An expatriation tax or emigration tax is a tax on persons who cease to be tax resident in a country. This often takes the form of a capital gains tax against unrealised gain attributable to the period in which the taxpayer was a tax resident of the country in question. In most cases, expatriation tax is assessed upon change of domicile or habitual residence; in the United States, which is one of the few countries to tax its overseas citizens, the tax is applied upon renunciation of citizenship instead.
Canada imposes a "departure tax" on those who cease to be tax resident in Canada. The departure tax is a tax on the capital gains which would have arisen if the emigrant had sold assets after leaving Canada ("deemed disposition"), subject to exceptions. However, in Canada, unlike the U.S., 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.
In December 1931, the Reich Flight Tax was implemented as part of a larger emergency decree with the goal of stemming capital flight during the unstable Interbellum period. After the Nazis seized power in 1933, the Nazi government largely used the tax to confiscate assets from persecuted people (mostly Jews) who sought to flee the Third Reich. This tax was officially repealed in 1953.
The Netherlands has treaties with Belgium and Portugal permitting them to charge emigration tax against Dutch people who move to those countries. The aim is to impose a tax on persons who move abroad and cash out on the tax-free appreciation of their Dutch pensions. However, in 2009, the Supreme Court of the Netherlands ruled that the Tax and Customs Administration could not impose an emigration tax on a Dutch man who moved to France in 2001.
The current South African exit tax regime works in concert with South Africa's foreign exchange controls. A person who is a resident of South Africa as defined under the exchange control laws (someone who is resident or domiciled in South Africa) may change status to become an emigrant, if the person is leaving the Common Monetary Area (South Africa, Namibia, Swaziland, and Lesotho) to take up permanent residence in another country. A single emigrant may expatriate up to R4 million of assets without exit charge, while a family is entitled to twice that amount. The emigrant must declare all worldwide assets to an Authorised Dealer of the South African Reserve Bank, and obtain a tax clearance certificate from the South African Revenue Service.
Unlike most countries, the United States taxes its citizens on worldwide income, whether or not they are resident in the United States. To deter tax avoidance by abandonment of citizenship, the United States imposes an expatriation tax on those who give up U.S. citizenship. The tax also applies to green-card holders who abandon U.S. residency after having held a green card for at least 8 of the last 15 tax years.
The first law to authorize taxation of former citizens was passed in 1966; it created Internal Revenue Code Section 877, which allowed the U.S.-source income of former citizens to be taxed for up to 10 years following the date of their loss of citizenship. Section 877 was first amended in 1996, at a time when the issue of renunciation of U.S. citizenship for tax purposes was receiving a great deal of public attention; the same attention resulted in the passage of the Reed Amendment, which attempted to prevent former U.S. citizens who renounced citizenship to avoid taxation from obtaining visas, but which was never enforced. The American Jobs Creation act of 2004 amended Section 877 again. Under the new law, any individual who had a net worth of $2 million or an average income tax liability of $139,000 for the five previous years who renounces his or her citizenship is automatically assumed to have done so for tax avoidance reasons and is subject to additional taxes. Furthermore, with certain exceptions covered expatriates who spend at least 31 days in the United States in any year during the 10-year period following expatriation were subject to US taxation as if they were U.S. citizens or resident aliens.
A bill entitled Tax Collection Responsibility Act of 2007 was introduced during the 110th session of congress in July 2007 by Charles B. Rangel. It foresaw, among others, a revision of the taxation of former American citizens whose citizenship officially ends, In particular, all property of an expatriate up to certain exceptions would be treated as having been sold on the day before the expatriation for its fair market value with any gain exceeding $600,000 classified as taxable income. This bill failed to advance to the Senate.
The HEART Act, passed on 17 June 2008, created the new Section 877A, which imposed a substantially different expatriation tax from that of the earlier Section 877. The new expatriation tax law, effective for calendar year 2009, defines "covered expatriates" as expatriates who have a net worth of $2 million, or 5 year average income tax liability exceeding $139,000, except for certain dual citizens by birth and certain minors as defined in Section 877A(g)(1)(B) who are not considered "covered expatriates", provided they certify under penalties of perjury that they have complied with all federal tax obligations for the preceding five tax years and provided they file Form 8854. Under the new expatriation tax law, "covered expatriates" are treated as if they had liquidated all of their assets on the date prior to their expatriation. Under this provision, the taxpayer's net gain is computed as if he or she had actually liquidated their assets. Net gain is the difference between the fair market value (theoretical selling price) and the taxpayer's cost basis (actual purchase price). Once net gain is calculated, any net gain greater than $600,000 will be taxed as income in that calendar year. The tax applies whether or not an actual sale is made by the taxpayer, and whether or not the notional gains arise on assets in the taxpayer's home country acquired before immigration to the United States. It is irrelevant that the gains may have partly arisen before the taxpayer moved to the U.S.
The new tax law also applies to deferred compensation (401(a), 403(b) plans, pension plans, stock options, etc.) of the expatriate. Traditional or regular IRAs are defined as specific tax deferred accounts rather than deferred compensation items. If the payer of the deferred compensation is a US citizen and the taxpayer expatriating has waived the right to a lower withholding rate[clarification needed], then the covered expatriate is charged a 30% withholding tax on their deferred compensation. If the covered expatriate does not meet the aforementioned criteria then the deferred compensation is taxed (as income) based on the present value of the deferred compensation.
- Canada Revenue Agency: Emigrants and Income Tax
- Canada Revenue Agency: Newcomers to Canada
- "Dutch expats exempted from emigration tax". Radio Netherlands Worldwide. 2009-06-20. Retrieved 2012-05-27.
- "Tax and exchange control implications of emigration". ENSight. August 2010. Retrieved 2012-05-27.
- Liu, Renee S. (1998). "The Expatriate Exclusion Clause: An Inappropriate Response to Relinquishing Citizenship for Tax Avoidance Purposes". Georgetown Immigration Law Journal 12 (689).
- Pfeifer, Michael G. (2009-09-28). "United States: The Final State of Expatriation? Omissions and Technical Issues Under the HEART Act". Mondaq.com. Retrieved 2012-05-12.
- "IRS: Expatriation Tax". Retrieved 2009-11-25.
- "US Inbound: New section 877A significantly alters expatriation tax regime". Retrieved 2010-03-20.
- Instructions to form 8854
- Notice 2009-85, Section 2(A)