The IBSA Podcasts
IBSA podcasts contain information from a global community of entrepreneurs and professional advisors dealing with international business structuring and regulatory compliance.
Hosted by Roy Saunders, who has over 50 years’ experience within the financial sector, these podcasts delve into enlightening conversations with a wide range of leading professionals aiming to demystify the complex world of business and provide invaluable insights to help listeners deal with various complex technical matters to best support their business and clients.
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The IBSA Podcasts
Wealth, Migration and Tax: A Global Perspective
Embark on a journey through the labyrinth of international taxation with Roy Saunders and Derren Joseph. In our latest conversation, we tackle the weighty topic of US taxation for citizens and green card holders abroad. You'll discover why clinging to an American passport isn't just about patriotism, but can also be a strategic choice for flexibility and access to the US—even as the shadow of the exit tax looms for the affluent and long-term residents.
We'll guide you through the nuanced differences between grantor and non-grantor trusts, debunking common misconceptions and revealing their true colours. As we weave through the evolving tapestry of global migration, from Southern Europe to the sands of the Emirates, you'll hear why the world's wealthy are chasing more than just tax breaks. To cap off, we reflect on the ripple effect of fair taxation in quelling the tides of global social unrest, underscoring its role in maintaining the delicate balance of societal harmony. Join us for this compelling discourse that promises to broaden your perspectives on wealth, mobility, and the pursuit of a stable global community.
Hello, and welcome to this IBSA podcast on the topic of US exposed persons moving to Europe. My name is Roy Saunders, founder and chairman of the IBS A, the International Business Structuring Association, which is a multidisciplinary global association of entrepreneurs and their professional advisers dedicated to sharing their expertise with each other within a great networking platform. And today, I'm joined by Darren Hayden Joseph, a US lawyer specializing in international cross border taxation for US individuals. Maybe they're moving to the UK or beneficial regimes such as Spain or Italy or have a fairly high tax jurisdictions such as France and Germany. Darren will also be covering the taxation of trusts in the US and beyond. So there you are. Darren, what are your key points that you'd like to talk about?
Speaker 2:Hi, Roy. Pleasure to be here again. My name is Darrin Joseph. HTG attacks, a member of Moore's Rule. And we're that seeks to demystify the sometimes confusing rule of international tax. One point of correction, I'm not a lawyer, I'm a tax adviser, So just just don't wanna get in trouble. Now in terms of what we wanna cover, yeah, we can definitely talk about US exposed persons. Whether they be citizens of Greek cardholders. And the world of options in front of them, primarily Europe, but we can also talk about Central, South America, as well as Southeast Asia, which is where I'm primarily based.
Speaker 1:And with the with the US citizen. I know that US citizens are taxed
Speaker 2:Mhmm.
Speaker 1:Worldwide whether they are visited to the US or not. Green card holders. We've had a chat about this before whether or not it's a good idea to have a green card, to give up a green card, if you've been present in the US, is it eight out of fifteen years? You you can elect I I'm not quite sure of the situation there. So in fact, you can comment on that?
Speaker 2:Absolutely. So you're absolutely correct, of course, as a US taxpayer, you're taxing your worldwide income. So that'll primarily be citizens, and those who qualify to Section seventy seven zero one, which will be permanent residents. Those who trigger substantial presence, substantial presence being a bit of a convoluted calculations, one eighty three days, but it includes the two prior years as well, I I won't get into it. But once you are the US exposed, you're taxed in your worldwide income. If you leave the US if you're a citizen of green cardholder and you continue to be taxing your worldwide incomes. It follows you around. If it is, since your taxation was triggered by substantial presence, which may be the case of some visa categories like the E's and the L's, for example, then you can leave that taxation behind and you just be taxed on your US source income. But
Speaker 1:if you hold on to your green card, you carry on being taxed.
Speaker 2:Correct. Correct. So as long as you keep your green card or your citizenship, that taxation will follow you wherever you go.
