Exit Tax and Tax Residency | Fintax

Jose Maria Alfin
October 6, 2023

Analysis of the consequences of the application of exit tax when an individual decides to move his residence to another jurisdiction

Many people are currently thinking about moving the tax residence to a tax friendly country because of the COVID 19 crisis and the regulations approved by many countries to recover from the especially important expense consequence of the pandemia.

Normally this concern starts by making an analysis of the tax residency regulations of the country in question. However, the taxpayer does not think about other especially critical issues such as the so-called exit taxes.

Exit taxes respond to a justified equity reason since capital gains must be taxed in the country where the person was resident when the gain was accrued.

Nevertheless, they were not taxed because the assets did not leave their wealth, and they must be taxed when the person decides to move their residence to another country. However, the treatment of the exit tax can be quite different. The tax administration of the country of origin can demand the liquidation of this unrealized capital gain or demand guarantees. According to European Union rulings (Court of Justice of the European Communities) the obligation to liquidate the tax when a person moves to another European Union country is against the principle of free movement of persons. However, this limitation is only applicable if the taxpayer moves his residence to a country member of the European Union or the European Economic Espace (Switzerland, or Liechtenstein). Over the next few days, I will analyze the treatment of the exit tax in Spain and the favorite destinations of taxpayers who decide to leave their country to seek refuge in other countries more attractive from the tax point of view. Specifically, we will look at the special treatment of certain immigrants in Portugal, Italy, United Kingdom, Malta, and Andorra. We will see the tax system and the consequences of moving to each of these countries. Despite what many politicians have said that these kinds of movements are not legal, that is not true. However, it is necessary to comply with the rules of the game, which is to say, the tax regulations of the country of origin and destination and, if both countries have a Double tax treaty in force, look to the tie breaking rules contained in the Convention to avoid double taxation.

You can find a video summarizing this post on our youtube channel.

Best regards,

Jose Maria ALFIN

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