Expatriation tax

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An expatriation tax or emigration tax is a tax on persons who cease to be tax-resident in a country. This often takes the form of a capital gains tax against unrealised gain attributable to the period in which the taxpayer was a tax resident of the country in question. In most cases, expatriation tax is assessed upon change of domicile or habitual residence; in the United States, which is one of only three countries (Eritrea and Myanmar are the others) to substantively tax its overseas citizens, the tax is applied upon relinquishment of American citizenship, on top of all taxes previously paid. Australia has "Deemed disposal tax" which in essence is exit tax.

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Australia

"Deemed disposal" occurs when someone stops being an Australian resident. For tax purposes, they are deemed to have disposed of assets that are not taxable Australian property for their market value. [1]

Canada

Canada imposes a "departure tax" on those who cease to be tax-resident in Canada. The departure tax is a tax on the capital gains which would have arisen if the emigrant had sold assets after leaving Canada ("deemed disposition"), subject to exceptions. [2] However, in Canada, unlike the U.S., the capital gain is generally based on the difference between the market value on the date of arrival in Canada (or later acquisition) and the market value on the date of departure. [3]

Eritrea

Eritrea charges a 2% tax on income to all Eritreans who live outside Eritrea. This measure has been criticized by the Dutch government, which expelled a top Eritrean diplomat because of it. [4]

Germany

In December 1931, the Reich Flight Tax was implemented as part of a larger emergency decree with the goal of stemming capital flight during the unstable interwar period. After the Nazis seized power in 1933, the Nazi government largely used the tax to confiscate assets from persecuted people (mostly Jews) who sought to flee Nazi Germany. [5]

Today, when moving out of Germany company shares (ownerships of >1%) will be virtually sold and capital gain taxed based on the current value. [6]

Netherlands

The Netherlands has treaties with Belgium and Portugal permitting them to charge emigration tax against Dutch people who move to those countries. The aim is to impose a tax on persons who move abroad and cash out on the tax-free appreciation of their Dutch pensions. However, in 2009, the Supreme Court of the Netherlands ruled that the Tax and Customs Administration could not impose an emigration tax on a Dutch man who moved to France in 2001. [7]

Norway

Norway imposes an emigration tax on unrealised capital gains as it appears on the day of departure if the unrealised gains exceeds 500,000 NOK. The tax may be deferred without collateral if the subject takes residence in another EEA member state, and with collateral otherwise. If the taxed gain is not realised within a five-year period, it will be assumed that the emigration was not motivated by tax purposes and the tax will be dismissed or refunded. [8] [9]

South Africa

The current South African exit tax regime works in concert with South Africa's foreign exchange controls. A person who is a resident of South Africa as defined under the exchange control laws (someone who is resident or domiciled in South Africa) may change status to become an emigrant, if the person is leaving the Common Monetary Area (South Africa, Namibia, Swaziland, and Lesotho) to take up permanent residence in another country. A single emigrant may expatriate up to R4 million of assets without exit charge, while a family is entitled to twice that amount. The emigrant must declare all worldwide assets to an Authorised Dealer of the South African Reserve Bank, and obtain a tax clearance certificate from the South African Revenue Service. [10]

Spain

In December 2014, a new 'Exit Tax' was announced which is governed by Article 95 of the Income Tax Act. This applies to departing Spanish resident taxpayers with shares worth more than four million euros or one million if they hold a stake of 25% of a single business and then transfer their habitual residence outside Spain if they have previously lived in Spain 10 of the last 15 years. [11]

United States

Unlike all other countries with the exceptions of Eritrea and Hungary (with caveats), the United States taxes its citizens on worldwide income, even if they are a permanent resident in another country. [12] To deter tax avoidance by abandonment of citizenship, the United States imposes an expatriation tax on high-net-worth and high-income individuals who give up U.S. citizenship. The tax also applies to lawful permanent residents or green-card holders who are considered "long-term residents." The Internal Revenue Code defines a long-term resident as any individual who is a lawful permanent resident of the United States in at least 8 taxable years during the period of 15 taxable years ending with the taxable year during which the expatriation occurs. [13]

