Appendix Table A-3.-Treaties That Contain Saving Clauses That Expressly Apply to Current and Former Citizens After the Loss of Citizenship Regardless of the Reason of Such Loss Notes to Appendix Table A-3: (1) No restriction on the number of years that either country may tax a former citizen and no requirement that the former citizen expatriated with a tax avoidance motive. Appendix B: Summary of Other Countries' Taxation of Expatriation and Immigration Overview The following is a preliminary survey of other countries' taxation of citizens and residents.1 While not an exhaustive survey, it reveals that most nations generally tax the worldwide income of their residents, whether citizens or aliens, but only the domestic source income of their nonresidents, whether citizens or aliens. Hence, unlike in the United States, the criterion of residence rather than citizenship is central to the liability to tax in these countries. Two exceptions are the Philippines, a former U.S. colony, and Eritrea. The Philippines and Eritrea also tax their nonresident citizens on their worldwide income. Prior to 1981, Mexico also asserted tax jurisdiction on the worldwide income of its citizens.2 Several European countries impose income tax on their former citizens or residents for some period of time after they become nonresidents. Australia, Canada, and Denmark are the only countries that impose an exit tax when a resident 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. It appears that a limited number of countries attempt to tax former residents and that a smaller group impose an exit tax. With the exception of Australia and Canada, the breadth of any such taxation is narrower than that proposed in the Administration's fiscal year 1996 budget proposal, the Senate amendment to H.R. 831, S. 700, or H.R. 1535. The relevant provisions relating to taxation of former residents, exit taxes, and the taxation of immigrants' accrued gains are described below. 1 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 has consulted primary sources and outside practitioners. The results reported should not be interpreted as an authoritative representation of foreign laws, but rather as a preliminary summary of foreign tax stat utes. 2 Richard D. Pomp, "The Experience of the Philippines in Taxing Its Nonresident Citizens," in Jagdish N. Bhagwati and John Douglas Wilson (eds.), Income Taxation and International Mobility (Cambridge: The MIT Press), 1989. Taxation of former residents Eritrea On February 10, 1995, Eritrea enacted a new tax law that applies only to its nonresident citizens. The law imposes a two-percent tax on the net income of non-resident citizens. The Eritrean Ministry of Foreign Affairs is responsible for collecting such taxes through its embassies and consulates. It is unclear what the tax status is of an Eritrean who gives up his citizenship. Finland Generally a person who has his permanent residence in Finland is subject to taxation on his worldwide income and wealth.3 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 the three-year rule often may be overridden by bilateral tax treaties to avoid double taxation of the individual.4 Even where a tax treaty overrides the three-year rule, the Finnish citizen still is required to file an annual tax return. France 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.5 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. However, French citizens and other nonresidents are liable for income tax on French-source income. In the case of nonresidents who own property in France and reside in tax haven or nontreaty countries, France asserts the right to tax 3 Finland is one of a number of European countries that imposes an annual net wealth tax. 4 Finland's treaty with the United States eliminates the three-year rule to preclude double taxation. 5 An exception to this rule arises in the case of an individual holding dual citizenship. 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. income from such property assumed to equal three times the fair market rental value of such property.6 In practice, such tax is infrequently collected. Germany 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 (measured based on the relative amount 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 a German citizen who was a tax resident of Germany for at least five years during the 10-year period immediately prior to the cessation of his residence. A German national need not relinquish his citizenship for the tax to apply. The individual is taxed as a German resident for 10 years after expatriation. The provision taxes the individual as a German resident on all income that is not treated as foreign source income for German tax purposes.7 This provision is similar to the present-law provision of the United States. However, the tax applies only to taxable income in excess of DM32,000 ($19,839).8 In the case of expatriation to countries with which Germany maintains tax treaties, the tax treaties generally take precedence over the extended limited tax liability. Any issues of double taxation are dealt with by treaty.9 While Germany generally exempts from tax the long-term capital gains realized by individuals, gains from the disposition of business assets are subject to tax as business income. More specifically, Germany exempts long-term gains realized on personal portfolio assets, but holdings of certain substantial interests are considered to be business assets and any gain subject to tax as business income upon their disposition. Such gains are taxed at one-half the ordinary individual tax rate. A long-term (at least 10-year) resident of Germany, regardless of citizenship, who terminates his residence is deemed to have disposed of his ownership in certain German corporations. Specifically, the individual is treated as having sold his interest in domestic corporations in which he owns more than 25 percent. The gain from the deemed sale of up to DM30 million ($18.6 million) is taxed at half of the regular tax rate. The taxpayer may pay the tax ratably over five years. No tax liability applies under the provision if the termination of residence is temporary and the period of nonresidence does not exceed five years. 10 If the taxpayer held the interest in the German corporation when he first became a German resident, he may use the fair market value of the stock (in lieu of the historical cost) at the time he became a resident in computing the gain. These provisions apparently were enacted in response to the expatriation of certain wealthy individuals, many of whom were high 6 Expatriate French citizens are exempt from this tax for their first two years of residence in a tax haven or nontreaty country. ?This generally implies that only German domestic-source income is subject to tax. 8 United States dollar value calculated at the estimated average daily 1994 exchange rate value as calculated by OECD, Organization for Economic Cooperation and Development, OECD Economic Outlook, vol. 56, December 1994. 9 See Parts V.F. and V.G. and Appendix A for a discussion of the issue of double taxation and the interaction of such a provision with current U.S. tax treaties. 10 The tax authorities may extend this period for an additional five years. Taxation of former residents Eritrea On February 10, 1995, Eritrea enacted a new tax law that applies only to its nonresident citizens. The law imposes a two-percent tax on the net income of non-resident citizens. The Eritrean Ministry of Foreign Affairs is responsible for collecting such taxes through its embassies and consulates. It is unclear what the tax status is of an Eritrean who gives up his citizenship. Finland Generally a person who has his permanent residence in Finland is subject to taxation on his worldwide income and wealth.3 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 the three-year rule often may be overridden by bilateral tax treaties to avoid double taxation of the individual. Even where a tax treaty overrides the three-year rule, the Finnish citizen still is required to file an annual tax return. France 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.5 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. However, French citizens and other nonresidents are liable for income tax on French-source income. In the case of nonresidents who own property in France and reside in tax haven or nontreaty countries, France asserts the right to tax 3 Finland is one of a number of European countries that imposes an annual net wealth tax. 4 Finland's treaty with the United States eliminates the three-year rule to preclude double taxation. 5 An exception to this rule arises in the case of an individual holding dual citizenship. 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. |