A tax exile is a person who leaves a country to avoid the payment of income tax or other taxes. The term refers to an individual who already owes money to the tax authorities or wishes to avoid being liable in the future for taxation at what they consider high tax rates, instead choosing to reside in a foreign country or jurisdiction which has no taxes or lower tax rates.
In general, there is no extradition agreement between countries which covers extradition for outstanding tax liabilities.[ citation needed ] Going into tax exile is a form of tax mitigation or avoidance. A tax exile normally cannot return to their home country without being subject to outstanding tax liabilities.[ citation needed ] This may prevent the individual from leaving the country until these taxes owing have been paid.
Most countries tax individuals who are resident in their jurisdiction. Though residency rules vary, most commonly individuals are resident in a country for taxation purposes if they spend at least six months (or some other period) in any one tax year in the country, and/or have an abiding attachment to the country, such as owning a fixed property.
Under UK law a person is "tax resident" if that person meets any of the residency tests set out under the Statutory Residency Test introduced on 6 April 2014. [1]
The Statutory Residence Test states that a person will be non-resident if they meet one of the three Automatic Overseas Tests. [2] The Automatic Overseas Tests focus on how much time a person spends visiting the UK. For example, the first Automatic Overseas Test states that if a person spends less than 16 days in the UK in a tax year, then that person will be non-resident. [3]
If a person is not able to meet any of the Automatic Overseas Tests, then they can still be non-resident under the Statutory Residence Test, but to do so they must ensure (a) they do not meet the Automatic Residence Tests, and (b) they are categorised as non-resident under the Sufficient Ties Test. [4] [5] The Sufficient Ties Test determines whether a person is resident or non-resident by reference to their UK ties and their UK visits. The fewer ties a person has to the UK, and the less time the person spends in the UK, the more likely they are to be UK non-resident.
Under the Internal Revenue Code, a "U.S. person" (including United States citizens and U.S. permanent residents) is taxed on his or her worldwide income regardless of place of residence. U.S. persons can avoid U.S. tax liability on non-U.S. source income only by moving abroad, renouncing citizenship (or terminating or losing permanent residence), documenting that renunciation/termination/loss, and (as often required) formally exiting the U.S. tax system via IRS Form 8854. Exiting high net worth and high income individuals may owe an expatriation tax. However, if they continue to receive income from any U.S. sources, they will still be liable for U.S. taxes, often on a tax withholding basis and sometimes with less favorable tax rates (such as dividend tax rates). U.S. states and municipalities with their own tax systems sometimes have different exit rules.
U.S. persons living abroad are often entitled to substantial U.S. tax relief principally through the foreign earned income exclusion, foreign housing exclusion, and/or foreign tax credit (claimed via IRS Forms 2555 and 1116). Moreover, effective U.S. income tax rates can occasionally be negative: in principle, some U.S. persons can qualify for refundable tax credits (net cash payments from the IRS) on non-excluded income even while living outside the U.S., such as the past Making Work Pay tax credit. All other U.S. tax advantages remain available in principle, such as U.S. tax-advantaged retirement and education savings accounts. No matter where they live, U.S. persons must file all required financial reports such as U.S. FinCEN Form 114.
As mentioned above, a permanent resident in the United States is generally treated as a citizen for tax purposes unless his or her residency lapses or otherwise ends. Former "long-term" permanent residents remain liable for U.S. taxes unless and until they formally exit the U.S. tax system via IRS Form 8854. An immigrant not legally admitted for permanent residence (such as a guest worker) generally becomes liable for U.S. taxes on worldwide income after spending a certain number of days in the U.S. within a certain time period, as described in IRS Publication 519.
A limited liability company (LLC) is the United States-specific form of a private limited company. It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC is not a corporation under the laws of every state; it is a legal form of a company that provides limited liability to its owners in many jurisdictions. LLCs are well known for the flexibility that they provide to business owners; depending on the situation, an LLC may elect to use corporate tax rules instead of being treated as a partnership, and, under certain circumstances, LLCs may be organized as not-for-profit. In certain U.S. states, businesses that provide professional services requiring a state professional license, such as legal or medical services, may not be allowed to form an LLC but may be required to form a similar entity called a professional limited liability company (PLLC).
A tax treaty, also called double tax agreement (DTA) or double tax avoidance agreement (DTAA), is an agreement between two countries to avoid or mitigate double taxation. Such treaties may cover a range of taxes including income taxes, inheritance taxes, value added taxes, or other taxes. Besides bilateral treaties, multilateral treaties are also in place. For example, European Union (EU) countries are parties to a multilateral agreement with respect to value added taxes under auspices of the EU, while a joint treaty on mutual administrative assistance of the Council of Europe and the Organisation for Economic Co-operation and Development (OECD) is open to all countries. Tax treaties tend to reduce taxes of one treaty country for residents of the other treaty country to reduce double taxation of the same income.