The first U.S. income tax to include U.S. citizens living overseas dates to 1862, but the first law to authorize taxation of former citizens was passed over a century later, in 1966. The 1966 law created Internal Revenue Code Section 877, which allowed the U.S.-source income of former citizens to be taxed for up to 10 years following the date of their loss of citizenship. Section 877 was first amended in 1996, at a time when the issue of renunciation of U.S. citizenship for tax purposes was receiving a great deal of public attention; the same attention resulted in the passage of the Reed Amendment, which attempted to prevent former U.S. citizens who renounced citizenship to avoid taxation from obtaining visas, but which was never enforced. [14] [15] The American Jobs Creation Act of 2004 amended Section 877 again. [16] Under the new law, any individual who had a net worth of $2 million or an average income tax liability of $124,000 for the five previous years (adjusted annually for inflation) [17] who renounces his or her citizenship is automatically assumed to have done so for tax avoidance reasons and is subject to additional taxes. Furthermore, with certain exceptions covered expatriates who spend at least 31 days in the United States in any year during the 10-year period following expatriation were subject to US taxation as if they were U.S. citizens or resident aliens. [18]

A bill—which failed to advance to the Senate—entitled Tax Collection Responsibility Act of 2007 was introduced during the 110th session of congress in July 2007 by Charles B. Rangel. It contemplated, among others, a revision of the taxation of former American citizens whose citizenship officially ends. In particular, all property of an expatriate up to certain exceptions would be treated as having been sold on the day before the expatriation for its fair market value with any gain exceeding $600,000 classified as taxable income.

The HEART Act, passed on 17 June 2008, created the new Section 877A, which imposed a substantially different expatriation tax from that of the earlier Section 877. [15] The new expatriation tax law, effective for calendar year 2009, defines "covered expatriates" as expatriates who have a net worth of $2 million, or a 5-year average income tax liability exceeding $139,000, to be adjusted for inflation, or who have not filed an IRS Form 8854 [19] certifying they have complied with all federal tax obligations for the preceding 5 years. Notwithstanding the above, certain dual citizens by birth and certain minors as defined in Section 877A(g)(1)(B) are not considered "covered expatriates." Under the new expatriation tax law, "covered expatriates" are treated as if they had liquidated all of their assets on the date prior to their expatriation. Under this provision, the taxpayer's net gain is computed as if he or she had actually liquidated their assets. Net gain is the difference between the fair market value (theoretical selling price) and the taxpayer's cost basis (actual purchase price). Once net gain is calculated, any net gain greater than $600,000 will be taxed as income in that calendar year. The tax applies whether or not an actual sale is made by the taxpayer, and whether or not the notional gains arise on assets in the taxpayer's home country acquired before immigration to the United States. It is irrelevant that the gains may have partly arisen before the taxpayer moved to the U.S.

The new tax law also applies to deferred compensation (401(a), 403(b) plans, pension plans, stock options, etc.) of the expatriate. Traditional or regular IRAs are defined as specific tax deferred accounts rather than deferred compensation items. If the payer of the deferred compensation is a US citizen and the taxpayer expatriating has waived the right to a lower withholding rate[ clarification needed ], then the covered expatriate is charged a 30% withholding tax on their deferred compensation. If the covered expatriate does not meet the aforementioned criteria then the deferred compensation is taxed (as income) based on the present value of the deferred compensation.

In 2012, in the wake of Eduardo Saverin's renunciation of his citizenship, Sen. Chuck Schumer (D-NY) proposed the Ex-PATRIOT Act to levy additional taxes upon citizens renouncing their citizenship.

See also

Related Research Articles

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<span class="mw-page-title-main">Taxation in the United States</span> United States tax codes

The United States has separate federal, state, and local governments with taxes imposed at each of these levels. Taxes are levied on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as various fees. In 2020, taxes collected by federal, state, and local governments amounted to 25.5% of GDP, below the OECD average of 33.5% of GDP.

