MAGAZINE

https://www.easyexpat.com/en/mag/2022/10/22/2022/10/22/expat-tax-policies-around-the-world.htm

Finance

Expat tax policies around the world

Depending on their nationality, expats have to deal differently with tax. In the US it can be a real issue and a lot of Americans living abroad are complaining about the paper work and difficulties it makes. South Africa has recently implemented a worldwide taxation for their citizens. In the UK, a specific non-domiciled status allow top earners and extra rich to avoid paying most of their tax. Other countries have a "Wealth Tax" that can affect expatriates.

As the old adage goes: The only certainties in life are death and taxes. This is also true for all those adventurous expats that leave home to sample living in other countries, but have to deal with sometimes complex tax situations. Tax rules and regulations in the majority of countries are complicated for those who must pay them, and infringing any tax laws can have dire legal consequences.

The United States: Tax on worldwide income

Worldwide income is defined as any income such as salaries, wages, interest or dividends earned, or rental income. All US expats have to file a US Federal Tax Return, no matter where in the world they happen to live, if their worldwide income exceeds a certain value. For self-employed individuals, the threshold is only $400.

There are, however, many pertinent deductions, credits and exclusions that are in place to ensure expats are not taxed twice on the same income.
To qualify for these exclusions you must qualify as an expat officially as per special guidelines.

It is important to note that US expats must file their taxes even though they won't owe any taxes to the government.

Exclusions:

Foreign Earned Income Exclusion: an amount of $108,700 is exempt from tax if earned on foreign soil for the year 2021 and $112,000 for 2022. Using this exclusion is a common way for taxpayers to reduce their tax liability. This is only applicable to income earned on foreign soil and not in the US. But it includes all rental income, whether domestic or overseas. There are, however, more deductions that may apply that can reduce the taxable amount.
To qualify for this exclusion you have to fill in a special form that, once approved, qualifies you for the exclusion which you can then use for any subsequent tax returns you file while living overseas as an expat.
Another prerequisite is passing the Physical Presence Test: you must physically be in a foreign country for 330 full days out of a total of 365 days (i.e. not more than 35 days in the US if you want to visit family or friends).
Bona Fide Residence Test: requires you to be overseas for one full tax year or longer with no plans to move back soon; this test excludes temporary contractors from qualifying for this exclusion.
Foreign Housing Exclusion: these can include rent and utilities you pay overseas.
Foreign Tax Credit: if you pay tax in your host country, you can apply for a dollar-for-dollar tax credit on your US taxes. However, income excluded from taxes using the Foreign Earned Income Exclusion cannot also be eligible for Foreign Tax Credit.
The Child Tax Credit: any dependent US children with a social security number are eligible and can reduce your tax liability considerably.
Certain states may also require expats to file a state tax return if they still have a spouse or dependent living there, or if they have a bank account, or property in that state, etc. Some examples of states that impose these rules are California, New Mexico and Virginia.
A Foreign Bank Account Report (FBAR) must be completed if your overseas bank balances exceed a certain amount. This is to prevent people from hiding taxable money overseas. This report is filed separately from the regular income tax return but has the same deadline as tax day.
You may also be eligible to file FATCA (Foreign Account Tax Compliance Act) if your assets surpass a certain threshold.
If you retire overseas, you are still eligible to receive your social security benefits whilst living overseas except for a few countries like Cuba, North Korea, etc. However, once you leave the country on the excluded list you are still eligible to receive the back payment of your social security benefits for the period you were denied. Your social security benefits must be listed on your tax return because in some instances they are taxable.
The US has Totalization Agreements with 28 countries. You can pay your social security taxes in those countries and receive the credits that can be used as benefits in another.

If US expats are frustrated with the high taxes they have to pay and consider renouncing their US citizenship, they may do so provided they have complied with the IRS requirements for the last five years before renouncing their citizenship. They may also be eligible for an exit tax depending on their income and net worth.

