Changing residence involves (too) many tax problems, both for individuals and companies.

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1 Changingresidenceinvolves(too)manytaxproblems, bothforindividualsandcompanies. Changing residence is among the most sensitive topics for international tax practitioners.residenceoftaxpayersisakeyfactorinthedeterminationofthe jurisdiction to tax: changing it implies fundamental modifications in the taxing powerofeachstateinvolved.thisshowsthatthestatesinvolvedhaveconflicting interestsindeterminingthetaxtreatmentofachangeofresidence.theresultis amultitudeofrulesandreactionsfromstatestostatesthatlargelyrelyontaxpolicyreasons. Inafewpages,thisessayaimstoprovidereaderswithanoverviewofsomeof themosttroublesomeandcomplexconsequencesfromchangingresidence,both forindividualsandcompanies.illustrationofthevarietyofstatereactionswillbe giventhroughaselectedsampleoftaxationrulesapplicableinfranceorinthe UnitedStatesofAmerica. Thefirstissuesappearwiththedeterminationoftheresidenceoftaxpayers,and thetechnicaldifficultiesforgettingoutofaqualificationasresidentfromastate (I). Other troubles come at the time of the transfer of residence since it can triggeremigrationtaxesprotectingthetaxingrightsofhomestates(ii).afterthe change of residence, problems arise with respect to the interests kept in the homecountry(iii). Still, this essay does not cover numerous problems following a change of residence,suchastiming issuesordifferencesinvaluationmethods.butinthe light of this presentation, one should conclude that without a complete investigation on when, how to prepare and how to document a change of residence,thisprocesscouldseriouslyturnintoanightmare. 1

2 I Problemsrelatedtothedeterminationofresidence The concept of residence varies for each country: changing residence entails complicatedresearchesandcompliancerequirements. A Domestic and conventional connecting factors used to determinetheresidence 1 Forindividuals Individuals seeking to change their residence must first determine the connecting factors of both countries of emigration and immigration for income tax purposes. Countries often refer to their variant of residence as connecting factordeterminingtheextentofthetaxliability.butotherfactorscanbefound: The French income tax for individuals uses as connecting factor the fiscal domicile: this recovers four alternative criteria. Will be considered as having a fiscal residence in France and therefore will have an unlimited tax liability the individualhavinginfrance 1 : Ahome( Foyer ),definedastheplacewhereataxpayerhashishabitual abodeandhisfamilyties; His principal abode: used as criteria only if the home cannot be determined,thisiswherethetaxpayerspentthehighernumberofdays; His principal professional activity, taking into account the income generatedandthetimespent; Hiscentreofeconomicinterest. TheUnited Statesfederalincometaxforindividualsusesasoneofitsconnecting factortheconceptofresidencefortheapplicationofanunlimitedtaxliability 2. Buttheconceptismoremechanical:First,willbeconsideredasresidentofthe 1FrenchTaxCode(FTC),articles4AandB. 2U.S.InternalRevenueCode(I.R.C.), 1,2(d),61,7701(a)and(b). 2

3 United States any individual meeting the substantial presence test. This generallyrequiresthattheindividualhasbeenpresentintheu.s.formorethan 31 days during the calendar year, and for more than 183 days taking into accountonethirdofthedaysofpresenceoftheprecedingyearandonesixthof thedaysofpresenceofthesecondprecedingyear 3.Second,willbeconsideredas U.S. resident any individual who is lawfully admitted for permanent residence, suchasagreencardholder,nomatterwherehelives. The United States federal income tax also establishes the U.S. citizenship as an independentconnectingfactorforanunlimitedtaxliability 4. One could conclude that changing residence may result in a qualification as resident for tax purposes in both countries. Such situation would counter the applicabilityofataxtreaty.therefore,taxtreatiesincludeanarticleprovidingits own definition of residence. The O.E.C.D. model of tax convention makes first a referencetodomesticlawofcontractingstatesfordeterminingresidence.ifan individualisresidentofbothstates,tiebreakerruleswilldeterminefromwhere he is considered resident. Thus, he will be considered as resident from the countrywherehehasapermanenthome.ifhehasahomeinbothstates,hewill beresidentofthestatewithwhichhispersonalandeconomicrelations(center ofvitalinterest)arecloser.ifitcannotbedetermined,a habitualabode testis applied. In the absence of habitual abode, he will be resident from the state of whichheisnational.otherwise,thecontractingstatespromisetotrytosettlethe questionbymutualagreement 5. 2 Forcompanies Whenacompanyplanstochangeofresidence,thisisessentialtodeterminethe criteria used by the states involved: among domestic laws, four theories have beenencounteredasconnectingfactorsforcompanies: 3Somedaysareexemptedfromthe183 daytest. 4I.R.C. 7701(a)(30)(A). 5O.E.C.D.Model,article4. 3

