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 over fifteen years ago. At the time most international lawyers did not consider it necessary for some international clients to look at alternative residence solutions, and 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 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 country. However, anyone thinking seriously about moving their main residence to another country, 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. Furthermore, the advances in communications and computer technology has 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.
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.
Indeed, an alternative residence is an effective tool for international tax planning, and also facilitates more privacy in investment and banking as many reporting and exchange of information requirements are based on (tax) residence.
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. 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 United Kingdom, 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 United Kingdom, the United States 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, particularly if you are doing everything correctly and earn an honest living. 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, which are already a serious problem in many countries around the world). The only way to get avoid this is to move your residence to another country with a less invasive environment, providing more personal privacy.
In the United States the erosion of privacy has reached even further, and additionally 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 to file 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 essentially 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, almost 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 in this case. 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 United Kingdom) 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 the case of 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