The IRS does have an amnesty programme that assists expats who find they have been unwittingly non-compliant (including the "Accidental Americans"), without facing any penalties, called Streamlined Filing Compliance Procedures.

One thing is certain: filling US tax for expat is a burden and creates huge issues for US citizens living abroad. During each presidential campaign, American Abroad groups are advocating for a reform on the tax requirement when living in other countries; so far to no real effect, despite constant promises from the Republican or the Democrat parties.

The US has tax treaties with 69 countries to prevent double taxation for expats. These can be complicated depending on where you're living so consult a professional to see how this affects your tax status.

We have dedicated several articles to the US Expat taxes. See:

South Africa: a new law to tax income worldwide

There were new tax legislation changes made in March 2020, just before Covid and lockdowns, which left many South African expats scrambling.

New tax laws state that only the first ZAR1.25 million (USD 69K) of foreign income is exempt from tax. But you must be able to prove that you have spent more than 183 days outside of South Africa in a single 12-month period, of which 60 days must have been spent consecutively and this must be work-related, i.e. earning a salary.

Everything above this amount is taxable at the relevant marginal tax rate. Any income earned in SA is also taxable.

However, the exemption threshold includes all allowances like housing, bonuses, etc which once added up can easily reach the threshold of no tax.

Double Taxation Agreements (DTAs)

South Africa currently has DTAs with 81 countries like the UK, Australia, USA, UAE, Japan, Sweden and Thailand. These legislative agreements prevent South African expats from being taxed twice on the same income.

The relevant DTA, depending on the country the SA expat is residing in and registered as a taxpayer, will determine the taxable income and in which country it is to be paid. Even if you successfully obtain a DTA, you still have to file a tax return in SA.

Applying for the DTA must be done every year for the filing of each tax return.

United Kingdom: The non-dom loophole for extra-rich

Resident status is important when determining how much tax a UK expat is liable for, in addition to factors like income source, capital gains and location of assets.

Non-residents or expats are tax liable for any income in the UK such as business profits, rental income, etc.

The UK does have non-double taxation treaties with many countries to prevent individuals from getting taxed twice in the same income.

Allowances

There are allowances applicable under certain conditions.

Disregarded Income comprises income such as interest earned and dividends, excluding rental income. An expat's tax liability cannot be more than the sum of withheld tax on disregarded income and the tax liability if certain allowances were not applied.
Capital Gains Tax for Expats
UK expats are not liable for capital gains tax when they sell off assets, except in a few instances.
The Statutory Residence Test determines the UK tax residence status of individuals as of 2013. It's a complex set of factors that will determine how much of your foreign income is taxable, if any at all.

A very (very!) controversial status: non-domiciled

Someone with non-domiciled (shorten as non-dom) status is not liable for paying tax on foreign-earned income but remain taxable on funds earned in the UK. Unlike normal UK residents, they can relocate their investments offshore in order to avoid paying tax. Any foreign-earned funds are then not taxable in either the UK or their country of domicile. However, if they bring these funds into the UK it becomes taxable.

To qualify the candidate can live in the UK and be a tax resident but their permanent home (domicile) must be on foreign soil and they must be able to prove it. However this concept of "permanent" home is not based on where you live or spend most of your time as in the vast majority of other countries. According to the British definition, this location is usually the country the person's father considered his permanent home when they were born and where they may plan to retire. The non-dom concept comes from colonial time and the British Empire (which explains the number of Indian and Chinese non-doms).

A reform in 2017 has restricted the possibilities to apply to the non-dom status, charging a lumpsum for people wanting to continue sheltering their foreign income from the British taxman after some years:

Those who have been living in the UK for at least 7 of the previous 9 tax years must pay £30,000 a year to the government.
Those who have lived in the UK for 12 of the previous 14 tax years must pay £60,000 a year.
After 15 years of the previous 20 tax years, UK residents can no longer benefits from the status and must pay tax on their worldwide earnings.