Speaker 1:Is it a good idea to give up your old breakout?
Speaker 2:I, perhaps, will be on the minority. First of all, I think that the textails shouldn't whack a dog. So it depends on what the client's needs are and what their ultimate objectives are. To meet that drives whether you wanna hold on to something like a green card. Personally, I'm hugely in favor of holding on to the why Right now, the US is an extremely attractive jurisdiction. I mean, from a, you know, from a business point of view, financial markets in terms of the world of opportunity. In addition to which it is the number one jurisdiction of choice for high net worth individuals. So wherever behind it. There there are a number of bodies which studied in movement of the migratory patterns of high net worth individuals. So those with investable assets of over one million, sent out million years, investable assets of one hundred million or more, and billing years. And again, the destination of choice And the cities, the number one cities, to attract and retain high net worth individuals that disproportionately the US. So it is it is a huge method. So if it is that you're planning to spend some time abroad, so you're gonna leave I would just keep it in your back pocket so that the US remains an option. And especially if there's a substantial portion of your wealth, So for example, you have a business set up in the US or, you know, you have some investment properties or whatever the case may be, and you want access, easy, unfettered access to your business, to meet with you can tap board meetings, to meet with key suppliers or customers, or whatever the case may be. Again, I would keep it from an immigration document. Because as we saw during the recent health crisis, Yes, travel was particularly difficult. But at no point, were US citizen denied entry or egress at same with Greek cardholders as well, multiple permanent residents. So if only for that, I will keep it.
Speaker 1:Okay. So judging from what you've said, and I've had one or two clients who've actually given up their US citizenship. You would probably advocate against that. But on the basis that you do give up your US citizenship, can you tell me a little bit about the exit tax that would apply? And would the tax applied to green cardholders as well.
Speaker 2:Right. That that that's a good question. And and, yeah, you know, I I always give my point of view, but you know, to your point, we do two or three clients every month who are giving up the citizenship with root cause. Right? So it is it is a personal choice. If it is, yes, an exit tax, may apply. The if it is your citizen, and your net worth is in excess of two million dollars or you've had a tax liability on average over student threshold It moves on inflation, but I think it's roughly, let's say, hundred and eighty thousand dollars for the preceding five years. Or if it is that you're a long term permanent resident, what do you mean by a long term? So you've
Speaker 1:had a long term since you've
Speaker 2:had a long term dream car for at least eight years. So then you trigger. So if you've downloaded for, you know, fewer than h's, then exit taxes won't particularly be a concern. So again, for that long term private resident, you have you trigger what we call covered stat status by virtue of your net assets being excessive. Two million dollars your average tax liability be in excess of, let's say, a hundred and eighty thousand dollars in the past few years. There's another way of triggering it, which is those who refuse to disclose what their assets are. But we don't typically deal with that type of time. So essentially, yes, you you you may trigger that exit tax and how the exit tax works just real top line, you you create a balance sheet, if you will, what your assets are, what the basis is. So class price as well as the the the market value. And we look at the delta between the two and that delta, so that is looked at in terms of a deed disposal. And we know you're not gonna sell it, but you, you know, you can't pretend as if you want. Based on that, the taxes calculation.
Speaker 1:Well, you know, it's it's unlike some countries which do have an exit tax but they also have a step up in basis on the on when they come into the country. I believe that in the US, you don't have that step up in basis. So it seems a little bit unfair, something it'll come to the U. S. With a a low cost asset and and and be taxed on exit?
Speaker 2:Absolutely. One can have that conversation. Of course, as professionals, we all advocate pre immigration task planning regardless if we go way to, but the vast majority of people do not. And as you rightly pointed out, there's no automatic step up in basis. So as part of the prerogation, process, we do certain things, just valid basis. But if you didn't take advice, then then you're right. You can be in a a a painful position. Should you wish to
Speaker 1:What what would you suggest as a to create that step up in basis, transfer to a trust or something? Or would you suggest
Speaker 2:can yeah. I mean, there's certain things like a check to box election. If it's a portfolio of publicly traded at equities, for example, you can sell and repurchase. So it really depends on the asset class and the nature of your holdings. Then there may be a way, not always, but there may be a way to to affect that that step up in basis. Yeah.
