Overseas Taxation For Expats

The old saying about “death and taxes” is much overused, but it’s also pretty true.

Wherever you are in the world and whatever the political makeup of the local government, you can be sure that if they agree with the UK on nothing else they WILL agree on the need to tax people. Some cynics would say it is the only thing most governments know how to do.

This is a vast subject of course and of great interest to expats, but it is way beyond the capability of any single article to explore in-depth. There are numerous variables such as what country you’re living in, whether you are working or retired and how much savings you have, all of which would need to be looked at before saying anything specific about your circumstances. If you have any doubts or concerns, or need specific advice, you must contact a taxation expert in your new country who specialises in expat tax.What we can do here is discuss some basic principles that you may find useful.

To start, sadly any views that taxes are something to be paid by ‘the locals’ and not expats is often mistaken.

Employment

Let’s consider for a moment everyone’s favourite subject – income tax.

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The expat who is neither retired nor independently wealthy and therefore has to try and earn a living, will pay income tax of one sort or another (with the exception of one or two special case countries and tax havens – usually reserved for the rich!).

As a general rule overseas, and by European law for EU countries, the basic principle is that you must pay relevant taxes in your country of main residence at the prevailing rates. If you are working as a salaried employee then that should not be a big problem – your employer should in most cases attend to that for you unless you live in a country where taxes are declared and paid each year by the individual.

For self-employed expats, it doesn’t matter where your income comes from, again as a general rule you must declare that income in the country that is your main place of residence and pay tax on it there. So if you’re earning money in the UK, Germany and Spain, but your normal place of residence is Italy, then in principle all your earnings should be declared in Italy and taxes paid at Italian rates.

Traditionally many countries have been very relaxed about this rule but it didn’t take long for them, particularly in the EU, to realise that UK expats in particular were trying to “pick-n-mix” by living in a country but deciding to pay their taxes in another where the tax rates were lower and saying to their local tax authorities “we’ve paid and don’t need to pay more”. This usually involved making a, let’s charitably say, “vague” declaration about their country of primary residence.

The authorities in many countries are now cracking down on this and these loopholes are being closed so keep that in mind.

Be cautious also about local tax offices that casually say you can declare your earnings and pay tax on them in another country. This is usually a throwaway statement made without thought to get rid of a nuisance phone call from a foreigner. It will be of no use to you at all if you’re questioned on this later. ALWAYS check with a tax expert before you start declaring and paying tax in a country other than your normal place of residence!

There are circumstances, usually around border areas or via Internet working, where some income is genuinely earned overseas and taxed in the country it is earned in. This is rarely the case for the average self-employed expat but in those circumstances although you may have to declare the income locally you can also show it to be tax paid at origin. You should not be taxed on it twice.

Remember that even if you have your income obtained through working overseas paid in turn into an overseas bank account, you may still liable to pay tax on it in your country of residence via the ‘total income’ provisions. Penalties for deliberate tax evasion can be severe. It would be a mistake to assume the local authorities “will never find out” or that you’re cleverer than they are. Some expats have found that out the hard way where tax evasion is concerned.

Pensions

The position here is usually simple and without grief for the vast majority.

Those expats retired and receiving UK state or private pensions or other benefits that are taxed at source in the UK or elsewhere, may have to declare this income locally but if you show it is already taxed you should have no worry that it will be taxed again.

If you’re fortunate enough to have investment income from several sources and several countries then the situation can become seriously complicated! Once again as a general rule if your income has been taxed at source you should not have to pay again but you will probably have to declare it.

Be aware that income from another country that is declared to you as being “TAX FREE” in that country may not necessarily count as the same thing in your new country. Tax paid status and tax -free are not the same thing.

Declarations of Income

It’s also not unusual to find expats asking resentful questions about why they have to declare all their income in their new country if it’s already been taxed. The cry of “what’s it got to do with them?” is often heard.

There are a number of reasons why you’ll probably be asked to tell your new country everything that’s going on in your financial world but the information is needed for legitimate purposes e.g. to assess distribution of social benefits.

Clearly nobody wants to see local social services departments handing out Christmas food vouchers to millionaires or struggling folk missing out on benefits they may be entitled to, so it is important that the state has some understanding of an individual’s or family’s total financial position.

Local Residence Taxes

You can be fairly sure that you’ll have to pay the local equivalent of the UK council taxes covering things such as sewage provision, water and local services etc. In some countries you may get reductions or exemptions if you live less than so many days in your home per year, or if your property is uninhabitable, only partly habitable, or under renovation.

It’s worth asking the locals, as many expats are blissfully unaware that they could be entitled to some reductions. Also don’t be afraid to pop into the local town hall – which is often a mine of information.

The Final Curtain

Finally we come to the grim ‘death’ side of the famous saying we started with.

The laws with regard to death duties, taxes and inheritance laws are phenomenally complicated and vary tremendous by country. In some countries, inheritance and tax laws are so contorted and mediaeval that even local people can’t understand them and lawyers are always needed.

As a property owning expat you will probably be subject to those laws in the event of your death. Unless you want your family to disappear under a mountain of paperwork, tax bills and possible legal battles once you’ve gone, you really should consult a solicitor and make out a formal will.

The costs for this are not usually very high and it will mean that the taxman is not in effect pursuing you even once you’ve gone! Do not make the mistake of assuming that these problems after death only affect the rich or landed gentry. In some countries the financial thresholds for state intervention in estates are very low. That modest bungalow overlooking the sea may seem small and a ‘little piece of England’ to you, but the local taxman may be rubbing his hands with glee at the prospect of getting some money out of it once you’ve gone.

It’s a slightly grim subject, but deal with it sooner rather than later via a will and inheritance provisions based upon expert local advice.


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