Increasingly, many clients are spending time outside their home countries. Maybe it's to get a start-up off the ground. Maybe it's to retire. Some are looking for better security than in their home countries — or just a change of scenery. Whatever the reason, most of these clients will tend to focus on income tax issues.

In response, advisors in their clients' home countries will likely encourage them to do nothing until they change their residence and then restructure how they hold their portfolio to minimize tax. Advisors in their destination country are likely to urge these clients to accelerate income and gains, to defer losses, and to restructure how they hold their portfolios to minimize tax prior to their arrival.

So when do clients make these changes, before or after their departure? Even after they depart, some countries continue to tax residents for a full year. Depending on where clients settle, some continue to tax departing residents for three years. And those surrendering U.S. citizenship or a U.S. green card held for more than seven years will be taxed by the United States on their income and gifts for 10 years. Very few countries have tax treaties with the most common destinations (for example, Switzerland, the United States, the United Kingdom and Monaco) that help avoid double taxation. That creates an “interim” period during which a client might be a taxpayer in two places, making the conventional advice difficult to coordinate.

Another important question: What immigrant status should a client choose in his destination country? There are usually at least a couple of options. In the United States, the choice can have far-reaching fiscal implications. In other places, the choice is less important. Too little attention is paid to this question.

What links can or should clients establish with their new country consistent with changing their fiscal residence? This can determine the rights that individuals (such as a spouse or child) might have to their wealth. It might also affect their inheritance tax status in the new country.

Before deciding to live in another country, clients should focus on the interplay between the purposes for their time in a foreign land and their immigration status, where their family will be, and how their financial assets are invested.

Obviously, everybody's situation is different. Still, it's useful to consider the questions that clients should ask their advisors before moving and to look at the kinds of things advisors might suggest to protect wealth. Here are the client's four key questions:

  1. What should I do before leaving my home country?

  2. What immigration status should I have in my new residence?

  3. How should I structure the ownership of my business and financial investments?

  4. What (if any) changes should I make to how I invest my financial assets?

And here are the answers advisors might give:

  1. What should I do before leaving my home country? The client will be a taxpayer in only one country before he departs. After he departs, he could be a taxpayer in two, for a period of time. For example, the United States will tax a U.S. citizen living abroad indefinitely on his worldwide income. That's an extreme case. More typically, after leaving Brazil, you'd continue to be a Brazilian taxpayer for one full calendar year. If you leave Mexico to take up residence in a country that has a favorable tax regime and no full exchange of information agreement with Mexico (for example, the United Kingdom, Switzerland or Monaco), you will continue to be a Mexican taxpayer for three years.

    It is important therefore to plan before departure for that interim period. That can be tricky, especially if there is no income tax treaty between the client's home country and the destination. And the solutions may differ country to country.

    After that interim period, earnings on some assets (like financial investments) need to be protected only from tax in the place where the client is a taxpayer. Depending on where that is, the earnings on other assets (like operating business investments) might continue to be subject to tax in two countries.

    For people moving from one high-tax country to another, life insurance products and/or trusts often will be sufficient to shelter investment portfolios from tax. There should be little to do before leaving for a tax-favored jurisdiction if it's someplace other than the United States or the United Kingdom (for example, Switzerland or Monaco). During any interim period, your client's existing investment structure should suffice to minimize tax both in his home country and his destination. And after that period, he might simplify his holding structure consistent with the rules in his destination. Earnings from operating business investments should continue to bear the tax burden in the country where the business is located, but the investments should not be subject to tax in the destination unless investment assets are distributed. Financial investments in your client's home country can pose some special problems. If his home country has an income tax treaty with the new country, planning during the interim period might be simpler. Otherwise (and in the long term), he might decide to liquidate his local portfolio and invest in other markets.

    If he plans to move to the United States or the United Kingdom, he should consider changing his ownership structure and/or his investment policies before departing. More on that later.

  2. What immigration status should the client have in his new residence? The choice of status has important fiscal consequences in the United States. In the high-tax countries that seek to attract immigrants (for example, the United Kingdom and Spain), there are a few choices, but the choice itself has no fiscal consequences: how the client frames his application does. In most other high-tax jurisdictions, the immigration status is inconsequential. In tax-favored destinations, there is typically a special status designed precisely for fiscal purposes. Therefore, if the client plans to move to the United States or the United Kingdom, he should take care in framing his immigration status.

    If he owns an operating business, the United States offers two choices: the “immigrant investor” visa and the “intra-company transfer,” or L-1 visa. The immigrant investor visa requires that he invest U.S. $1 million in a U.S. business that will create 10 or more full-time jobs for non-family members. This could easily be a subsidiary of his operating business. The intra-company transfer visa is available if he is an executive of his operating business and he plans to work for the business in the United States. From a pure income tax perspective, both types of visas seem equivalent. But from an overall tax point of view, they couldn't be more different.

    The immigrant investor visa gives the client a “conditional green card” for two years that should mature to a standard green card in the third year. That will very likely mean that if the client should die or make transfers (especially between spouses) while he is in the United States, there could be significant tax due. It also might create a presumption that U.S. law will govern his marriage and the rights of his heirs to his wealth. This might not be consistent with his wishes.