Speaker 1:And on the basis that you transfer to a trust, for example, before your life, they fell to a trust. Can you just briefly explain. I probably won't be able to do it that briefly. The front door and the non front door areas so that when actually somebody isn't a US resident, how are they taxed on the income of the trust?
Speaker 2:That's that's another common question. Once we get on to calls for premigration, tax planning. The first thing that people wanna talk about is a trust. And naturally so, because, you know, the media plays with it a lot plays with the concept and creates the idea that it's this panacea, this is silver bullet that will solve all their problems, unfortunately, does not. So under the US tax code, you have a grant or trust in non grand total trust, which roughly equates with revocable trust under England and Wales and irrevocable trust. So So that that's roughly what it is. Now by virtue, regardless of whether it's a ground to a non ground to trust, having a foreign trust, it's a good idea. So we never discourage people because of two things, asset protection, succession planning. As we all know, the US is very litigious and I always tell people if you do business in the US and you haven't been sued, it just means you haven't been in business long enough, everybody gets sued at one point in time. It's just off for the course. And it it is super helpful to shield your assets and and have it in that that that foreign trust. There's also succession planning. You you legally avoid probated more importantly if you trigger the estate tax then those assets already in that foreign trust would be shielded from that calculation. So that's helpful. Now from a tax point of view, in terms of income tax, If it is that your trust is categorized as a grantor trust, which most of them would be, then, unfortunately, a grantor trust farm planted trust for US tax purposes is transparent. So all the distributions within or the income producing activity within the trust flows directly onto your personal tax feature. And if it is that you have a non branch of trust, then yes, you will only at the very least, you'd only be taxed on that portion of the distribution that will go to a U. S. Exposed benefit history. But if it is it's yours if you settle the trust, and therefore you're the ground show of the trust and you move to the US, within five years, it's automatically a foreign ground toe chest. So even if it's set up to be an irrevocable chestnut, it's gonna be a foreign grant to trust, unfortunately. So there's no tax benefit. They also because of, you know, this very nature, people wanna you know, to engage in tax fund. The IRS has a series of code sections from, I think, section six seventy one to six seventy seven. Excluding six seventy to a claim, that would deem trust to be granted trust for just, you know, just the slightest amount of control or that that a US spokesperson would be. So in fact, what you have as a situation, you need to plan outside of five years and chances are you probably would have needed to get US council involved. To ensure that it was drafted in contemplation that the trust will become US exposed, which many people doing. So that's why most doing quality by. So the far ground to trust in in summary is the holy grail, but it is difficult. In the prerogative test planning process to achieve.
Speaker 1:Okay. So so controlling in any way of that Exactly. Cause a big problem. Okay. So we've now got people who have been in the US and who are now leaving the US. Let's talk about where they go. Yeah. They they might be going to the UK. Of course, we've got we're right in the middle of our non domed changes. About. But they might be going elsewhere. Where would you typically find your US clients going to?
Speaker 2:Well, you know, the destinations of choice again, looking at the high net with migratory patterns right now, outside of the US, you're looking at Europe. Right? And again, it's a big change since COVID. People are becoming very conscious of you know, health and you're looking for jurisdictions that offer awesome healthcare. And as things become a bit uncomfortable actions you're looking for safety as well. Safety comes as a premium. So in terms of the clients that we normally encounter in our ecosystem, It's Southern Europe, so France, Spain, Portugal. The Emirates primarily Dubai, but, you know, the Emirates is just more than Dubai. So just generally the Emirates as well as Singapore and Southeast Asia. Those are the common jurisdictions that we get involved in.
