside practitioners. The results reported should not be interpreted as an authoritative representation of foreign laws, but rather as an overview of foreign tax statutes. 467 Evcent where noted all foreign currency conversions into US dollars were made at the exchange rate prevailing on September 30, 2002, as reported by the International Monetary Fund in International Monetary Fund, International Financial Statistics, November, 2002. Taxation of former residents Finland Generally a person who has his permanent residence in Finland is subject to taxation on his worldwide income and wealth.468 For three years subsequent to departing Finland, a Finnish citizen is liable for Finnish income and wealth taxes on his worldwide income and wealth unless he can establish that no "essential ties" with Finland are maintained. The three-year "essential ties" rule is interpreted by the individual's facts and circumstances. Among circumstances that create essential ties are the individual's family residing in Finland; the individual carries on business activities in Finland; the individual owns real estate in Finland; and the individual is not permanently staying abroad perhaps for reasons of pursuing studies or a limited employment assignment. After three years, the individual is taxed as a nonresident unless the tax authorities can establish otherwise. The three-year rule does not apply for the purpose of inheritance taxation. In practice bilateral tax treaties for the mitigation of double taxation of the individual often may override the three-year rule.469 Even if a tax treaty overrides the three-year rule, the Finnish citizen still is required to file an annual tax return. France 470 As provided by the France-Monaco income tax treaty, France can tax as a French resident any French citizen who resides in Monaco regardless of whether they resided in France or in another country prior to establishing residence in Monaco. Cooperation between the tax authorities of France and Monaco provides enforcement of this arrangement. Treaty arrangements between France and Monaco regarding inheritance taxes are not as stringent as those governing income taxes. Non-French sited property of a French citizen residing in Monaco is exempt from French inheritance taxation if the individual had resided in Monaco for more than five years prior to death. Aside from the unique agreements with Monaco, emigration from France generally creates no French tax liability under either the income or inheritance taxes, except in two circumstances. First, French citizens and other nonresidents are liable for income tax on Frenchsource income. A distinction is made depending on whether or not the nonresident has one or more dwellings at his or her permanent disposal in France. If the nonresident does not have a tax. 468 Finland is one of a number of European countries that imposes an annual net wealth 469 Finland's treaty with the United States eliminates the three-year rule to preclude double taxation. 470 An evrention to this rule arises in the case of an individual holding dual citizenshin. If such an individual moved to Monaco from a country other than France he may claim the nationality of the other country to avoid taxation as a French citizen. dwelling, he or she will be taxed exclusively on the basis of his or her French-source income. If the nonresident has one or more dwellings at his or her permanent disposal, whether held directly or indirectly, and the nonresident resides in a tax haven or nontreaty country, he or she is subject to tax based on a deemed income equal to three times the fair market rent of the dwellings. However, if his or her French-source income exceeds this deemed income, tax is assessed based on actual income.471 In practice, such tax is infrequently collected. 472 Second, for certain French residents who emigrate from France on or after September 9, 1998, France imposes a tax on the net accrued, but unrealized, capital gains on the shares of companies in which the émigré and his family hold more than 25 percent of the vote or value. To be subject to this tax, the individual must have been resident in France for at least six of the preceding 10 years. The taxpayer need not pay the liability immediately. Deferral is permitted if the taxpayer provides the name of a representative in France who is authorized to receive any correspondence from the tax administration on the taxpayer's behalf. The representative must agree to fulfill all obligations and the taxpayer must provide acceptable guarantees to the tax administration to secure payment of the deferred liability. In addition, the taxpayer must file an income tax return annually during the deferral period on which the taxpayer reports the deferred tax. The deferral period ends if, within five years from the date of departure from France, the taxpayer transfers, sells, or redeems the shares. Credit may be made for taxes paid to a foreign country on this subsequent transfer, sale, or redemption. The taxpayer is exempt from the deferred tax liability if the taxpayer reestablishes residence in France or if the taxpayer holds the shares for five years measured from the date of departure from France. 473 Germany .474 Germany imposes a so-called "extended limited tax liability" on German citizens who emigrate to a tax-haven country" or do not assume residence in any country and who maintain substantial economic ties with Germany as measured in terms of the individual's German-source income or assets. The regime applies to both the German income tax and inheritance tax. This tax applies to an individual who was both a German citizen and a tax resident of Germany for at least five years during the 10-year period immediately prior to the cessation of his or her residence. The individual need not be a German citizen at the time of emigration. A qualifying individual is subject to the extended limited tax liability for 10 years after termination of 471 Former French citizens are exempt from this tax for their first two years of residence in a tax haven or nontreaty country. 472 The provision applies to the ownership of any company, French or foreign, that was subject to French corporate income tax. 473 The taxpayer is entitled to reimbursement of the costs associated with the establishment of the guarantees required to obtain deferral. 