4 Theincorporationtheory:wherethecompanyisregistered; Therealseattheory:whereislocatedtheeffectiveplaceofmanagement; Theprincipalplaceofbusiness; Thecontroltheory:wheretheshareholdersarelocated. In the United States, the residency test for corporations relies on the incorporationprinciple.domesticcorporations,meaningcorporationscreatedor organizedintheunited StatesorunderthelawsoftheUnited States 6,aretaxed ontheirworldwidetaxableincome 7. Franceusesavariantoftherealseatprinciple.First,thecompanyisresidentof thestatewhereitisregistered.ifthislegalseatisasham,therealseatprevails 8. Nevertheless, the French income tax for corporations respects the territoriality principle and does not include income earned in the habitual exercise of an activityoutoffrance 9. The O.E.C.D. model also proposes a tiebreaker rule for companies: the place of their effective management. The U.S. model of tax treaty proposes the place of incorporation as first tiebreaker. If this cannot solve the double residency and the contracting states do not reach a compromise, the company will not be treatedasaresidentofeithercontractingstate. B A complicated process for getting out of a qualification asresident 1 A need to break all ties with the emigration state for individuals Catchall rules for residency of individuals often require that the individual cut everytiewithhisformerhomecountry.individualsmustthereforechangetheir 6I.R.C. 7701(a)(3)and(4). 7I.R.C. 11,61. 8OfficialGuidelineDB4H FTC,article209 I. 4

5 factual situation rather than merely try to fit into legal criteria: this can be a heavyproblemforthem. With respect to French residency rules, one shall be advised to avoid any elementhavingbeentakenintoaccountbytheauthoritiesforthedetermination of residence. For instance, leaving any family member in France is risky. Individuals shall sell or reorganize their ownership of French assets, in particular for real estate since the administration could consider even a secondary house as a permanent home if it is at the disposal of the individual. Also,allbankaccounts,lifeinsurancepoliciesetc.mustbeclosedandmovedto the host country. Name must be withdrawn from all public election lists or electoral rolls, and the social security administration shall be informed of the changeofaddress.anyexecutivepositionsincompaniesbasedinfranceshallbe resignedfrom.also,oneshouldkeepinmindthatcellphonesareaneasywayto trackusers location 10. EventhoughtheUnited States rulesaremoremechanical,individualsseekinga changeofresidencemightfacehardchoices,suchasgivinguptheircitizenship ortheirgreencard.however,anamericancangiveuphiscitizenshipwhilehis spousemaintainshiscitizenship.thus,heisallowedtogetavisatofreelyenter and exit the U.S., he could live in another country and maintain a home in the United States. The main consideration would be to cautiously respect the substantialpresencetest 11. Individualscouldenjoymoreflexibilityiftheymovebetweencontractingstates of a tax treaty: the tiebreaker rules of the O.E.C.D. model are subject to a hierarchy. So long as both states respect this hierarchy principle, a change of residence with respect to the first connecting factor (usually the permanent home) might be sufficient. Nevertheless, any remaining factor in the home country is a decrease in certainty for the individual s residency status. Interestinglyenough,theU.S.modeloftaxconvention saves therighttotaxits 10BernardChesnais,France:movingtaxresidence,BNAInternational, Reuven S. Avi Yonah, International Tax as International Law: An Analysis of the International TaxRegime,CambridgeTaxLawSeries,