A tax deduction or benefit is an amount deducted from taxable income, usually based on expenses such as those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and tax credits. The difference between deductions, exemptions, and credits is that deductions and exemptions both reduce taxable income, while credits reduce tax.

Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdictions that facilitate reduced taxes. Tax avoidance should not be confused with tax evasion, which is illegal. Both tax evasion and tax avoidance can be viewed as forms of tax noncompliance, as they describe a range of activities that intend to subvert a state's tax system.

<span class="mw-page-title-main">Taxpayer</span> Person or organization subject to pay a tax

A taxpayer is a person or organization subject to pay a tax. Modern taxpayers may have an identification number, a reference number issued by a government to citizens or firms.

A capital gains tax (CGT) is the tax on profits realized on the sale of a non-inventory asset. The most common capital gains are realized from the sale of stocks, bonds, precious metals, real estate, and property.

A gift tax, known originally as inheritance tax, is a tax imposed on the transfer of ownership of property during the giver's life. The United States Internal Revenue Service says that a gift is "Any transfer to an individual, either directly or indirectly, where full compensation is not received in return."

For households and individuals, gross income is the sum of all wages, salaries, profits, interest payments, rents, and other forms of earnings, before any deductions or taxes. It is opposed to net income, defined as the gross income minus taxes and other deductions.

<span class="mw-page-title-main">Income tax in the United States</span> Form of taxation in the United States

The United States federal government and most state governments impose an income tax. They are determined by applying a tax rate, which may increase as income increases, to taxable income, which is the total income less allowable deductions. Income is broadly defined. Individuals and corporations are directly taxable, and estates and trusts may be taxable on undistributed income. Partnerships are not taxed, but their partners are taxed on their shares of partnership income. Residents and citizens are taxed on worldwide income, while nonresidents are taxed only on income within the jurisdiction. Several types of credits reduce tax, and some types of credits may exceed tax before credits. Most business expenses are deductible. Individuals may deduct certain personal expenses, including home mortgage interest, state taxes, contributions to charity, and some other items. Some deductions are subject to limits, and an Alternative Minimum Tax (AMT) applies at the federal and some state levels.

International taxation is the study or determination of tax on a person or business subject to the tax laws of different countries, or the international aspects of an individual country's tax laws as the case may be. Governments usually limit the scope of their income taxation in some manner territorially or provide for offsets to taxation relating to extraterritorial income. The manner of limitation generally takes the form of a territorial, residence-based, or exclusionary system. Some governments have attempted to mitigate the differing limitations of each of these three broad systems by enacting a hybrid system with characteristics of two or more.

Tax amnesty allows taxpayers to voluntarily disclose and pay tax owing in exchange for avoiding tax evasion penalties. It is a limited-time opportunity for a specified group of taxpayers to pay a defined amount, in exchange for forgiveness of a tax liability relating to previous tax periods. It typically expires when some authority begins a tax investigation of the past-due tax.

Marital deduction is a type of tax law that allows a person to give assets to his or her spouse with reduced or no tax imposed upon the transfer. Some marital deduction laws even apply to transfers made postmortem. The right to receive property conveys ownership for tax purposes. A decree of divorce transfers the right to that property by reason of the marriage and is also a transfer within a marriage. It makes no difference whether the property itself or equivalent compensation is transferred before, or after the decree dissolves the marriage. There is no U.S. estate and gift tax on transfers of any amount between spouses, whether during their lifetime or at death. There is an important exceptions for non-citizens. The U.S. federal Estate and gift tax marital deduction is only available if the surviving spouse is a U.S. citizen. For a surviving spouse who is not a U.S. citizen a bequest through a Qualified Domestic Trust defers estate tax until principal is distributed by the trustee, a U.S. citizen or corporation who also withholds the estate tax. Income on principal distributed to the surviving spouse is taxed as individual income. If the surviving spouse becomes a U.S. citizen, principal remaining in a Qualifying Domestic Trust may then be distributed without further tax.