474 For this purpose country is a tax haven if it does not impose an income tax income tax liability that would arise for a single person with an income of 47 188 1959 the less than two thirds of the corresponding German income tax liability. residency, except that no such tax is due in years when the individual has German-source income of no more than €16,500 ($16,269). Under extended limited tax liability, the individual is taxed on all income that does not qualify as foreign income in the hands of a resident. This includes German-source income that creates a tax liability for nonresidents in general, as well as German-source income for which other non-residents are not liable to taxation, as well as income that is not German-source income yet is not deemed to be foreign-source income. Examples of such income are interest income from deposits held in German banks or income from international consulting not attributable to a particular country, and passive income from foreign controlled companies. In the case of relocation to countries with which Germany maintains tax treaties, the tax treaties generally take precedence over the extended limited tax liability, with the effect that any issues of double taxation are dealt with by treaty. This German tax regime is similar to that imposed by section 877 under U.S. Federal tax law. To avoid circumvention of the extended tax liability regime, Germany extends to individuals who are subject to the extended limited tax liability the taxation of base company income from foreign controlled corporations that is imposed on German resident shareholders.475 Income from a foreign controlled corporation is attributed to a German extended limited tax liability taxpayer, if the taxpayer, alone or with other residents, owns more than 50 percent of the voting shares of the controlled corporation, and if, in addition, the controlled corporation resides in a low-tax country and the corporation's income is primarily passive income. Another tax liability is imposed on emigrating taxpayers who own, or have owned, a certain percentage of shares in a German corporation by treating the taxpayers' change in residence as a deemed sale of the shares. As of January 2002, the disposition of shares in a German corporation qualifies as the disposition of a business asset that leads to income taxation. on the realized gain, if the individual disposing of the shares has owned at least one percent of the company's shares at any time during the preceding five years, and these criteria are applied to resident or non-resident taxpayers who actually sell the shares, as well as to emigrating taxpayers who are deemed to have sold the shares when they leave the country. Before January 2002, the threshold value for taxing the capital gains of substantial share ownership was 10 percent of the share capital. The above described taxation of capital gains realized from the sale of shares is an exception from the general principle that individuals are not taxed on long-term capital gains on shares. The taxation of the realized gains and deemed realized gains described above is based on the principle that holding one percent of the share capital, or more, amount to the ownership of a business asset and in Germany the general principle for business assets is that gains realized on the sale of a business asset are taxable income. For emigrating taxpayers, the gain from the deemed sale is calculated by determining the fair market value at the time of relinquishing German residence less the taxpayer's basis. If the taxpayer had already owned the corporate holding at the time he or she became a German 475 This provision is similar to rules under Subpart F of the U.S. Internal Revenue Code. resident, the taxpayer may use the fair market value of the holding at the time he or she became a resident in lieu of basis. For years after 2000, such deemed gains of emigrating taxpayers are taxed as ordinary income, whereas such realized gains of resident taxpayers are taxed at a preferential rate by exempting one-half of the gain from income. These tax regimes for former citizens and former residents apparently were enacted in response to the termination of residency by certain wealthy individuals, many of whom were highly visible to the general public as athletic or artistic performers. The Joint Committee staff was unable to find any information regarding the extent of any revenue raised by these provisions. Enforcement of the deemed disposition provision may be difficult with respect to its application to substantial participation in foreign companies. The extended limited tax liability generally only applies to German-source income and, in principle, should be enforceable. Enforcement may be enhanced by the taxation of foreign base company holdings. However, these provisions can be avoided by relocating the taxpayer's property outside Germany. Ireland In general, Irish residents, and those ordinarily resident, are liable for tax on their worldwide income, unless the individual is domiciled outside of Ireland. In this circumstance, only income from Irish sources and income remitted to Ireland from sources outside of Ireland and the United Kingdom is subject to tax. An individual is said to be "ordinarily resident” in the current year if the individual was resident in the prior three years. An individual ceasing residence in Ireland will not cease to be ordinarily resident, and thereby subject to Irish income tax, until he or she has been non-resident for three continuous tax years. Italy Resident individuals are subject to income tax on their worldwide income. Residents of Italy are those persons, whether citizens or not, who for the majority of the tax year are registered in the Civil Registry or who are domiciled in Italy. Italian citizens who remove themselves from the residents' register and have moved to any one of 57 identified tax havens are deemed residents of Italy, unless proof to the contrary is provided. 476 476 The identified tax haven countries are: Andorra; Anguilla; Antigua and Barbuda; Aruba; the Bahamas; Bahrain; Barbados; Belize; Bermuda; the British Virgin Islands; Brunei; the Cayman Islands; Cyprus; the Cook Islands; Costa Rica; Djibouti; Dominica; Ecuador; French Polynesia; Gibraltar; Grenada; Guernsey; Hong Kong; the Isle of Man; Jersey; Lebanon; Liberia; Liechtenstein; Macao; Malaysia; Malta; the Marshall Islands; Mauritius; Montserrat; Nauru; the Netherlands Antilles; Niue; Oman; Panama; the Philippines; Monaco; San Marino; Sark; the Seychelles Singanore St Kitts and Nevis St. Lucia: St. Vincent and the Grenadines: Switzerland; Taiwan; Tonga; the Turks and Caicos Islands; Tuvalu; Uruguay; Vanuatu; Samoa; and the United Arab Emirates. |