6 citizensontheirworldwideincomeeventhoughtheywouldbequalifiedasnonresidents The tax treatment subordinated to legal constraints for companies Unlike individuals, companies are legal creatures which life and acts must be described by law. As a consequence, the organization of a change of residence hastofitlegalmechanismsdescribedbyapplicablelawsofthecompany,bothin homeandhostcountries.now,thetaxconsequencesofatransferofresidence, aswellasthesurvivaloftaxattributes,maylargelydependonthetypesoflegal mechanismsauthorizedinthecountriesatstake.ifnolegaltoolscorrespondtoa plannedchangeofresidence,thecompanymightnothaveanyotherchoicethan winding up in the home country and reincorporate. If the legal environment allows certain types of operations having the effect of a change of residence, it remainscrucialfortaxpurposestodeterminetheextentofallowancesandthe technicalconstraintstheyimply. When France is the home country, the company law allows shareholders to change the residence of SARL 13 companies without a loss of legal personality. However, other types of companies may have to wind up and reincorporate 14. ButinEuropeanCommunitylaw,theregulationontheEuropeanCompany(socalledSE)statesthattheregisteredofficeofanSEmaybetransferredtoanother MemberState,withoutresultinginthewind upoftheseorinthecreationofa new legal person 15. French rules transposing this regulation state that when a companytransfersitsseatinanothermemberstate,whetherornotthecompany looses its legal personality, this do not lead to treat it as winding up for tax purposes 16.Therefore,fromFrancetoanothermemberstate,anSEoraFrench companycanchangeofresidencewithouthavingtobearthetaxconsequencesof 12U.S.model,article SociétéàresponsabilitéLimitée. 14FrenchCommercialCode,articlesL223 30andL CouncilRegulation2001/2157/EC,article FTC,article221. 6

7 winding up. Also, the Merger Directive 17 provides substitute methods for planningachangeofresidenceofacompanyintheeuropeancommunity,using operations that can claim the benefits of the directive, such as a merger or a transferofassets. In the United States, applying the incorporation principle, the legal process for changing residence of a company depends on state laws. When the company planstomovefromortoaforeigncountry,thereisnosimplifiedformavailable that merely changes the place of incorporation. However, it is still possible in those situations to realize a change of residence, through the use of substitute methods such as a cross border merger. Generally, the tax consequences will dependonthequalificationoftheoperationasreorganizationfortaxpurposes 18. II Emigrationtaxesuponthetransferofresidence Atthedateofatransferofresidencevarioustaxconsequencesmaybetriggered. Under the generic name of emigration taxes, Rijkele Betten distinguished five typesofemigrationtaxesunderthreecategories:exittaxes,extendedincometax liabilitiesandclawbacksofdeductions 19. A Transfer of residence may cause the collection of exit taxes 1 Forindividuals Whenthehomecountryseekstoprotectitstaxclaim,afinaltaxuponemigration can be enacted. This final tax might be general, meaning that all unrealized capitalgainsontaxablesourcesofincomearetaxed.inalimitedfinaltax,thetax claimislimitedtocertainsourcesofincome. 17CouncilDirective90/434/EEC. 18I.R.C R.Betten,IncomeTaxAspectsofEmigrationandImmigrationofIndividuals,IBFD,

