Handling taxes when having multiple domiciles

Your children are enrolled at school and university in the UK. You and your partner parent your youngest daughter in London while you consider moving your tech start up to Berlin. In order to manage your teams, you would have to be present at least three to four days per week. Is this a smart set up? And should you make Germany your first or second domicile?

Having a second domicile has recently become increasingly important. International business activities paired with the guarantee of asset protection and promising investments draw an ever-growing number of individuals abroad. A million questions arise, out of which, besides your personal circumstances, the tax implications may be one of the most important aspects to consider.

London or Berlin? What will be your future ‘centre of vital interests’?

Into the blue
Berlin sounds appealing? In a first step we recommend you to analyse your 

  • business environment
  • costs of moving and life maintenance (including taxes and social insurances) 
  • frequency of travel between the two countries in question
  • required minimum presence in the desired second domicile

Additional, common stumbling blocks are the

  • second country’s migration policy – Have factors such as for example the political influence of the European Union on residence permits, passports and investments been considered? 
  • sanctions policies of foreign states – primarily the US and the EU
  • future tax residence – Where will your future ’centre of vital interests’ lie? 
  • tax implications of cross-border financed projects – How will you e.g. handle a situation in which family members finance international projects from the first domicile and others have moved? 

Study these aspects well in advance to be more flexible to respond to upcoming challenges (just to be clear: they will arise at some point!).

Active or passive business status?
Once the basics are sorted, you should proceed by understanding whether you are active or passive in doing business. An active business status is characterised by your active involvement in a business activity (being that, for example, employment or owning a company). If your business status is passive, then you do not have the right to be active in business life. The most common example of a passive business status is retirement. 
Once you know your business status, you have several options to choose from:

Active business status

  • business immigration – immigrate your business via an investment in your second domicile (example: Switzerland investment programs) 
  • apply for a green, blue card etc. –  then apply or set up your own company in the second domicile and employ yourself 
  • obtain citizenship & residency by investment – then apply or open up your own business

Passive business status

  • move to a country with lump-sum taxation –  Popular tax regime programs, which allow you to relocate and stay in another country. Nevertheless, they restrict you to be active in business life.

Obtaining legal advice
Having determined your desired jurisdiction and actual business status, the next step consists of checking the second domicile’s legal framework - both from a migration and taxation point of view. 
Especially tax legislation can reveal unexpected surprises you want to avoid. Amongst many other factors, you should try to understand whether your desired second domicile has a Double Tax Treaty (DTT) agreement with the country of the first domicile and if not, how does it eliminate double taxation in its national legislation?

Back to the roots
When the situation in the country of your envisioned second domicile it clear, you should shift your attention to your current country of residence. Take Russia as an example. If you lose your status as a tax resident of the Russian Federation, your income derived from sources within the Russian Federation will be taxed at a rate of 30%. Furthermore, you will lose your right to several income tax deductions. 
In the worst case, you may find yourself subject to a tax conflict: two countries consider you as a taxpayer. After all, the ‘centre of vital interests’ can become the decisive factor in determining the taxation of your worldwide income. 

Time-consuming but worth it
Only careful planning combined with the choice of a reliable jurisdiction will ensure the predictability of financial costs in the implementation of such an important life project such as obtaining a second domicile.
 

About the author

Alexander Yudovich, LL.M., is Head of Russian & CIS Desk at the law firm Rechtsanwälte Lennert Partners AG (Liechtenstein).

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