Planning for the Tax Implications of Migration and Alternative Residence

As high-net-worth individuals return to previous patterns of travel, investment, and migration, it is timely to consider the tax implications, and revisit whether existing tax and residence planning has remained effective through the disruption of the pandemic period. Taxes are rarely simple, and each additional jurisdiction with which your tax affairs come into contact increases their complexity.

The New World Wealth data in this Henley Global Citizens Report signals that worldwide migration of high-net-worth individuals has begun to recover during 2022 and is forecast for 2023 to exceed pre-pandemic levels. With the return of migration by affluent investors, it is timely to revisit the key tax considerations when acquiring residence or citizenship of a new jurisdiction. In the past, the more popular destinations attracting affluent investors have included high and complex tax jurisdictions such as Australia and the USA. While the UAE is an increasingly sought-after destination, high tax jurisdictions remain popular.

In many jurisdictions, tax residence triggers tax on worldwide income, and can attract wealth or estate taxes. While some locations offer residence benefits without requiring a significant physical presence, many of the desirable locations for residence, education, and healthcare may require a more substantial physical presence of an individual or their family. This in turn can trigger tax residence.

If tax residence is to be established by participating in a residence or citizenship by investment program, investors should implement plans to mitigate the impact of local taxes on their offshore investments before taking any action that triggers tax residence. Failure to manage your tax residence can expose your worldwide income to additional taxes, including profits or dividends from businesses operated abroad. When planning for the protection and succession of family wealth, inheritance and gift taxes can be particularly significant — especially if they apply to worldwide assets. Investors should take care, as such taxes can be triggered inadvertently by transactions that might appear to be innocuous family matters, or that are attached to past gifts and transactions in the unfortunate event of a taxpayer’s untimely demise.

Whenever considering migration, change of residence, or investing overseas, it is important to plan ahead, to implement well, and to monitor requirements continuously.

Over the pandemic period, international movement has been hampered by quarantine requirements, border closures, and safety concerns. If you are contemplating engaging in international travel or migration as they resume, it is advisable to consider the potential tax implications. It is also timely to revisit any arrangements already in place and reflect on the consequences of the last couple of years. Any plans that relied on travel and physical presence may have been disrupted and their effectiveness could now be at risk.

The data in this report shows that affluent investors from both mainland China and Hong Kong have been migrating. People from Hong Kong may be used to the simple and benign tax system there and need to be prepared for the complexity tax can bring. In addition to anticipating the requirements of their destination tax systems, investors migrating from mainland China also need to address the implications in mainland China and what obligations they continue to have there.

Moving to a new country does not mean leaving the previous one’s tax system behind. The USA taxes the worldwide income of its citizens and China taxes the worldwide income of individuals who are domiciled in mainland China, with domicile often determined by the combination of nationality and hukou, namely, household registration. These are two examples of jurisdictions where tax obligations will likely remain regardless of whether you obtain a residence visa for, or move to, another location. Other jurisdictions, such as the UK, may stop taxing worldwide income each year when tax residence is broken, but continue to consider the longer-term attachment to the jurisdiction for inheritance tax purposes.

Taking any action that touches a new tax jurisdiction requires a series of considerations. First, consider the tax implications in the destination country — whether you are taking residence there, acquiring citizenship, or merely investing into that country.

Second, consider whether the steps you plan to take are effective in your current location. Taking residence or citizenship in one country does not necessarily relieve your obligations in another. This is particularly true if the residence or citizenship by investment program does not involve physical and substantial relocation to the destination country. Tax residence and immigration residence status often have different triggers and effects.

Finally, any planning to manage your tax obligations must be properly implemented and reviewed on a regular basis. Changes in circumstance, such as those forced on us by the pandemic and response measures taken by various governments, may disrupt and possibly invalidate the required outcomes that you initially intended.