8 FollowingtheoutcomeofthedeLasteyrie 20 case,francedecidedtototallyrepeal itslimitedexittaxonindividuals 21.Indeed,theEuropeanCourtofJustice(ECJ) held that the French provision had at the very least a dissuasive effect on taxpayers wishing to establish themselves in another member state, because upon emigration, individuals were subject to tax on a form of income that had not yet been realized. Nevertheless, the ECJ in the N 22 case held that the suspension of payment made subject, for example, to guarantees, constitutes a restrictive effect on the freedom of establishment in that the taxpayer is deprivedofenjoymentoftheassetsgivenasaguarantee.onecanconcludethat anexittaxofferingadeferralofpaymentuntiltheactualrealizationofthegains, notconditionedtoguaranteesorthedesignationofarepresentativeinthehome state, does not necessarily constitute a restriction to the freedom of establishment. The European Commission confirmed that exit taxes were possible,but anymeansofpreservingthetaxclaimmustbestrictlyproportional tothataimandmustnotentaildisproportionatecostsforthetaxpayer 23. TheUnited Statesrecentlymodifiedthetaxationofindividualsuponemigration from an extended tax liability system to a general final tax 24. This exit tax 25 is targeting US citizens who relinquish citizenship, or long term residents who terminate US residency, if they meet a net income tax liability requirement ($ adjusted), a net worth requirement ($ ), or if they fail to certifythattheycompliedwithallustaxobligationsforthepreceding5years 26. Attheexpatriationdate,anynetunrealizedgaininexcessof$ (adjusted) ontheirworldwideproperty 27 issubjecttoincometax.thismark to Marketrule offersanelectionfordeferralofpaymentgenerallyuntilthedateofdisposition oftheproperty,uponthefurnitureofaguaranteeandanirrevocablewaiverof 20deLasteyrie,C 9/02,ECJ(04/17/2004). 21FTC,formerarticle167bis. 22Nv.inspecteur,C 470/04(ECJ,09/07/2006). 23CommunicationonExitTaxation,COM(2006)825(EuropeanCommission12/19/2006). 24HEARTAct,06/17/ I.R.C. 877A 26I.R.C. 877(a)(2).Seeexceptionsforcitizensin 877A(g)(1)(B). 27 Certain items, such as deferred compensation items, are excluded and subject to different rules. 877A(c). 8

9 any tax treaty right that would preclude assessment or collection of the exit tax 28.Aninterestischargedforthedeferralperiod.Onecanhighlightthatthere isnotax avoidancemotiverequirementandthatthistaxalsocoversassetsthat wouldotherwisebetaxableinu.s.upontheirultimatedisposition 29. U.S.shareholdersofaPassiveForeignInvestmentCompany(PFIC) 30 mightnot be aware of owning stock of a company falling into this broad definition. It is quite common that no proper election 31 was made to minimize the tax consequences of this anti deferral provision. As a result, when this PFIC shareholderemigrates,theindividualwillbetreatedhashavingdisposedofthe PFICstock 32.Thegainwillbetaxedasifitaccrued,pro rata,duringtheyearsthe stock was held. The U.S. tax due equals the yearly taxes due plus interest from eachyear sduedate.thetaxrateappliedisthehighesttaxratefortheownerfor theyearsofdeferral Forcompanies AcompanyseekingtochangeofresidencefromFrancetoacountryoutsidethe European Community could be forced to wind up and reincorporate. The treatmentofsuchatransferofseatfortaxpurposesissubjecttoawindingup regime,leadingtotheimmediatetaxationofallprofitsrealized,profitssubjectto deferredtaxationandunrealizedgains 34.Adeemeddistributionofallprofitsof thecompanytoitsshareholdersisalsotriggeringtaxes 35. Nevertheless,theEuropeancommunitylawdidnotprohibitmemberstatesfrom enactingexittaxesoncompanies.accordingtotheecjinthecartesiocase,ina situation where a company transferring its seat changes its national applicable 28I.R.C. 877A(b). 29EllenS.Brody&JasonK.Binder,USadoptsexittaxuponexpatriation,BNAInternational, I.R.C I.R.C. 1295and U.S.ProposedRegulation (b). 33 Kenneth J. Vacovec & Todd M. Beutler, The Tax Treatment of Transfer of Residence of Individuals,United Statesreport,56 th IFAcongress, 1.2.1, FTC,article FTC,article111bis. 9

