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Tax Planning (Domicile (Indications of intention to retain a foreign…
Tax Planning
Domicile
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Origin
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Acquired at birth from their mother or, if their parents are married, it is that of their father
Can never change but can be superseded by an individual acquiring a domicile of choice or dependancy
Dependance
Until your client reaches the age of sixteen, the domicile follows that of the person they are legally dependent on
Choice
Where your client has set up 'home' e.g emigrated to, for example, the UK
Crucial first step when investigating a client's domicile is to establish their domicile of origin, the domicile of origin is hard to displace and a client can only have one domicile at any given time
In order to supersede a domicile of origin, the client must acquire a domicile of choice and to do this following conditions may need to be satisfied. The individual (beneficial owner, settlor, beneficiary should):
Sell / transfer / move all the assets that provide a connection to the current domicile to the new domicile
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Be physically present in the country chosen as the new domicile, usually by residing there for at least three years and one day
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Not acquire a domicile of choice in a country before arriving there regardless of having decided to live there for the rest of their life
An individual may 'on paper' have resided in their domicile of choice for many years but may not have sufficient intention to reside there permanently to acquire a domicile of choice
Indications of intention to retain a foreign domicile, i.e that an individual does not intend to stay permanently , include
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A person can abandon a domicile of choice without necessarily acquiring a new domicile of choice, in which case their domicile of origin will revive
A person abandons a domicile of choice by ceasing to reside in that particular jurisdiction and by ceasing to intend to reside there permanently or indefinitely
An individual will not become domiciled in the UK if they intend to leave once a particular contingency occurs, provided the contingency is reasonably certain in character and there is a substantial chance it will happen. It must not be a vague hope or aspiration but a definitive intention, for example 'if I survive my spouse' or 'when I have finished my research' or 'when the political situation in my native land improves' are too vague
In the UK, a client's deemed domicile is where they have lived for the past 17 years out of the last 20 years and where they intend to 'die' or be 'buried'. It is the usual basis for taxation for determining any liability for inheritance tax
Double taxation treaties
It is not unusual for a business or individual who is resident in one country to make a taxable gain (earnings, profits) in another. This person may that they are obliged by domestic laws to pay tax on that gain locally and pay again in the country in which the gain was made
Double taxation therefore is the principle referring to income taxes that are paid twice on the same source of earned income, for example where a person is resident for tax in one jurisdiction but has earned money abroad which is taxed at source
Double taxation also occurs in corporate bodies because corporations are considered separate legal entities from their shareholders. As such, corporations pay taxes on their annual earnings, just as individuals do
When corporations pay out dividends to shareholders, those dividend payments incur IT liabilities for the shareholders who receive them, even though the earnings that provided the cash to pay the dividends were already taxed at the corporate level
The concept of double taxation has prompted significant debate, some argue that taxing dividends received by shareholder is an unfair double taxation income (because it was already taxed at the corporate level) whilst others intend that this tax structure is fair
Proponents of keeping the 'double taxation' pm dividends point out that without taxes on dividends, wealthy individuals could enjoy a good living off the dividends they receive from owning large amounts of common stock, yet pay essentially zero taxes on their personal income
Supporters point out that dividend payments are voluntary actions by companies and as they are not required to have their income 'double taxed' unless they choose to make dividend payments to shareholders
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Double taxation treaties are drawn up to protect the taxing rights and protect against attempts to avoid or evade liability. These treaties will also usually contain provisions for the exchange of information between the taxation authorities of different jurisdictions
UK government statistics indicate that there are more than 2,500 double taxation treaties world-wide and the UK has the largest network of treaties covering over 100 countries. The UK seeks to encourage and maintain an international consensus on cross border economic activity and to promote international trade
Double taxation treaties are agreements between two different jurisdictions which are designed to protect against the risk of double taxation where the same income is taxable in two jurisdictions, provide certainty of treatment for cross-border trade and to prevent tax discrimination against UK business interests abroad
Bilateral double taxation agreements may require that tax be paid in the country of residence and be exempt in the country in which it arises or the country where the gain arises deducts taxation at source and the taxpayer receives a compensating foreign tax credit in the country country of residence to reflect the fact that the tax has already been paid. To do this, the taxpayer must declare themselves (in the foreign country) to be non-resident there
Residence
Used by a majority of tax regimes as a standard framework which can be applied to all chargeable persons and one that is not considered unfair to any minority group
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The UK tax residency rules were abolished in 2013 and replaced by a new statutory residence test following the Finance Act of 2013
The term 'resident for tax purposes' sets down the minimum number of days that a person needs to live in any jurisdiction in order to be classed as a chargeable person and so be liable to pay the taxes of that jurisdiction
There has to be a minimum time frame so that a temporary visitor would not be charged tax if they were to spend their holidays in that jurisdiction
The key taxes to consider, in the context of the products and services provided by offshore service providers are
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What should be taken into account, as part of best practice is an OSP's dealings with their clients to evaluate the basis of determining what the potential liabilities of the client, currently are and what tax planning issues could be. For example
Income tax may apply to residents on their worldwide income, whereas non-residents may only be liable to pay tax on income sourced from that jurisdiction
The rules in the jurisdiction where the individual is resident may allow income, gains and wealth of the 'outsider' (non-domicile) to remain untaxed in that jurisdiction, provided the assets remain 'outside' the jurisdiction
The rules of that jurisdiction where the individual is domiciled may only tax income/gains/wealth located or sourced in that jurisdiction
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Capital Gains Tax: A UK tax on the gain or profit made when an entity sells, gives away or otherwise disposes of an asset
Tax information exchange agreements: An understanding between two countries that they will share information on civil and criminal tax investigations
Tax laws in many jurisdictions, especially in the UK and USA have made some trusts less popular and have disadvantages. For example, in the UK, inheritance tax has been particularly severe on discretionary trusts while income tax relief for charitable trusts has encouraged a growth in their continuous use
The concept of a fiscal connection provides a country/jurisdiction with a 'legitimate' right to tax clients (individuals, trustees, partnerships and/or corporations) on their earned and unearned income/gains/wealth.This right is usually determined by establishing a fiscal connection, based on the tax regime of the jurisdiction
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The liability to pay taxes of any kind is dependent on the tax regime of the jurisdiction in which clients are determined to be resident for tax purposes
Some jurisdictions may only levy income tax, while others, such as the UK charge taxes on income, unearned income, capital gains lifetime gifts (inheritance tax)
The majority of jurisdictions are likely to levy taxes on chargeable persons. A chargeable person is an individual, partnership, trustee or company that is resident for tax purposes
The basis of tax planning is not to evade paying any tax, but to avoid paying more than is necessary. This may seem a reasonable concept from the point of view of the client and the OSP but the tax authorities and even the government in power will have a different perspective
Taxation revenues are raised to fund government spending and pay for public services such as hospitals, education and the road or rail infrastructure. This will also be seen as a valid reason to charge taxes from the point of view of the public
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