Dual residency: identifying and solving common problems

Session Chairs

Michael Fischer, Fischer Ramp Buchman, Zürich

Alan Winston Granwell, Holland & Knight, Washington DC

Panellists

Ramona Azzorpardi, WH Partners, Malta

Guadalupe Díaz-Súnico, Gómez-Acebo & Pombo, Barcelona

Marine Dupas, Arkwood SCP, Paris

Victor A Jaramillo, Caplin & Drysdale, Washington DC

Andrea Tavecchio, Tavecchio & Associati, Milan

Jennifer Emms, Maurice Turnor Gardner, London

Reporter

Marcus Niermann, POELLATH, Berlin

Introduction

The panel discussed a variety of selected issues with regard to dual tax residency, which can arise both in an income and estate/inheritance and gift tax context. As tax residence is determined under the highly diverse domestic tax laws of each jurisdiction, a person can qualify as a tax resident in more than one jurisdiction at the same time. In this situation, so-called tie-breaker rules in bilateral tax treaties may resolve this issue. If there is no such treaty, the resolution depends solely on the respective provisions of national tax law. The panel focused on the interaction of United States tax law with that of France, Italy, Malta, Spain, Switzerland and the United Kingdom, respectively.

US inbound scenario

Alan Winston Granwell explained the particularities of US income tax law, where a resident in one of the six countries establishes dual residency by becoming a US income tax resident (the inbound scenario). This could occur under US domestic law when either the requirements of the green card test or the substantial presence test are met. Substantial presence requires an individual to be physically present in the US for at least 31 days in the current year and at least a total of 183 days of presence, with days spent during the current year counting in full, a third of the days in the first prior year and a sixth of the days in the second prior year. A different residency test, based on domicile, applies for estate/gift taxes.

The panel discussed whether tie-breaker rules apply to individuals qualifying under special foreign country regimes (eg, forfeit rules). For Switzerland, Michael Fischer commented that it is not possible unless the individual makes a special election to be taxable on US source income. Andrea Tavecchio affirmed this for Italy. Jennifer Emms replied that a tax credit in the UK is not possible, as there is no actual remittance under the UK remittance basis taxation regime. Marine Dupas explained that this issue is decided on a case-by-case basis in France. In Spain, Guadalupe Díaz-Súnico explained that employment income under the so-called Beckham regime is taxed worldwide, but it is not clear whether treaty benefits apply.

Granwell commented that if an individual is a US resident under internal US law but is a treaty resident under a treaty tie-breaker provision, the individual is still required to file most international activity forms in the US (eg, Foreign Bank and Financial Accounts (FBAR) filings), even if that requirement has been questioned in a recent case (Aroeste v United States, Case No 22-cv-682-AJB-KSC (SD Cal February 13, 2023)).

Granwell cautioned that lawful permanent residents could become subject to the US expatriation provisions if certain conditions are satisfied.

US outbound scenario

Victor A Jaramillo commented that US citizens and green card holders are taxable on worldwide income. Failing to file proper tax returns may result in severe penalties. Differences between tax law and immigration law pose additional risks for non-US citizens. Dual residency occurs when a US citizen or green card holder takes up an additional residency in another country (outbound scenario).

Granwell and Jaramillo specifically pointed out that US citizens and green card holders living abroad compute their US income tax liability in US dollars, so exchange gains/losses may result, depending on the applicable exchange rates.

US citizens living abroad might have difficulties opening local bank accounts due to US Foreign Account Tax Compliance Act (FATCA) requirements.

Switzerland

Fischer stated that the Swiss tax regime differs in the 26 cantons. The Swiss–US tax treaty generally protects Americans from double taxation on income. There is a wealth tax in Switzerland, but it is not covered by a treaty. Switzerland’s so-called forfait taxation regime requires that the taxpayer must have no gainful employment in Switzerland. Switzerland generally levies social security contributions, unless the person is employed elsewhere. There is a separate inheritance tax treaty with the US, which does not cover gift tax. However, most cantons do not levy any gift/inheritance tax on transfers to close family.

