Some of you might remember that during the French presidential campaign both Sarkozy and Hollande were proposing some sort of expat tax – Sarkozy wanted to tax those who “left for tax reasons”, that ever flexible political catch phrase, whilst Hollande wanted to implement a 75% income tax rate on earnings above 1 million Euros – A sure way to send many wealthy French expats flying towards London and Switzerland.
Anyway, I came across an article about the recent parliamentarian elections that have taken place and about how, for the first time, French expats will be represented by 11 deputies representing overseas constitutencies. Here is an article from the Guardian which has an interesting graphic of how they divided the electoral regions up and how many of the 2 million French expats live in each.
I also came across the following article (article in German, see the google translate link) from the Swiss press today which was talking about Claudine Schmid, a resident of Zürich and now also a French deputy. Switzerland isn’t just under pressure from the US – There are 200,000 French citizens resident in Switzerland, many of whom are now very nervous about what Hollande has in store for them. Will they all be seen as living there for “tax reasons”?
Neither Hollande nor Sarkozy talked about going after normal people, just the “tax dodgers”. The problem here of course is would they differentiate between the two and what is to stop them just tacking a flat tax onto the French nationality itself, as Sarkozy called for? Sarkozy already passed a tax apparently which forces French expats to pay at least 19% in capital gains tax on French investments – The instructions for how this would work have yet to be published but it is on the books.
Pay attention to what happens here, because this could be the “Pandora’s Box” moment for letting taxation based on citizenship out of the box- We just don’t realise it yet. The wildcard here will be whether or not this new expat representation will actually be able to fight such measures. What do you think will happen?
I’m starting to see how absurd the world has become. Countries allocate the entire land of the world among them with artificial borders, define classes of people according to their birth or genetic origin in these borders, and invent a multitude of rules and papers that govern what people from each class can do, where and when they can stay, and how they can maybe change their class. Thinking outside the box, do these classes really mean anything? Of course peoples have different languages, races, religions, cultures, traditions and ideas, but they form mostly a continuum and don’t have clearly defined boundaries, and in the end each person is different. Citizenship is a gross approximation of the first-level classification of cultures of the world, an arbitrary definition for practical purposes only, and it is given way too much importance.
When you consider that passports didn’t become widespread until WWI — and then only for “security” purposes to ensure all who came and left were properly tagged and not enemies (but after the war passports were kept on until today) — it becomes crystal clear that passports, and by extension citizenship, really only serve the State. They need to tag you for their purposes, not yours.
Well, I personally do wonder if the nation states of today will even exist in a hundred years’ time. It will probably be just a collection of massive regional blocs like the EU, AU, Latin American Union, North American Union (Sorry Canadians!), ASEAN, etc. Or maybe we’ll change from being subjects of a country or state to that of some mega corporation that ends up owning everything 🙂
I hear a lot that French citizens are depositing their money here in Belgium. Is this to avoid the French wealth tax or benefit from our lack of capital gains taxes or what? I also read that some people are making use of some treaty that we have with Hong Kong to move money around somehow and avoid a withholding tax, but the details were a bit over my head.
For those who don’t know, Belgium is probably unusual in comparison with most countries because we have one of the highest rates of personal income tax in the world, but this is balanced by the lack of a capital gains tax, wealth tax, gift tax (usually) and the possibility of having no inheritance (estate) tax levied. Basically, our tax system is the polar opposite of the way that the US one works!
The Belgian tax system is so different from the US system that, under the US citizenship-based tax system it must be virtually impossible for a US citizen to survive living in Belgium. Most of the things you have listed as not being taxed by Belgium are subject to tax by the US, so the American there cannot help but come out on the short end of the stick. He has a surplus of foreign tax credits to offset the US tax on earned income, but these cannot be used to offset the US tax on the non-earned income such as capital gains. Prior to the Tax Reform Act of 1976 it was possible to use foreign tax credits on earned income to offset the US tax on such things as captial gains. But that is no longer true.
This is what the US legislators that write tax laws totally fail to understand. Or if they do understand they don’t really care. The primary objective of citizenship based taxation is to punish US citizens for living in a country with a tax system that is different than that of the US “so Americans will stay home where they belong.” Proof of that is that 91% of US citizens living abroad generate zero tax revenue for the US Treasury because the taxes they pay to the governments where they live, together with the FEIE, totally offset their US tax obligation But they have spend from a few to several thousand dollars for competent and costly tax assistance to produce the mountains of paperwork to substiante they owe no US tax.
The other 9% live in countries with vastly different tax systems and produce all the tax revenue paid by overseas Americans.
With all due respect to the highly qualified accountants who prepare tax returns for overseas Americans, US citizenship-based taxation is primarily a job creator for them.
@Don Pomodoro, Interesting. I also read that Sweden is a similar case, very high income tax rates but no wealth, gift or inheritance taxes (recently abolished). Still, the income tax rates of about 50% in countries like Belgium and Sweden seem too high to me, because it means that I would pay in taxes the same as my net income. The US has been increasing its exemption on gift and inheritance taxes at the federal level, and in many states they were totally abolished. It’s still very uncertain what Congress and the rest of the states will do about it in the near future.
