In the last 10 days, I have met with no less than four people whose companies are relocating them to the United States. These people are being asked to relocate for periods of up to three years, with the possibility that the assignment could be extended further. There are a number of issues that arise when an individual relocates to, and potentially becomes a tax resident of, the United States. Below are nine issues that should be addressed in such a situation. Each issue is discussed in brief, and a U.S. tax advisor should be consulted if any of these situations apply.
- Make sure your bank will still work with you.
Many banks now have policies, for non-tax reasons, that they will not work with people resident in the United States. Before you move to the United States, make sure that your bank will continue to work with you while you are in the United States. If not, consider moving the bank account to an institution that will work with you while in the United States, or alternatively, consider having an external asset manager, who is registered with the U.S. Securities and Exchange Commission (SEC) as a registered investment advisor, be your contact person. Otherwise, the financial institution will close the account.
- Does your portfolio hold investment funds?
The United States has very strict rules as to the taxation of offshore investment funds, such as Luxembourg SICAVs. These can be subject to disastrous tax consequences if held by a U.S. tax resident. Prior to moving to the United States, individuals should review their portfolio to determine whether or not they have offshore investment funds. While it would be simplest for such individuals not to hold offshore investment funds while resident in the United States, if they do, they should consult with their U.S. tax advisor and investment manager to evaluate whether or not such investments should be held while in the United States. In many cases, there are possibilities to address holding such investments, and these should be discussed with the relevant advisors.
- Do you have an interest in a trust?
The United States has adverse U.S. tax rules for U.S. tax residents who settle or benefit from certain non-U.S. trusts. These rules can apply to trusts settled by an executive before the executive relocates to the United States. Further, these rules can apply to distributions the executive receives from a trust settled by other persons. Individuals relocating to the United States should review existing trust arrangements prior to moving to the United States. In addition, they should review any plans of family members to establish trusts from which the individual might benefit. Individuals relocating to the United States should consult with their U.S. tax advisors to discuss planning to mitigate the adverse rules applicable for U.S. tax residents with interests in non-U.S. trusts.
- Stepping up basis in assets.
Unlike many countries, the United States does not give an individual a new acquisition value in his or her currently held assets when he or she moves to the United States. Instead, the assets retain their original acquisition value. This can lead to high capital gains taxes if the assets are sold while resident in the United States. Thus, it becomes imperative that prior to a move to the United States one steps up the basis in his or her assets to the current fair market value. Oftentimes this can be as simple as completing a sale and a repurchase at fair market value of the assets within an appropriate timeframe, ensuring that there is adequate distance between the two. Thus if the assets are subsequently sold, the price at the repurchase will be used as the cost basis for U.S. tax purposes, reducing the potential capital gains tax.
- No holding companies.
It is quite common for people around the world to hold their assets through a holding company. Oftentimes these have significant tax benefits, depending on the tax jurisdiction at issue. In some jurisdictions, however, such structures do not provide a tax benefit and, moreover, can actually be extremely tax disadvantageous. In the United States, there is a set of rules called the Controlled Foreign Corporation (CFC) rules that can cause income to be taxed at significantly higher rates than it would otherwise be if the income is earned by a non-U.S. company owned by a U.S. resident. While a detailed description of the CFC rules is beyond the scope of this article, a U.S. tax advisor should be consulted if any non-U.S. holding companies are owned.
- Evaluate the issue of assets held through community of heirs.
Many people in Switzerland hold assets that they inherited through what is known as “community of heirs.” There are many misconceptions regarding the tax treatment of the community of heirs. Some people take the view that these are taxed as estates. Other times people take the view that they are taxed as simple partnerships. The law in this area is very unclear and can lead to undesirable results if no additional planning is done.
- The importance of timing.
In comedy and tax planning, timing is everything. For an executive relocating to the United States, timing is critical. The timing of an individual’s U.S. residency start date impacts when the individual first becomes subject to U.S. tax as a resident. Timing the recognition of income and losses (and coordinating that timing with the residency start date) can yield significant tax savings. Many executives can control some aspects of when they recognize income or losses; for example, by having dividends paid from controlled companies, accelerating collections, or recognition of bonuses and services income. Due to the importance of timing, individuals are well advised to consult with their U.S. tax advisors early when considering a relocation.
- Planning for a potential long term move to the United States.
While people are always excited about a short term relocation to the United States, it is common for some people to end up staying in the United States indefinitely. While income tax for U.S. purposes is an important concern, the U.S. estate tax, which can be as high as 40 percent of the taxable estate, can be extremely devastating. Planning can be done in advance of a move to the United States to help mitigate the impact of the estate tax, if there is even a remote chance that the individual might stay in the United States long term.
- Do not keep money undeclared.
Even if one is going to the United States for only a short period of time, one should under no circumstances fail to report income or assets to the United States. The United States taxes its residents on a worldwide basis, unlike most other nations, and income earned outside of the United States must be reported and subject to tax. Foreign income and assets are also subject to special reporting requirements under U.S. law and the United States is extremely aggressive in this area. A U.S. tax advisor should be consulted on the tax and reporting obligations that might apply to an individual relocating to the United States, who will likely have significant income and assets in his or her home country.
Author: Marnin Michaels, Partner, Baker & McKenzie Zurich, Switzerland
www.bakermckenzie.com