Tax protesters in the United States have advanced a number of arguments asserting that the assessment and collection of the federal income tax violates statutes enacted by the United States Congress and signed into law by the President. Such arguments generally claim that certain statutes fail to create a duty to pay taxes, that such statutes do not impose the income tax on wages or other types of income claimed by the tax protesters, or that provisions within a given statute exempt the tax protesters from a duty to pay.

<span class="mw-page-title-main">Corporate tax in the United States</span>

Corporate tax is imposed in the United States at the federal, most state, and some local levels on the income of entities treated for tax purposes as corporations. Since January 1, 2018, the nominal federal corporate tax rate in the United States of America is a flat 21% following the passage of the Tax Cuts and Jobs Act of 2017. State and local taxes and rules vary by jurisdiction, though many are based on federal concepts and definitions. Taxable income may differ from book income both as to timing of income and tax deductions and as to what is taxable. The corporate Alternative Minimum Tax was also eliminated by the 2017 reform, but some states have alternative taxes. Like individuals, corporations must file tax returns every year. They must make quarterly estimated tax payments. Groups of corporations controlled by the same owners may file a consolidated return.

Tax protesters in the United States advance a number of constitutional arguments asserting that the imposition, assessment and collection of the federal income tax violates the United States Constitution. These kinds of arguments, though related to, are distinguished from statutory and administrative arguments, which presuppose the constitutionality of the income tax, as well as from general conspiracy arguments, which are based upon the proposition that the three branches of the federal government are involved together in a deliberate, on-going campaign of deception for the purpose of defrauding individuals or entities of their wealth or profits. Although constitutional challenges to U.S. tax laws are frequently directed towards the validity and effect of the Sixteenth Amendment, assertions that the income tax violates various other provisions of the Constitution have been made as well.

<span class="mw-page-title-main">Taxation in South Africa</span>

Taxation may involve payments to a minimum of two different levels of government: central government through SARS or to local government. Prior to 2001 the South African tax system was "source-based", where in income is taxed in the country where it originates. Since January 2001, the tax system was changed to "residence-based" wherein taxpayers residing in South Africa are taxed on their income irrespective of its source. Non residents are only subject to domestic taxes.

<span class="mw-page-title-main">Foreign Account Tax Compliance Act</span> 2010 U.S. tax law

The Foreign Account Tax Compliance Act (FATCA) is a 2010 U.S. federal law requiring all non-U.S. foreign financial institutions (FFIs) to search their records for customers with indicia of a connection to the U.S., including indications in records of birth or prior residency in the U.S., or the like, and to report such assets and identities of such persons to the United States Department of the Treasury. FATCA also requires such persons to report their non-U.S. financial assets annually to the Internal Revenue Service (IRS) on form 8938, which is in addition to the older and further redundant requirement to report them annually to the Financial Crimes Enforcement Network (FinCEN) on form 114. Like U.S. income tax law, FATCA applies to U.S. residents and also to U.S. citizens and green card holders residing in other countries.

<span class="mw-page-title-main">Ex-PATRIOT Act</span> Proposed 2012 United States law

The Ex-PATRIOT Act was a proposed United States federal law to raise taxes and impose entry bans on certain former citizens and departing permanent residents. The law would automatically classify all people who relinquished U.S. citizenship or permanent residence in the decade prior to the law's passage or any future year as having "tax avoidance intent" if they met certain asset or tax liability thresholds or had failed to file any required federal tax forms within the preceding five years. People determined to have "tax avoidance intent", referred to in the text of the law as specified expatriates, would be affected in two ways. First, they would have to pay 30% capital gains tax on any U.S. property sold after the law's enactment. Second, they would be barred from re-entry into the U.S. either under immigrant or non-immigrant categories.

The Quarterly Publication of Individuals Who Have Chosen to Expatriate, also known as the Quarterly Publication of Individuals, Who Have Chosen to Expatriate, as Required by Section 6039G, is a publication of the United States Internal Revenue Service (IRS) in the Federal Register, listing the names of certain individuals with respect to whom the IRS has received information regarding loss of citizenship during the preceding quarter.

