Everything you need to know about Exit Taxes.
So, you’ve decided to embark on that adventure and leave as soon as things go (kind of) back to normal? Exciting!
You’re going to travel the world working remotely or perhaps you’ve even decided to move to a new country that’s going to be your new home base.
You were faced with the decision of whether you’d also officially – hence, on paper – leave your home country and decided to go for it.
You’ve terminated your rental contract, sold your car, and packed your bags. You made sure your insurances cover you wherever you go and it’s exciting to finally be at an airport again, immersing yourself into that great energy of new experiences waiting to be lived.
Your adventure kicks off and although you miss your family and friends back home, your home country disappears a bit to the background of your new adventurous life.
But wait… Until you receive that message.
Because apparently, there’s just a minor detail you still have to arrange with the Tax Authorities in your home country: the Exit Tax.
Wait, what? That’s right, there are countries that make you pay a tax when you leave. And with leaving I mean: when you’re officially giving up your tax residency in your home country.
WHAT IS AN EXIT TAX?
To put it very shortly: an Exit Tax is a capital gains tax as if you would have sold all your assets when you left your home country and then had to report your gain from it.
In other words: it’s usually applied to unrealized capital gains.
WHICH COUNTRIES IMPOSE AN EXIT TAX?
There’s quite a lot of countries that impose Exit Taxes, and there’s a good bunch of countries on the list where plenty of digital nomads come from.
Most people aren’t even aware of this and simply pack their bags and leave… So, you’re not alone if this is you.
Here’s a non-complete list:
The United States, Canada, Germany, Australia, Spain and South Africa: they all impose an Exit Tax upon leaving the country. In specific cases, so do France and Denmark.
Canada imposes a departure tax on which the capital gain is generally based on the difference between the market value on the date of arrival in Canada (or later acquisition) and the market value on the date of departure.
Spain applies an Exit Tax only to high-net-worth individuals that have shares worth more than 4 million euros or one million if they hold a stake of 25% of a single business and then transfer their residence outside of Spain.
France applies an Exit Tax if you have been a resident of France for at least six years out of the previous ten prior to the transfer abroad and if you own stocks or shares whose value is equal to or greater than 800,000 EUR or represents at least 50% of a company’s corporate profits.
Germany applies in certain situations shares in corporations as taxable income when permanently moving abroad.
When you stop being an Australian tax resident, the Australian Taxation Office may deem that you have disposed of all the assets you own. This means you may be liable to pay capital gains tax on those disposals.
Disclaimer: Please keep in mind that the purpose of this blog post is to simply shed some light on Exit Taxes so that people become aware of them. This blog post won’t go into all the requirements, triggers, exemptions of each and every country out there.
THE UNITED STATES
#A special case
The United States is a little different from the other countries on the list.
It’s one of the only two countries worldwide (like Eritrea) that still obliges a USA citizen to pay taxes in the States, even when they have officially immigrated, hence do no longer have residency in their patrial country.
So, when does that Exit Tax apply to American citizens?
To avoid having to pay taxes in the United States for the rest of their lives, many American expats decide to give up their American citizenship at some point.
Quite a decision in itself, as you can imagine. An often unexpected surprise then awaits them in the form of the Exit Tax.
#Green-card holders: faced with the Exit Tax too
But even non-American citizens can be impacted by this Exit Tax, as it also applies to lawful permanent residents or green-card holders who are considered long-term residents.
Anyone who has been a lawful permanent resident in at least eight out of the fifteen taxable years before officially leaving the country is considered a long-term resident.
HOW MUCH DO I NEED TO PAY?
As explained before, the Exit Tax is calculated over the capital gain you would have earned on selling all your assets before leaving. These net capital gains can be taxed as high as 23.8%
Let’s use an example to put things into practice.
Imagine: you’re a Canadian-born citizen and you purchased a Condo in Toronto in your twenties for $100,000 CAD. In a few months, before your thirtieth birthday, you’ve decided to follow your heart, take a leap of faith and move to Italy.
However, to not burn all the bridges behind you in case your new dolce vita life turns out a little less dolce than expected, you decide to not sell your condo but instead rent it out.
You could sell it of course, but you were so glad getting on that property ladder that you rather don’t. So, you’re leaving Canada, but keeping your condo.
To keep this example simple, let’s assume that other than your condo, you don’t have assets in Canada.
The condo is now worth $200,000 CAD. If you became a non-resident of Canada, you would be deemed to have sold the condo and would need to report a taxable capital gain of $50,000CAD (1/2 of the $100,000 gain) on your income tax return and pay Exit Tax of up to $25,000 (depending on which state you’re in and which progressive tax rate applies) even though you haven’t sold the property.
I know this sounds crazy. That’s why tax planning is key. You may actually be able to elect to defer this tax (with limits), post-trigger, or elect to trigger losses on an exempted property to reduce the Exit Tax.
In some cases, you may also elect to carry back a subsequent loss or undo a triggered gain (if you decide to move back to Canada).
WHAT TO DO IF YOU’RE PLANNING TO OFFICIALLY GIVE UP RESIDENCY IN YOUR HOME COUNTRY?
First of all, get informed. Find out if your home country imposes an Exit Tax, and get familiar with all specifics. You can do your own research online of course, but also reach out to us.
We’re more than happy to help you with your country’s tax specifics. The next thing to do is to look at your own situation. What’s your net worth when leaving your home country?
IS THE EXIT TAX A REASON TO PREVENT YOURSELF FROM GOING ABROAD?
No way, if you’d ask us! Surely, any taxes you didn’t expect come as an unpleasant surprise and could possibly create difficulties if you were not prepared for paying them.
However, the fact you’re reading this article now already got you past that stage in which you could be unexpectedly surprised and that’s amazing.
Inform yourself on the Exit Tax of your home country and look at your personal situation to understand what amount you’d have to pay.
If your home country does impose an Exit Tax then I recommend preparing a list of all of your assets and the estimated fair market values and the cost of each. You may want to get your accountant involved to make estimates and valuations of shares or other assets.
Make sure you don’t forget all other administrative notifications that you need to do before leaving such as notifying your bank and the tax office that you are planning to leave and when you will become a non-tax resident.
It might also pay off to review any current corporate structure and to look at steps on how to minimize the Exit Tax and any ongoing filing requirements as a non-tax resident.
Moving abroad or starting to work remotely will bring upon some costs, and just look at this as an extra cost. However, you’re going to do great things.
You’re going to earn your money in a new way, and you might even earn much more than you did in your home country. We’re always here to help, so please reach out to us and we are more than happy to assist you on your journey.
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Check out our current services. We are here to guide you and help you navigate through the complex world of International Taxes and Business Structures.
We hope you have enjoyed this article. If you have any further questions please leave us a message below and we’ll get back to you as soon as we can.
NOTICE: The content of this article is not to be considered as a legal opinion or tax advice. Wanderers Wealth does not hold itself out as a legal or tax advisor. If you want to receive a legal opinion or tax advice on the matter in this article please contact us directly and we will refer you to a legal practitioner.