Offshore and International Company Formation

Domicile and Residence Advantages in The UK and Republic of Ireland

In many instances the subtle and somewhat semantic differences between being merely resident or domiciled and resident can have serious tax planning consequences. Certainly, the concepts are widely employed in international law and can affect both individuals and companies. In respect to the former (particularly in those countries influenced by the United Kingdom's tax system) not being domiciled can prevent one from paying taxes on one's worldwide income whilst often also reducing, or even eliminating, inheritance and capital gains taxes.

Nevertheless, it is very important to note that more and more countries are making physical residence the 'acid test' for taxes relating to the individual, particularly taxes on income. Often relegating the domicile issue to secondary importance. For companies there are often similar benefits, however, they are mostly gained through the applicable double taxation treaties.

Of course, as with everything today, it is often not possible to directly apply the general tax principles of a given country as treaties and/or local statutes sometimes amend these. Further, it is important not to look at a 'favourable' tax jurisdiction in isolation as, in many instances, one's domestic legislation could present obstacles.

For example, in countries such as Denmark (having some of the worlds highest tax rates) there are provisions, which specifically demand that its citizens continue to pay, subject to applicable tax treaties, indigenous taxes for a number of years after establishing foreign residence. In other words, a Danish citizen moving to' tax free' Monaco and satisfying all local requirements could nevertheless still find himself subject to draconian taxes.

The United States is another country which is very reluctant to allow its citizens escape the 'tax net' and, again subject to tax treaty provisions, will generally try to tax expatriates on any income over, at the time of writing, US$76,000.00 in a given tax year. Of course, it is very difficult for countries to enforce the payment of tax from expatriates; however, such a course could create difficulties for those intending to return 'home'. Generally, for citizens of jurisdictions such as Denmark and the United States, it is more advisable to use the fact that neither country has any restrictions on investing abroad in legitimate companies benefiting from favorable treaties.

Terms explained as they generally apply in the UK and Ireland

Both the United Kingdom and Ireland can afford significant advantages to those deemed not to be locally domiciled in that non-domiciled individuals are only taxed on their UK and not worldwide income even if ordinarily resident for many years or even born in either country. In recent years, particularly in the United Kingdom, there have been moves to change the current somewhat anachronistic system but generally it seems to have been concluded that any changes could cause significant harm to the local economies.

In fact, although obviously unfair to fully indigenous people, it has been calculated that any legislative change in the UK would have disastrous consequences on both London house prices and the City as up to 20,000 super-wealthy individuals could migrate with their capital. To date, not even the Labour Government seems willing to take the risk although plainly not egalitarian.

Terms

Domicile

In simple terms one's domicile is generally inherited from one's father no matter where actually born oneself - including the United Kingdom. However, it should be noted that the courts have been willing to ascribe British domicile to a person who's father was not born in the UK if there is clear evidence that the UK is the domicile of choice.

For this reason, many tax planners often recommend that people with foreign connections and permanently resident keep those connections alive maintaining second passports and belonging to appropriate expatriate clubs etc.

Ordinary Residence

This where an individual considers 'home' even it temporarily non-resident. Where an individual is therefore working abroad for a year he or she may not be physically resident in either the UK or Ireland but could still find that certain taxes can still be imposed such as capital gains and perhaps inheritance taxes.

Residence

This is a statement of fact confirming where an individual is legally resident at any given point in time whether or not legally deemed domiciled in the UK or Ireland.

Finally, it should be noted that notwithstanding the above the UK and Ireland have relatively liberal tax laws when their own citizens are working abroad often allowing the legal insertion of an offshore company to prevent unnecessary repatriation of funds upon their return. Non-domiciled individuals generally have little or no UK tax consequences if and when they decide to work and live abroad unless such a move was instigated to avoid UK capital gains taxes on UK generated capital gains.