For globally-minded families, changing one's nationality or tax residency is an option to consider. We can help.
Today, many families with the means and ability to be globally mobile are acquiring a second citizenship or residency in a new country. While the rationale behind their choice of jurisdiction can vary, it often includes visa-free travel or a more favorable tax or reporting regime. Perhaps an even more important reason for such an effort is to guarantee a family a “Plan B” in the event of political, economic, legislative, military, environmental or other unrest that may arise in their home country.
There are two different paths to selecting a jurisdiction, depending on whether one desires only a passport or seeks to physically move to that new country. That decision itself will be driven by the needs of the particular family and what is most important to them. Either way, one must consider a number of factors (listed in the sidebar) prior to making a move.
FACTORS TO CONSIDER WHEN DECIDING ON A NEW JURISDICTION
WAYS TO ACQUIRE CITIZENSHIP
A major benefit of acquiring an additional citizenship is that one is entitled to all the rights granted to other citizens of that country. These rights, once fully granted, can only be revoked under extreme circumstances. They may also be inherited by children, grandchildren or more remote descendants. The right to travel freely in certain other countries without the need for visas can be an additional advantage. Citizenships (such as those in European Union countries) can even grant the holders the automatic right to live in multiple jurisdictions.
There are many ways to become a citizen of a particular country (see sidebar). The quickest route to citizenship, however, can be through an investment program—which may not have any physical residency requirements. These programs have become a way for a country to raise revenue by allowing individuals to “purchase” citizenship through an investment or a real estate acquisition in the country. Typically, the more mobility a passport provides, the more expensive it is.
From a tax standpoint, in most countries merely being a citizen does not cause a person to become a taxpayer.1 That said, once a person decides to take advantage of the passport and actually move to the country, careful thought should be given to its tax regime, and how it may differ from that of the current country. With sufficient time, there may be an opportunity to plan and restructure assets before moving.
CITIZENSHIP BY INVESTMENT: CASE STUDY
Mr. and Mrs. Hernandez are tax residents and citizens of Bolivia. They have a daughter with a newborn child who is married to a U.S. citizen in Miami.
Mr. Hernandez travels extensively on business throughout Europe and Mrs. Hernandez wishes to travel to the United States to visit her daughter and grandchild. However, Bolivians only have visa-free or visa-on-arrival access to 77 countries, and the United States and most European countries do not fall within this group.
The Hernandezes do not wish to move to another country—their operating business is in Bolivia and their younger children are still in school—but they are interested in obtaining a passport from a country that offers them greater mobility and, if ever necessary, a safe haven should Bolivia become unsafe or unstable. The Hernandezes may be good candidates for a “citizenship through investment” program, as simply obtaining residency elsewhere would not address the totality of their potential needs.
Unlike citizenship through investment, establishing a new residency often requires a substantial time commitment. In addition, a home may need to be rented or purchased, or an investment made in a business. As laws change, a residency permit has the potential to be taken away.
Establishing a residency in a new country can cause a person to become a taxpayer there (while citizenship on its own is much less likely to trigger taxation). For this reason, one should review their assets prior to establishing a new tax residency to determine if any changes should be made to improve tax efficiency in the new country. Some types of investments or structures may no longer be appropriate. For example, the new country may not recognize certain structures, such as trusts, and this could create uncertain tax or reporting situations for settlors and beneficiaries (as in the case of civil law countries). If immigrating to a high-tax country, careful planning prior to arrival may make it possible to mitigate taxes.
It is important to keep in mind that establishing residency in a new country does not mean that your “old” country will no longer recognize you as tax resident, and you should analyze both jurisdictions to ensure your actions will achieve the desired goal. Some countries, such as Canada, will require a resident to proactively sever residency so as to no longer be considered a tax resident. Individuals with dual residencies must be careful to avoid double taxation if they are seen to be taxable residents of two countries, and if, in particular, there is no double taxation treaty between those countries. Lastly, one should not fall into the trap of being considered an “accidental” resident in a country that elects to tax those who have established an economic center of interest or activity there, regardless of the time actually spent in the country.
OBTAINING A NEW RESIDENCY: CASE STUDY
Mr. Ferreira, a wealthy banking executive living in Brazil with his family, is greatly concerned about the increasing political instability and violent crime in the country, especially now that his children are getting older. He would like to move somewhere where his children can grow up in relative safety. He is exploring the different residency programs available in politically stable countries with low crime rates.
Not all citizenship and residency programs are created alike, and some jurisdictions are much more desirable than others.
Some programs are under scrutiny by organizations such as the Office for Economic Cooperation and Development (OECD) and the European Commission. In a recent move to clamp down on avoidance of the Common Reporting Standard (CRS) through citizenship and residence obtained via investment schemes, the OECD analyzed over 100 schemes offered by CRS-participating countries and has named 21 jurisdictions that it regards as potentially high-risk and subject to misrepresenting an individual’s tax residence. The European Commission is currently monitoring Citizenship by Investment programs in EU countries that grant investors nationality without the obligation of having meaningful and genuine connections with the country.2
There are various companies that provide passport and residency “shopping” services where information can be found on various programs, and nationalities are rated on their desirability. However, the question “residence or citizenship?” can only be answered by taking account of the many different factors and prioritizing what is most important. Whether it be safety, tax minimization, or ease of travel, it will require professional guidance, tax analysis and personal soul-searching to determine what is right for one’s family.
As a result of our global reach and through our counterparts around the world, J.P. Morgan can provide valuable insights into the impact of changing one’s nationality or tax residence. Please contact your J.P. Morgan Investor and Wealth Advisor to review the appropriateness of investments held in your portfolios as well as any wealth planning structures you may have in place. It is important this analysis take place as you consider obtaining a second passport or residency to determine if these assets will continue to make sense once a second passport or country of residence is obtained and to allow time for any needed restructuring. Your Wealth Advisor can help you coordinate with legal and tax advisors to ensure all taxation and regulatory impacts are understood and, where possible, mitigated.
1 U.S. citizens are subject to tax on their worldwide incomes irrespective of where they reside.
2 See European Parliament Study Citizenship by Investment (CBI) and Residency by Investment (RBI) schemes in the EU.
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