10 law (lex societatis), the freedom of establishment prevent the home member statefromdissuadingtheconversionintoacompanygovernedbythelawsofthe hostmemberstatebyrequiringthecompanytowinduporliquidate,unlessthe homememberstatecouldshowsomemandatoryreasoninthepublicinterest 36. However,ifthereisnochangeinlexsocietatis,thehomememberstateisallowed torequirefromthecompanytowindupandreincorporateinthehostcountry, since this situation is outside the scope of the freedom of establishment. Thus, exit taxes are possible, and the European Commission indicated that such mechanism would be also possible in the context of the application of the freedom of establishment provided that it respects the outcome of the de LasteyriecaseandtheNcase 37. IntheUnited States,amerechangeofplaceoforganizationofonecorporationis covered by the so called type (F) reorganization rules. Without important change in shareholder s proportionate interests in the corporation, a reincorporationwouldeasilybequalifiedastype(f)andcouldbenefitfromnonrecognition provisions 38. Other types of reorganization could be used as substitute method to effectively reincorporate the company. The definition of type (F) reorganizations often overlaps with other reorganizations, but only a type(f)reorganizationallowsthecorporationnottoenditstaxableyear,andto carrybackpost reorganizationnetoperatinglosses 39. Intheinternationalcontext,aspecialprovisionappliesinordertoimposeatoll charge on the transfer of assets in transactions that might otherwise be taxfree 40. When assets used in the U.S. are transferred to a foreign taxpayer, the provision might render inapplicable the non recognition provisions for reorganizations by denying corporate status to the foreign corporation. Gain inherentinthepropertyisthereforerecognized.roughly,thisprovisionapplies to various types of transfers, such as(but not only) a transfer of property by a U.S. person to a foreign corporation in exchange for corporation s stock, where 36Cartesio,C 210/06,(ECJ,12/16/2008), CommunicationonExitTaxation,12/19/ I.R.C. 354,361and Paul R. McDaniel, Martin J. McMahon, Daniel L. Simmons, Federal Income Taxation of Corporations,chapter14,3 rd Ed. 40I.R.C

11 the transferor controls the corporation immediately after the exchange 41. Neverthelessthisrecognitionmechanismoffers,subjectedtostrictconditions 42, an exception allowing the non recognition treatment if the property is used in theactiveconductofatradeorbusinessoutsidetheu.s.,whenatleast80%of thestockofthetransferordomesticcorporationisownedby5offewerdomestic corporations 43. B Transfer of residence may trigger extended income tax liability In extended tax liability mechanisms, emigrated individuals or companies are treated as a deemed resident even though the rules for residency would conclude not. The extended tax liability can be unlimited, or limited to income andgainsfromsourcesintheemigrationcountry. TheFrenchtaxlawstatesthatgovernmentagentsworkingorrealizingamission abroadaresubjecttoanunlimitedextendedtaxliabilityeventhoughtheydonot meet the connecting factors used to determine their residence, if they are not subject to income tax in the foreign country 44. Also, the tax treaty between FranceandMonacostipulatethatindividualsofFrenchnationalitywhotransfer theirdomicileorresidencetomonacoareliableinfrancetothepersonalincome taxandthecomplementarytaxonthesametermsasiftheyhadtheirdomicileor residenceinfrance 45. One should recall that the United States taxes U.S. citizens on their worldwide income.moreover,u.s.citizensandlong termresidentswhoexpatriatedbefore June 17 th 2008 could be subject to a limited extended tax liability if the 41Bittker&Lokken,FederalTaxationofIncomes,EstatesandGifts,chapter71,Revised3 rd Ed. 42ProposedRegulation 1.367(a) 7. 43I.R.C. 367(a)(3)(A)and(a)(5). 44FTC,article4B. 45TaxTreatybetweenFranceandMonaco,article7,05/18/