Speaker 1:So you you've eliminated the UK because of the need to have health care and the state of the NHS moment.
Speaker 2:I haven't eliminated it. It's just that we don't get involved in that. First of all, statistically, there's been a net outflow of so called high net related videos from the UK over the past few years. And this is before any discussion of round changes in the non dom regime, which is again reinforcing the narrative that I threw out at the beginning, which it seems to be content to its but the data is rock solid. Again, I just wanna throw in for those who wanna take a deeper dive down that rabbit hole. Is Professor Kristabel Young from Cornell University. Peer reviewed journals, lots of economists looked at it, rock solid, anonymized IRS data from within the US and from Forbes and other sources for Internet national movement. And again, high net worth are not driven by taxes. So having said that, within our ecosystem. It's just that people knock on our doors when it comes to Portugal speed in France because we put out a lot of content around those jurisdictions of what they have to offer from a tax point of view.
Speaker 1:Okay. That's very interesting that the high net worth individuals aren't motivated by tax. And and that to some extent means that all of this changes in the non dominant legislation, which is tax driven, is actually no no benefit at all to the high net worth. They're gonna move because of other reasons, if you like. Well, they might stay as well.
Speaker 2:Exactly. People do what they wanna do. And from a UK point of view, again, I don't I I know that you you basically, you know, way more than me. But there have been recent changes recent in the past decade or two with the non dom regime. And again, you know, people running around this guy is gonna fall. This guy is gonna fall. And then nothing happened. Right? Yeah. So people things do I mean, not to say that there are individuals that will move. And then media, of course, because they they chasing clicks. They will grab onto those high profile individuals. But anecdotes do not make the case, and statistics fleet, they are not driven by taxes. So you're correct. Nothing is gonna happen.
Speaker 1:So now with the Spain, and and then Portugal has changed its rules as opposed to the non habitual resident. But you've got Spain and Italy with beneficial tax regimes. If you've got a US citizen that is gonna be subject all US taxation on all of his income anywhere in the world wherever he is resident. Are these beneficial tax regimes useful for US citizens going abroad?
Speaker 2:Potentially, there would be I mean, bear in mind that they're all gonna be temporary in nature. But at least for that initial period, it is something considered. France doesn't have any. They have an repatriate regime, but, you know, for they hang up with individual, they end up really on a salary, so that maybe doesn't make a difference. Italy has what as well in Belgium and some other jurisdictions. So the SPHERE. You mentioned well, we mentioned SPHERE. There's a the back end law. More recently, there's like a startup law, which Portugal has mimicked. So what in fact happens. Portugal is still in play, but they've kind of shadowed what Spain is doing. So Portugal is saying just by virtue of showing up, you're not gonna get a ten year break. What you can do, however, if you start a company that's bringing jobs to Portugal, then, yeah, this could be interesting. And if you are an employee under that company, then you effectively have a quasi territorial tax regime. So therefore, new Portugal source income will be taxed, and there there's a lot of, you know, it's like somebody said it's like the Swiss cheese. Of regime. So there are quite a few exceptions, maybe. But for the most parts, your your foreign source income is not gonna be taxed and you can bring it in. So whether you leave it outside or bring it in as a relevant, you can do what you like. We're just gonna test your your domestic income for ten years. Spain says the same thing as well. You know, there's a start up regime, so we'd prefer if you start a company. But even if you have digital no matter. A so called remote worker. Yep. Come. And for a period, I think it's six years, then right. We will treat you as tax nonresident even though we from an immigration point of view, are resident. And we're only taxing the Spain source income, which you do outside we're blind tip. You can bring it in if you want, but it's only for six years. So Italy, has that flat tax of a hundred thousand, which again is quite competitive compared to Switzerland's three hundred thousand. So I I think, you know, those three countries are attractive and interesting right now. We see most demand being for Spain as as things have been a bit uncertain for a number of reasons in Portugal. But but they all are quite popular and generating quite a number of inquiries right now.