My opinion is that taxes should be only on transactions, like income or consumption, but not on assets, like wealth, gifts and inheritance, because these were already taxed before. Capital gains are more complicated because they are not really income, sometimes the gains simply reflect inflation, while other times they are the result of random speculation, and they may be losses instead of gains.
*To add to what Shadow Raider has commented, the fact that the US dollar has depereciated with respect to the currencies of most other nations and the fact that US taxes are levied on US dollar equivalent values, is most unfair.
As a result of this loss of value of the US dollar capital gains are levied based on gains that are often ficticious. An asset purchased and sold in a foreign currency at a loss, can well result in a fitcicious gain when translated into US dollars. So the US citizen is in reality being taxed on the devaluation of the US dollar rather than a genuine capital gain.
There is nothing that is even remotely just or fair in this.
@Don, you said:
“I hear a lot that French citizens are depositing their money here in Belgium. Is this to avoid the French wealth tax or benefit from our lack of capital gains taxes or what?“
Probably all of the above. The Eduardo Savarin of France is Johnny Hallyday.
You’ve hit the nail on the head really: Anyone living in Belgium for an extended period of time will truly get the worst of both systems combined: very high personal income tax, high inheritance tax, capital gains tax, gift tax, etc. Being taxed at a rate well above that of the US heavily lifelong and then having your estate taxed once more seems truly unfair. The worst part though is having to keep track of taxes that don’t even exist here and always having to have them in the back of your head.
Its actually worse than that if you are in the highest tax bracket – I think that you could potentially end up paying a top rate of 50% + 6-7% in regional and local taxes, so 57% overall rate. Yes this is really high, and yes there is a lot of waste and questions to be asked about where all of it goes, but in general the services here are very good, especially healthcare. I also find our tax system fairer as you mention in that it only taxes income and consumption really. I personally find the entire concept of an inheritance tax to be despicable and an unnessary burden for one’s heirs to be saddled with.
Can’t believe that I forgot about this – I remember when Hallyday was trying to claim Belgian nationality as some sort of protest against the French government a few years back. He was eventually denied I think because he’s never lived here as I understand and didn’t meet the residency requirements. His tax arrangements sound very contrived – holdings in Luxembourg and Liberia, combined with residence in Switzerland only for tax reasons?
I hear that he lives in Los Angeles for part of each year. It would be unintentially very funny if he somehow goes over the 183 day 3 year “US person” check and gets a second tax bill from the IRS after all of that careful planning! This might even be combined with his Swiss accounts being dropped for becoming a “US person”…Won’t happen of course though.
*@Don Podormo: Just to clarify one item: The US does not have an inheritence tax but it does have an estate tax. They are similar, but really significantly different.
An Inheritence tax subjects the heir to a tax on what he inheritites, whereas an estate tax subject the estate to a tax before any of it is distributed to the heirs.
Inheritences are generally tax free to the inheritor under US tax law.
*@Roger – Do you know if the US taxes inheritances given to non-citizens/former citizens?
*@SadCSN, as far as I can determine, inheritances from estates of US persons received by non-resident foreign citizens are not taxed by the IRS.
This link summarizes how US source income to foreign citizens who are not US residents is taxed. It does not mention inheritences that I can find.
But I am not an expert on US tax law, so perhaps someone else who is. can provide an authorative answer to this question.
*As Roger said, it makes no difference who the recipient of a US estate is. It’s the estate that is taxed, not the recipient. This year there is a 5 million dollar threshold or exemption. This is due to go down to 1 million with the expiration of the ‘Bush tax cuts”
For example , your rich uncle has an estate of 6 million and leaves it to his poor Canadian ex- pat niece. His executor remits 350,000 to the IRS (35% of 1 million) and the balance to you. Next year barring a change in the rules, he remits 2.75 million to the IRS (55% of 5 million) and the balance to you.
These numbers are high because there are graduated rates and expenses. The rules for 2013 will probably be relaxed.
*@Roger and @Chester 12- Thank you so much for that info. Much appreciated!
While we’re on the subject of estate taxes, perhaps many non resident, non US persons do not realize that holding US ( domestic HQ) stocks in their non US brokerage accounts could subject their estates to US estate taxes.
For U.S. estate tax purposes, non-residents are taxed on the fair market value of their U.S.“situs” property. U.S. situs property is basically property situated in the U.S. and includes, for example: real property and tangible personal property situated in the U.S. at death, U.S. securities, including those held in a brokerage account in Canada or outside Canada, certain U.S. debt obligations, U.S. mutual funds including money market funds, interests in certain trusts including RRSPs, RRIFs, RESPs or TFSAs if the assets held by that trust have a U.S. situs
(reproduced form BDO.ca)
For non-US persons there is a $60,000 exemption. Canadians have a enhanced exemption covered by Article XXIX-B(2) of the Canada-US tax treaty.
I’m not sure if US ETFs and ADRs are consider as situs property.
Petros has stated a number of times that a person should dispose of their US investments. I couldn’t agree with him more. I got rid of my modest amount of US stocks last Fall.