The London School of Economy claims that more than one in five top earning bankers has benefited from non-dom status, which cost the UK economy a very substantial amount of money (dozens of billions). And the very rich are even more likely to claim this status: in 2018, 40% of those earning more than 5 millions a year have claimed the non-dom status.

Andy Summers, Associate Professor at LSE's Law Department, said:

“The non-dom regime is used mainly by the very rich, who get tax breaks not available to ordinary taxpayers. This giveaway could be costing the Treasury significant revenue and deserves more scrutiny at a time when everyone else is facing tax rises.”

Amongst famous UK residents benefiting from the non-dom stats we find Akshata Murty, the wife of former Chancellor of the Exchequer (UK Finance minister) and next Tory leader candidate Rishi Sunak (she is the daughter of Narayana Murty, founder of the Indian multi-national IT company Infosys and holds a 0.93% stake in the company, making £11.5m a year in dividends from Infosys, which she does not pay income tax on).

In a nutshell, by paying the £30,000 annual levy, she avoided paying about £4.4m to the UK in tax in 2022 (39.35% tax applied to dividend payouts for UK-resident taxpayers in the highest income band). The same also applied for the previous years and The Guardian estimates that she has collected tax-free about £54.5m in dividends from Infosys since 2015.

On the list, you find top bankers such as Stuart Gulliver, former CEO of HSBC, John McFarlane, former Chairman of Barclays and Pascal Soriot, CEO of AstraZeneca. Lord Ashcroft, the multimillionaire and former deputy chairman of the Conservative party was also using the scheme. Millionaire Conservative MP Zac Goldsmith was using the status until he was pressured by David Cameron who was Prime Minister at the time, to give up his non-domiciled status.

In the year to 5 April 2020, according to HMRC, there were 75,700 individuals filing tax returns in the UK who claimed non-domicile status (down from 78,600 the previous year), 64,700 of whom were UK residents. The scheme is designed for extra-rich residents. Many people who could claim the non-dom status are not doing it as their tax due on their foreign income is below the annual levy of £30,000.

Wealth tax in France (but also in other EU countries)

Residents are taxed on all income worldwide while non-residents are only liable for any French-derived income. If you're not living in France permanently but work for a French company, you may have to pay taxes on that income, subject to specific agreements to avoid double taxation.

However, many countries have tax treaties with France which prevents double taxation on the same income.

You are eligible to pay tax in France if any of the following reasons applies:

France is your main residence even if you are working abroad.
If you're in the country for a period greater than 183 days- these don't have to be consecutive days.
Your main employment is in France.
Most of your assets are in France.

Allowances

You earn under a specific threshold if working professionally.
Your social security contributions you pay as an employee.
Any work-related expenses to a maximum of €12,305.
If you have a dependent over the age of 75.
Any rental losses you may incur to a maximum of €10,700.
Any losses you may incur in the running of your business.
Child support payments.
Any means of domestic energy conservation you may invest in.
Contributions to investment policies.
If your income falls below a minimum threshold you may get rebates on property taxes.

French Wealth Tax

In 2018, France introduced the IFI (Impôt sur la Fortune Immobilière), excluding all financial gains from the calculation of the wealth eligible for taxation. It replaced the previous national wealth tax (ISF - Impôt sur la Fortune) which was applied to all wealth in France or abroad.

Since 2008 also, individuals who have not been tax-residents for the last 5 years do not have to include their foreign wealth to calculate the amount of tax due for the next 5 years after relocating to France.

There is a wealth tax ceiling of 75% for total taxes on yearly income that should not be exceeded for French residents.

Among the European Union countries, only Spain, Finland, France, Luxembourg, the Netherlands and Sweden currently levy a national wealth tax. Denmark and Germany abolished this tax in 1995 and 1997 respectively.

Share your experience, participate in the discussion and leave comments in our forum HERE.

Author: KashGo | 2022-10-22 20:49:08

Return to previous page.