An accidental American is someone whom US law deems to be an American citizen, but who has only a tenuous connection with that country. For example, American nationality law provides that anyone born on US territory is a US citizen, including those who leave as infants or young children, even if neither parent is a US citizen. US law also ascribes American citizenship to some children born abroad to a US citizen parent, even if those children never enter the United States. Since the early 2000s, the term "accidental American" has been adopted by several activist groups to protest tax treaties and Inter-Governmental Agreements which treat such people as American citizens who are therefore potentially subject to tax and financial reporting requirements – requirements which few other countries impose on their nonresident citizens. Accidental Americans may be unaware of these requirements, or their US citizen status, until they encounter problems accessing bank services in their home countries, for example, or are barred from entering the US on a non-US passport. Furthermore, the US State Department now charges USD 2350 to renounce citizenship, while tax reporting requirements associated with legal expatriation may pose additional financial burdens.

References

  1. ↑ "How changing residency affects CGT". Australian Taxation Office . Retrieved 30 October 2023.
  2. ↑ "Canada Revenue Agency: Emigrants and Income Tax". Archived from the original on 15 March 2012. Retrieved 24 October 2018.
  3. ↑ Agency, Canada Revenue (22 June 2017). "T4055 – Newcomers to Canada 2017". aem. Archived from the original on 5 April 2020. Retrieved 24 October 2018.
  4. ↑ "Dutch expel top Eritrean diplomat over 'diaspora tax' row". The Citizen . 17 January 2018. Retrieved 30 October 2023.
  5. ↑ Franke, Christoph (2007). "Die Rolle der Devisenstellen bei der Enteignung der Juden.". In Stengel, Katharina (ed.). Vor der Vernichtung: Die staatliche Enteignung der Juden im Nationalsozialismus[Before the Extermination: State Expropriation of Jews Under National Socialism] (in German). Frankfurt: Campus Verlag. p. 80. ISBN   978-3-593-38371-2.
  6. ↑ "§ 6 AStG - Einzelnorm". www.gesetze-im-internet.de. Retrieved 29 September 2023.
  7. ↑ "Dutch expats exempted from emigration tax". Radio Netherlands Worldwide. 20 June 2009. Archived from the original on 8 September 2012. Retrieved 27 May 2012.
  8. ↑ Melø, Atle (20 March 2019). "Exitskatt eller utflyttingsskatt på aksjer og likestilte andeler" . Retrieved 21 March 2022.
  9. ↑ "Lov om skatt av formue og inntekt (skatteloven)" . Retrieved 21 March 2022.
  10. ↑ "Tax and exchange control implications of emigration". ENSight. August 2010. Archived from the original on 4 August 2012. Retrieved 27 May 2012.
  11. ↑ González, Jesús Sérvulo (2 December 2014). "Hacienda aprueba un impuesto para gravar la salida de España de los ricos". El País. Retrieved 24 October 2018– via elpais.com.
  12. ↑ Newlove, Russell (9 February 2016). "Why expat Americans are giving up their passports - BBC News". BBC Online . BBC News. Retrieved 10 February 2016.
  13. ↑ "Taxtake: Are Green Card holders subject to the expatriation tax provisions?" . Retrieved 5 December 2016.
  14. ↑ Liu, Renee S. (1998). "The Expatriate Exclusion Clause: An Inappropriate Response to Relinquishing Citizenship for Tax Avoidance Purposes". Georgetown Immigration Law Journal. 12 (689).
  15. 1 2 Pfeifer, Michael G. (28 September 2009). "United States: The Final State of Expatriation? Omissions and Technical Issues Under the HEART Act". Mondaq.com. Retrieved 12 May 2012.
  16. ↑ "IRS: Expatriation Tax" . Retrieved 25 November 2009.
  17. ↑ "Expatriation after June 3, 2004 and before June 17, 2008" . Retrieved 2 April 2019.
  18. ↑ "Instructions to form 8854" (PDF). Retrieved 24 October 2018.
  19. ↑ "Internal Revenue Bulletin: 2009-45 - Internal Revenue Service". www.irs.gov. Retrieved 24 October 2018.


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