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Exit Tax Explained: Tax Liability on International Relocation

CA Ajay goel , Last updated: 30 September 2023  
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Exit taxes are levied by governments on individuals, businesses, or assets when they leave a country. These taxes aim to capture unrealized capital gains or accrued wealth before the taxpayer's departure.

Examining the historical evolution of exit taxes, this section delves into the origins of exit taxes, tracing their development over time. It highlights significant milestones, legal precedents, and major policy shifts. This section explores the rationale and underlying objectives of implementing exit taxes. It discusses the primary reasons governments resort to exit taxes and the desired outcomes they aim to achieve.

Example: John is a wealthy individual who has been a resident of Country A for the past 20 years. He has accumulated significant wealth and investments during his time in the country. However, John has decided to move to Country B for personal reasons and intends to terminate his tax residency in Country A.

Exit Tax Explained: Tax Liability on International Relocation

In Country A, there is an exit tax regime in place that imposes a tax on unrealized capital gains when individuals leave the country. The provisions and rules of the exit tax in Country A include the following:

Determining Tax Residence

Country A determines tax residency based on a set of criteria, such as physical presence, duration of stay, and other factors. Once John meets the conditions for tax residency termination, he will be subject to the exit tax.

Covered Tax Base

The exit tax in Country A applies to certain categories of assets, such as real estate, securities, business interests, and other valuable assets. These assets are deemed to be subject to unrealized capital gains taxation upon exit.

 

Valuation of Assets

Before leaving Country A, John needs to determine the fair market value of his assets subject to the exit tax. Valuation methods prescribed by the tax authorities must be followed to ascertain the accurate value of the assets.

Calculating Exit Tax Liability

Once the values of the assets are determined, the tax authorities apply the applicable tax rate to the unrealized capital gains. The tax rate may vary depending on the asset class and the duration of ownership. The tax liability is calculated based on the deemed gain at the time of exit.

Payment and Reporting Requirements

John is required to report the details of the assets subject to the exit tax to the tax authorities. He must also fulfill the payment obligations within the specified timeframe, which is usually shortly after leaving the country.

Tax Treaties and International Considerations

If Country A has tax treaties with Country B, there may be provisions in place to avoid double taxation or mitigate the impact of exit taxes. John should explore the treaty provisions and seek professional advice to ensure he optimizes his tax position.

In John's case, let's assume he owns a property, stocks, and a business in Country A. Before leaving, he consults with tax advisors to determine the fair market values of these assets. The total unrealized capital gains on these assets amount to $2 million.

Country A's exit tax rate for the assets owned by John is set at 20%. Therefore, his exit tax liability will be $400,000 (20% of $2 million). John will need to pay this amount to the tax authorities in Country A within the specified timeframe after his departure. It's important to note that the specific provisions, rates, and calculations can vary significantly between countries.

 

There have been several high-profile exit tax cases in recent years. These cases involve individuals or corporations who faced significant tax liabilities when leaving a country. Here are a few notable examples:

  • Eduardo Saverin - Co-founder of Facebook: Eduardo Saverin, one of the co-founders of Facebook, renounced his U.S. citizenship in 2012 before the company went public. This move was widely perceived as an attempt to reduce his tax obligations. As a result, Saverin became subject to the U.S. expatriation tax, which imposes a tax on the unrealized capital gains of individuals who renounce their citizenship. While the exact amount of his exit tax liability is undisclosed, it was reported to be substantial. This case sparked public debate and led to discussions on tax avoidance strategies.
  • Gerard Depardieu - French Actor: Gerard Depardieu, a renowned French actor, publicly renounced his French citizenship in 2013 and obtained Russian citizenship. He took this step in response to proposed tax increases by the French government. By leaving France, Depardieu faced a potential exit tax liability on his substantial assets and income. Although the exact amount of his exit tax liability is unknown, his case drew significant attention and highlighted the impact of high tax rates on the mobility of wealthy individuals.

In India, the concept of exit tax is not commonly referred to as such. However, there are certain tax provisions and requirements that apply when an individual or business ceases to be a resident of India.

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Published by

CA Ajay goel
(Job at Subex Limited (Bangalore))
Category Income Tax   Report

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