Fischer made some remarks regarding the Swiss treatment of trusts. The proposed Swiss domestic trust law, in his opinion, will likely fail due to the poorly drafted taxation part of the draft bill. Currently, the tax treatment of trusts works well based on tax authority circulars, even if statutory regulations do not exist.

Spain

Díaz-Súnico explained that the Spain–US income tax treaty allows Spanish residents with US citizenship to avoid double taxation. Taxpayers have to be aware of potential mismatches however (eg, regarding pension plans).

Regarding inheritance and gift tax, there is no treaty, so double taxation risks can arise.

Finally, she mentioned the Spanish treatment of trusts. According to a default rule on US connected trusts, all assets are deemed to belong to the settlor until his/her demise. Then, inheritance tax is generally due, even if the beneficiary does not have the power to dispose of the assets. In limited situations, the tax can be postponed under certain circumstances.

Malta

Ramona Azzorpardi commented that Maltese income tax law follows a dual concept, consisting of residence and remittance basis taxation. US citizens residing in Malta are only taxable in the US with the exception of Maltese sourced income (the Maltese tax thereon is creditable in the US).

Malta has no wealth tax. Also, the transfer of real estate upon death is subject to a two to five per cent stamp tax.

Foreign trusts and foundations are available under domestic Maltese law and are recognised if established under foreign law. These entities can be treated as companies.

Azzorpardi also mentioned that Maltese citizenship is easily available through the country’s citizenship by investment programme. Overall, Malta remains a viable option for Americans.

UK

Jennifer Emms explained the UK remittance base taxation regime under which UK non-domiciled persons may limit their UK income tax on non-UK sourced income that has not been remitted to the UK. Using the regime requires proper planning, so that individuals have sufficient funds available to finance their personal lifestyle.

Emms mentioned, for a taxpayer to claim non-domiciled (non-dom) status (to pay tax in the UK only on their UK income), the UK imposes charges. After an individual has been in the UK for seven of the last nine years, there is a £30,000 fee. The fee is increased to £60,000 to maintain non-dom status for someone that has spent 12 out of the last 14 years in the UK. Once someone has lived in the UK for 15 years, the individual becomes automatically domiciled. Whether a taxpayer should use the remittance basis must be carefully evaluated on a case-by-case basis.

Problems can arise with regard to trusts in US–UK tax planning. For example, if, in the US, as is common, a grantor/revocable/living trust were to be established, the trust may not be considered a ‘proper trust’ in the UK. As a result, the trust’s income may be attributed to the settlor or their spouse. Generally, as Emms pointed out, it is advisable to think carefully about creating trusts prior to coming to the UK.

In addition to this, Emms recommended that it is advisable for Americans in the UK to create a separate will under UK law.

France

Dupas firstly pointed out that married couples file their income tax returns per household. The French fiscal year is the calendar year; however, it is possible to become a French tax resident on every day of the year.

A French tax resident is mainly subject to income, wealth and inheritance and gift tax.

The inheritance and gift tax has high rates, up to 45 per cent between parents and their children and 60 per cent between others. However, it only applies if the taxpayer is a French resident at the moment of receipt of the funds/assets and in six of the ten years prior to the receipt. For new tax residents, there is an exemption for foreign situs assets in the first five years of French tax residence.

Italy

Tavecchio stated that the Italy–US income tax treaty usually prevents double taxation of income. Italian tax residents are subject to an income tax of approximately 45 per cent, a wealth tax with different rates for portfolio assets and real estate, as well as inheritance tax at a rate of four per cent. Tax residency starts at the beginning of the calendar year.

Italy has a forfeit regime under which non-domiciled residents can opt for a flat tax at a fixed amount of €100,000. It also allows for the opting out of the regime regarding income from specific countries in cases where there are treaty problems.

Tavecchio further pointed out that Italy recognises trusts with the option for them to be treated as a company. Trust funds must be taxed at least at 50 per cent of what the Italian tax burden would be.