Speaker 1:Does the EU in particular and perhaps the MEC? Does it fail upon these beneficial tax regimes as being sort of unfair competition for local residents compared to local residents?
Speaker 2:I think it does. So, I mean, it goes hand in hand with the so called golden visas. It's there's it's it's an open secret that Brussels, London and Washington DC do not like these Golden visas especially when it leads to citizenship without any real connection to the to the jurisdiction. They just don't like it. And they've been feeling some soft power, and now they're becoming a bit more overt with that as we know mortar is being taken to the European fort. As a result of it. We believe that pressures being exerted on other jurisdictions as well because because we remember there was a time this is before COVID. So before twenty twenty, you could have moved to Portugal from another European country like UK or Sweden. And you would just not be taxed on pension income. As a result, I think it was Sweden got very upset in the union lap to really revolt the the Swedish the Sweden, what you call, tax treaty to complain to Brussels. Brussels. For pressure. Lisbon and Lisbon implemented that ten percent So we know it happens, and it goes hand in hand with the golden Visa thing. But Brussels is being quite strategic. They're saying first off, let's because once you get access to one European country, you have access to all. So you can't you can't claim autonomy and say you're gonna do what you want because it impacts everyone else. So let's harmonize our position And I think they they the case study that that that, you know, the jurisdiction that they seem to prefer as an example would be Austria, which under under extra someone makes an extraordinary contribution, which is subjective, quite subjective, but it was relatively high. Austria will say yes. Welcome to Austria. Here's a passport as evidence of your citizenship. So again, for some sort of extraordinary contribution, yes. But to just rock up and write a check for half a million or a million euros and you get those benefits, they they clearly don't like it, and they go hand in hand.
Speaker 1:You mentioned Austria, they that's one of the countries that does have that step up in basis of the assets when they come into Austria. So, you know, one could come into Austria with your assets waiting to be sold. You then sell the assets once you're in Austria. You make a capital gain, but the basis of the capital gain is the high net value when you actually went into Australia. So actually, the gain is is negligible. That's a very, very attractive proposition.
Speaker 2:It is a very attractive proposition indeed, but more importantly, it doesn't play negatively the political arena. So you don't have, like, this two tier system where you have a certain class of citizens who are not taxed at the worldwide income and some that are. And some that even when you exclude the worldwide income, even the domestic sick income may get some sort of special privilege. So it's that two tier system that creates it seems to be creating this harmony.
Speaker 1:That's an interesting concept. I was reading this weekend about Mishi Sunak's wife, and she's earning huge amounts of money on dividend income. Was fine income. Therefore, as a non domed, she wasn't taxed, and she she moly thought that was wrong and decided that she would voluntarily accept UK taxation on a worldwide income. How how much do you think morality is now coming into the into play with taxation?
Speaker 2:It it it has become moral arguments, so it's not what is legal, but what is seen to be fair.
Speaker 1:At least, of course, state that the divergence with with other people with people who are resident of that country. And people come in from abroad like your US people coming into Spain. It's a it does create a two tiers. It's to really. So there is that moral ground that is interesting.
Speaker 2:It is. And we we and then step taking a step back, what's going on geopolitically. We see that across the world, there's an increase in social instability. It would manifest itself in different things, you know, political instability, crime, but there is an increase in social instability. And the last thing a government wants to do is add fuel to those flames. And if it is that people are gonna be super sensitive, especially as we have economic struggles in most jurisdictions right now. You want to create the impression that things are being fair everybody is paying their fair share as as we go through a collective struggle. So so you're absolutely right. It's it's a real concern. And governments wise to pay attention to that concern.
Speaker 1:Okay. Well, I mean, I think on that basis, on the on the issue of morality. I think we can end this podcast. Thank you very much, Darren, for joining me today. It was really interesting and informative And I'd like to thank our listeners for joining us today. So again, thank you, Darren.
Speaker 2:Thank you. It's been a pleasure and a privilege, Roy.