If you are strongly considering applying for citizenship or a second passport in any country, you should perform due diligence. Carelessness or mere oversight can lead to unnecessary expenses.
One area that you should keenly explore is the subject of taxation. Taxation does not only impact your application for a Caribbean citizenship program. Beyond that, it can adversely affect your finances over the short and long term.
Immigration goes beyond merely changing your residence. Before moving to another country or securing second citizenship, you need to be aware of the laws and regulations pertaining to taxation, both in your home country and the country you are moving into.
Specifically, you have to consult professionals about the subject of residency for immigration and taxation. Countries differ in their definitions of these. In short, you can end up paying taxes for two countries instead of one.
Take the United States, for example. Unless you formally relinquish your US citizenship, you will still be taxed by authorities even if you live outside the country, albeit there are some laws in place to help mitigate the double taxation for US citizens living abroad.
So what, exactly, should you be aware of regarding your planned immigration and its impact on taxation?
Typically, many countries base tax residency on a few factors. These include residence (deemed or ordinary), domicile, and citizenship.
Apart from this, countries differ in their definition of tax residency, depending on the purpose. Some countries define tax residency based on either residence or citizenship for income tax. However, when levying a tax for estate or gifts, the same countries may use domicile or citizenship.
If you become a citizen of Antigua and Barbuda, St. Kitts and Nevis or Grenada in the Caribbean, you are not considered a resident for tax purposes by their governments unless you physically reside in the country for a minimum of 180 days per year.
Dual tax residency
Whatever your purpose may be for securing dual citizenship, you should avoid double taxation. Apart from the associated expenses, dual taxation can translate to other hassles, like reporting information to the authorities.
This goes back to your home country. Countries like the United States consider their citizens tax residents. This means that no matter where you live, you still have to pay taxes unless you relinquish your citizenship. Simply moving to another country does not sever your obligation to your original country.
To avoid dual tax residency, you might need to sever it by satisfying specific requirements.
Take advantage of tax treaties
Apart from severing your tax residency, another way to avoid dual taxation you might want to explore is the tax treaty tiebreaker.
Under such a treaty, you pay taxes to only one country. The terms may differ among countries. In the case of Canada and Portugal, for example, you are considered a tax resident of the country where you have closer economic and personal relations.
If the personal or economic relations are unclear or if you do not have a permanent home in Canada or Portugal, your tax residency will be based on the country where you have a habitual abode, or the country where you are considered a national.
Costs and impact
Severing your tax residency from a country is not without its costs or impact on your finances. As such, you should be aware of these before finalizing your decision to immigrate.
In the past, all you had to do was to submit paperwork and pay a specific amount to sever your tax residency. Today, things have become a bit more complicated in many countries.
In some places, you will need to pay for departure taxes, which are based on the gains you accrued as a citizen of any of these countries. In other countries, you will need to pay an exit tax, which is based on the income you gained while abroad.
In both types of taxes, there is a considerable possibility of double taxation unless such is covered in an existing tax treaty between the two countries. Such an agreement protects individuals from double taxation with your country of origin levying taxes only on capital gains of an asset and the second country collecting taxes on gains on the same asset once you have become a tax resident.
On foreign assets
If you choose to retain a few assets in your home country, you have to know well ahead of time how your new country will treat those assets.
In some instances, these assets are treated as foreign assets and may be subject to taxation. Worse, some of these countries have strict rules regarding the reporting of these assets, and failure to comply with these rules can result in penalties.
Explore the rules and regulations relevant to your own situation or consult professionals who are well-versed in such matters.
Cover all your bases
Citizenship and residency by investment programs benefit both individuals and the countries that run such programs. For individuals, these programs provide them with a host of opportunities. And for the nations, these can mean critical capital needed to fund their initiatives.
However, before you make the life-altering decision of securing second citizenship or even renouncing your original one, it is vital to explore all the regulations governing your choice as well as the potential repercussions of these.
Arm yourself with the right knowledge, and do not hesitate to reach out to trusted experts when it comes to rules that may seem murky to you.