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.
In the United Kingdom, taxation may involve payments to at least three different levels of government: central government, devolved governments and local government. Central government revenues come primarily from income tax, National Insurance contributions, value added tax, corporation tax and fuel duty. Local government revenues come primarily from grants from central government funds, business rates in England, Council Tax and increasingly from fees and charges such as those for on-street parking. In the fiscal year 2014–15, total government revenue was forecast to be £648 billion, or 37.7 per cent of GDP, with net taxes and National Insurance contributions standing at £606 billion.
Double taxation is the levying of tax by two or more jurisdictions on the same income, asset, or financial transaction.
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."
A perpetual traveler is a person who bases different aspects of their life in different countries, without spending too long in any one place, under the belief that they can reduce taxes, avoid civic duties, and increase personal freedom. Books and services relating to the PT idea have been a staple of companies that specialise in marketing offshore financial centres, tax avoidance schemes, and personal privacy services.
Tax withholding, also known as tax retention, pay-as-you-earn tax or tax deduction at source, is income tax paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the income due to the recipient. In most jurisdictions, tax withholding applies to employment income. Many jurisdictions also require withholding taxes on payments of interest or dividends. In most jurisdictions, there are additional tax withholding obligations if the recipient of the income is resident in a different jurisdiction, and in those circumstances withholding tax sometimes applies to royalties, rent or even the sale of real estate. Governments use tax withholding as a means to combat tax evasion, and sometimes impose additional tax withholding requirements if the recipient has been delinquent in filing tax returns, or in industries where tax evasion is perceived to be common.
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.
The criteria for residence for tax purposes vary considerably from jurisdiction to jurisdiction, and "residence" can be different for other, non-tax purposes. For individuals, physical presence in a jurisdiction is the main test. Some jurisdictions also determine residency of an individual by reference to a variety of other factors, such as the ownership of a home or availability of accommodation, family, and financial interests. For companies, some jurisdictions determine the residence of a corporation based on its place of incorporation. Other jurisdictions determine the residence of a corporation by reference to its place of management. Some jurisdictions use both a place-of-incorporation test and a place-of-management test.
The "Beckham law" is a Spanish tax decree passed in June 2005. The law gained its nickname after the footballer David Beckham became one of the first foreigners to take advantage of it. However, the law is aimed at all foreign workers living in Spain. Upon application and acceptance by authorities, such individuals become liable for Spanish taxes based on their Spanish income and assets but avoid such taxes on their non-Spanish income and assets.
A qualifying recognised overseas pension scheme, or QROPS is an overseas pension scheme that meets certain requirements set by HM Revenue and Customs (HMRC). A QROPS can receive transfers of British pension benefits. The QROPS programme was part of British legislation launched on 6 April 2006 as a direct result of EU human rights requirements of the freedom of capital movement.
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 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.
Multiple citizenship is a person's legal status in which a person is at the same time recognized by more than one country under its nationality and citizenship law as a national or citizen of that country. There is no international convention that determines the nationality or citizenship status of a person, which is consequently determined exclusively under national laws, that often conflict with each other, thus allowing for multiple citizenship situations to arise.
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.
In international taxation, a physical presence test is a rule used to determine tax residence of a natural or legal person. It may rely on having a place of business in the jurisdiction, or remaining in or out of the jurisdiction for a certain number of days each year.
The bona fide residence test, like the physical presence test, comprises one way that an individual can qualify for the foreign earned income exclusion from United States income tax. In order to qualify for the bona fide residence test, an individual needs to reside in a foreign country for an uninterrupted period that includes an entire tax year. In addition, the bona fide residence test takes into account factors such as the individual's intention, the purpose of the trip, and the length and nature of the stay. There are special deductions and exclusions that accompany this only if the individual is a U.S. citizen or U.S. resident alien and has a tax treaty. The bona fide residence is not always the same as the domicile. The domicile is defined as one's permanent home.
American Citizens Abroad, Inc. (ACA) is a 501(c)(4) non-profit, non-partisan organization, organized as a Delaware corporation. Its sister organization, American Citizens Abroad Global Foundation (ACAGF), is a 501(c)(3) non-profit non-partisan charitable organization focused on education and research. ACA is a leading representative of American citizens residing outside the USA.
The Substantial Presence Test (SPT) is a criterion used by the Internal Revenue Service (IRS) in the United States to determine whether an individual who is not a citizen or lawful permanent resident in the recent past qualifies as a "resident for tax purposes" or a "nonresident for tax purposes"; it is a form of physical presence test. The SPT should be used in conjunction with the Green Card Test (the criterion that the individual possessed a valid Green Card at any time of the year). An individual who satisfies either one or both of these tests is treated as a resident for tax purposes.
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.