12 expatriationmetthetax avoidancepurposetests 46.Suchindividualsaresubject tou.s.taxationfora10 yearperiodonincomefromu.s.source. With respect to companies, a provision 47 applying to so called inversion transactionscangenerateanunlimitedextendedtaxliability.accordingly,when a company reincorporates as foreign corporation and thereby replaces the U.S. parent corporation of a multinational group with a foreign parent corporation, the parent corporation following such inversion is considered a domestic corporationforu.s.taxpurposes,eventhoughitisorganizedunderthelawsofa foreigncountry,ifatleast80%ofitsstockisownedbyformershareholdersof the inverted domestic corporation 48. This provision would not apply if the foreign parent corporation has substantial business activities in the country of incorporation. Also, an important exit from the scope of this provision can be foundincasesof internalgrouprestructuring 49. C Transfer of residence may drive to clawbacks of tax deductions Emigration taxes can be on the form of a recapture of deductions or deferrals previously taken. Such mechanisms help to prevent taxpayers from taking the bestofbothworlds:thetaxdeductionordeferralandnorelatedtaxableincome inthejurisdictionthereafter. For French companies, several tax advantages could cease upon emigration of the taxpayer. For instance, the French corporate income tax is based on a territoriality principle. However, a special provision allows small and medium sizecompaniestodeducttemporarilyforeignlossesoccurredbytheirbranches andsubsidiaries 50.Followingachangeofresidenceofthecompany,previously deducted losses are recaptured in the year of the transfer, except losses from 46I.R.C I.R.C Bittker&Lokken,FundamentalsofInternationalTaxation, 66.2, I.R.C. 7874(c)(2)(A);U.S.TreasuryRegulation (c)(2). 50FTC,article209C. 12

13 subsidiaries which stock are included in the portfolio of a French permanent establishment 51. In the context of a change of residence of a company by a reorganization to whichu.s.taxlawoffersnon recognitiontreatment,severalrecapturerulesmay apply 52. For example, since the U.S. taxes its residents on their worldwide income, the non recognition is denied if the transfer is of assets of a foreign branch that sustained net losses before the transfer. Thus, the transferor recognizesgainuptothelesserofthegainontheincorporationtransferorthe previouslydeductedbranchlosses 53. III Taxconsequencesfollowingatransferofresidence Maintaining any connection to the home country could result on tax liabilities targetingremaininginterestsoravoidanceattempts. A Problems arising from the taxation rules of nonresidents 1 Residents and non residents may be subject to different taxationrules Asstatedabove,residenceoftaxpayersisaclassicfactordeterminingthescope ofthetaxliability.indeed,non residentswilloftenbesubjecttoataxliabilityin theirformercountrylimitedtoincomefromsourcewithinthiscountry.besides, the determination of the taxpayers net taxable income, as well as tax rates applicable, may vary for residents and non residents. These latter differences could result in a higher effective tax rate for non residents compared to the taxationofresidentsforthesameincome.asaconsequence,thetaxationrules 51OfficialGuidelines4 H Bittker&Lokken,FederalTaxationofIncomes,EstatesandGifts,chapter71. 53I.R.C. 367(a)(3)(C). 13

14 applicabletonon residentsareoffirstimportancefortaxpayerswhoemigrated if they maintained some interests in the country of emigration. In particular, awareness of what is included in non residents tax base and what can be deductedfromitiscritical. The French income taxation for corporations is based on the territoriality principle. Thus, the change of residence of a company does not change dramaticallythescopeofthetaxliability.however,anindividualbecomingnonresident limits the scope of his income tax liability from worldwide to French source income 54. Moreover, even if residents and non residents are subject to the same rules of determination of French source taxable income, the general deductions from the gross income of taxpayers, such as the deduction for alimonies,aredisallowedfornon residentindividuals 55. TheUnited Statesdistinguishestwocategoriesofgrossincomeofnon resident corporationsandindividuals 56 :First,thegrossincomeeffectivelyconnectedwith the conduct of a trade or business within the United States: it is subject to the general taxation rules, including the progressive tax rates. Most of deductions areallowedonlyforthiscategoryandtotheextenttheyareconnectedwithit 57. Second, the gross income from source within the U.S. and not effectively connectedwiththeconductofatradeorbusinesswithintheunited States:itis subjecttoaspecialsetoftaxationrules,includinginmostcasesaflattaxrateof 30% 58.Usuallynodeductionsorallowancesforcostsinproducingthisincome arepermitted. 54FTC,article4A. 55FTC,article164A. 56I.R.C. 872and I.R.C. 873and882(c). 58I.R.C. 871and

15 2 Various tax incentives for emigration or immigration may apply Some countries may wish to encourage emigration or immigration of certain taxpayers.accordingly,taxincentivesthatmaybeavailableforindividualswho changedtheirresidencemustbescrutinized. AmongtheFrenchtaxincentivesforemigration,workerswhoareexpatriatedin a foreign country by their European based employer and who kept in France theirfiscaldomicile,particularlytheirhome,maybenefitfromanexonerationof Frenchincometaxfortheirwagesiftheyaresubjecttoasignificanttaxationin thecountryofexpatriation.inseveralvalorizedactivities,theconditionforthe exonerationofwagesisasufficientlylongexpatriationperiod.also,bonusesand premiums paid in consideration for the expatriation may not be taxed in France 59. In order to limit double taxation resulting from the worldwide taxation of income of citizens and residents of the U.S., certain U.S. citizens and residents havingataxhomeinaforeigncountrymayexcludefromtheirgrossincomean amount up to $ (adjusted) of foreign earned income. A housing cost amountisalsoexcluded 60.Inpractice,thisprovisionallowsmostofAmericans livingabroadtopaylittleintaxesintheu.s 61.TheUnited Statesalsoprovidesa foreigntaxcreditmechanismallowingu.s.citizensresidentinforeigncountries tocreditforeigntaxespaidonincomeovertheexcludedamount FTC,article81A. 60I.R.C ReuvenS.Avi Yonah,InternationalTaxasInternationalLaw, I.R.C. 901(b)(1). 15

16 3 Change of residence may not permit the avoidance of inheritanceandgifttaxes. Domestictaxlawscouldusedifferentconnectingfactorforinheritanceandgift taxesinsteadofthefactorsusedforincometaxpurposesinordertoextendthe scopeoftheirworldwidetaxliability 63. In France, the inheritance and gift taxes are based on worldwide assets of the deceasedordonorifhehashisfiscaldomicileinfrance.ifthefiscaldomicileisin aforeigncountry,thetaxisbasedonassetslocatedinfrance.however,thetaxis also based on worldwide assets received by recipients who have their fiscal domicileinfranceatthetimeoftheinheritanceorgiftandforatleastsixofthe tenyearsprecedingit 64. IntheU.S.theestateandgifttaxesarebasedonworldwideassetsifthedomicile ofthedeceasedordonor,whichiswherehelives,forevenabriefperiodoftime, with no definite intention of moving therefrom 65, is in the United States. This concept clearly differs from the concept of residence. Also, the estate tax is imposedonworldwideassetsofeverydecedentwhoisau.s.citizen 66. B Measures taken by the states against tax avoidance throughachangeofresidence Changing residence can be motivated by tax avoidance. Countries tend to struggleagainstthesebehaviorsbyenactingmechanisms 67 thatreducethetax benefits when they are considered undeserved. These anti avoidance mechanismsarenotalwaysexpresslydirectedagainstachangeofresidence:this maycreateproblemsfortheirdetection. 63FransSonneveldt,ApplicationofDeathTaxesintheEmigrationandtheImmigrationCountries, 56 th IFAcongress, FTC,article750ter. 65U.S.TreasuryRegulation (b). 66I.R.C. 2001and DennisWeber,TaxAvoidanceandtheECtreatyFreedoms,p.112,KluwerInternational,

17 For instance, individuals having kept the disposal of houses in France may be subjecttoincometaxonanestimatedbaseofthreetimestheirrentalvalueifitis higherthantheirgrossincomefromfrenchsource.thisprovisionwouldapplyif their residence is in a country that do not have a tax treaty with France and if theyaresubjecttoaneffectivetaxationinthiscountrynothigherthan2/3than thatoffrance 68. Thearticle limitationonbenefit oftheu.s.modeloftaxtreatydescribesmany situations where benefits are considered undeserved, since a treaty shopping may motivate a change of residence. For example, benefits from the tax treaty arelargelyreducedforpubliccompaniesiftheyhaveneithertheirsharestraded on a recognized stock exchanges, nor their primary place of management, locatedinthestateofresidence 69. Conclusion Changingresidencedoesentailmanytypesoftaxconsequencesateverystepof its process. In order to avoid tax traps or uncomfortable situations, tax consequences of any change of residence should be investigated as early as possible. 68FTC,article164C. 69U.S.modelofTaxTreaty,article22 2(c)(i). 17

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