    In contrast, the intra-company transfer visa gains the client admission to the United States for one year, after which the visa can be extended for another two years. Thereafter, the visa is subject to review every two years for additional three-year extensions. The main advantage of the L-1 visa is that, so long as the client intends to return home, it's unlikely that his worldwide assets will be subject to U.S. gift and estate tax. Even if he were to die in the United States, he could avoid U.S. tax on even his U.S. investments if properly structured.

    The choice of status is not particularly important in the United Kingdom. He can enter the United Kingdom without a visa and later can apply for clearance to remain. There are three main U.K. categories to choose from: investor, overseas firm representative, and business owner. These categories are more flexible in many senses than the U.S. categories.

    For example, the investor category permits a person with a net worth of U.S. $4 million to reside in the United Kingdom after making an investment of U.S. $1.5 million in any publicly traded company. And the business owner need only invest U.S. $400,000 and create two full-time jobs for U.K. persons, even if they are related to the business owner.

    During the first four years, the client should be sure to avoid significant absences. After the client has resided in the new country for four years, he can apply for “indefinite leave to remain.” If he can show means of support, leave should be granted. After that, the requirements of the three categories no longer apply and extended absences will not affect the client's residence status.

    The key issue in the United Kingdom is to be sure that the client's application to remain and the manner of his life is consistent with his stay being temporary. Temporary doesn't necessarily mean short-term, but just that he doesn't intend to make the United Kingdom his permanent home.

    Therefore, if he plans to move to either the United States or the United Kingdom, he should be sure to maintain sufficient contacts with his home country, so that he continues to treat it as his permanent home, although he's not a taxpayer there. For example, he should keep his driver's license current, maintain a home and keep valuables there, and list his country of residence on all official forms (for example, wills and immigration forms.) Still, he should keep the number of days he spends there and the amount of income he derives from his home country to a minimum. All of this will help assure that his migration minimizes global taxes.

  3. How should I structure the ownership of my business and financial investments? Business and financial assets have different tax characteristics and therefore ownership should be structured differently in order to minimize global tax.

    Dividends from and gains on the sale of business assets always are subject to the taxing regimes where the business is located. Depending on where the client is a taxpayer, those dividends and gains might also be subject to tax. The goal of structuring therefore is to minimize tax in the place where he becomes a taxpayer, recognizing that he will be a foreign investor in the place where the business is located.

    When moving from the United States, if the client plans to move any place other than the United Kingdom, creating a non-tax haven holding company (such as a Delaware limited liability company (LLC) or a Dutch CV) should be sufficient to minimize global tax. Dividends from and gains on the sale of the business should be exempt from tax where he is a taxpayer. And using a non-tax haven holding company should minimize tax in the country where the business is located. Depending on his situation, he might defer making these changes. If the client plans to move to the United States or United Kingdom, structuring the ownership of business assets is a bit trickier. The key issues are: the kind of activity the business is engaged in, whether he controls the dividend policy, and if a sale is possible while he is living abroad.

    For example, if the client is moving to the United States, it's important to evaluate whether the business earns mostly passive income, as the United States defines it. Structuring might be ineffective to minimize U.S. tax on those businesses and probably he'll have to make some trade-offs to minimize global tax. Many operating businesses will not earn mostly passive income, but there are some unusual exceptions. A real estate business, for example, is defined by the United States to have mostly passive income.

    Assuming that the business earns mostly active business income, the client should consider adding a local holding company to own the shares of the operating business before his departure, then make that special U.S. tax election over the holding company effective the day before he arrives in the United States. If properly structured, this should not create any tax in the place where the business is located and should protect all the historic appreciation of the company from U.S. tax on a sale. To the extent the client controls the dividend policy of the business, he should defer paying dividends until it is necessary to minimize U.S. taxes.

    If he's moving to the United Kingdom, however, you should be able to add the operating business to the trust you created and effectively defer any tax in the United Kingdom on dividends and any gains from a sale of the business or redemption of shares. As regards dividend policy, it might be useful if the trust were to receive outsized dividends and to have the trust hold those in its separate income account. This way the proceeds of any future sale of the company (or a redemption of shares) could be remitted to the client from the trust more tax efficiently.

    If the client's global financial assets are currently in a holding structure that defers tax in his home country, the client might want to modify the holding structure so that it continues to defer his home country tax during the “interim” period yet will be tax-efficient in his new country.

    For example, if he is migrating to the United Kingdom, he should create an appropriately drafted revocable trust (or modify an existing one) to own his holding structure. Doing so should not trigger tax in his home country because he reserves the right to amend and revoke the trust. During the interim period, his investment structure should continue to defer tax in his home country without a tax liability in the United Kingdom. He should make special arrangements, however, for any part of that portfolio that he might need to cover his living expenses during the interim period. Distributions to him from the trust for that purpose might not be the most tax-efficient, depending on the nature of the holding structure.

    If the client is migrating to the United States, he might consider making a special U.S. tax election over his holding structure, effective the day before he arrives in the United States. During the interim period, the holding structure should continue to defer tax in his home country. And any historic gains in his global portfolio should not be subject to U.S. tax if realized after his arrival. The holding structure also should avoid any U.S. tax if the client were to die while in the United States. But it will not help minimize U.S. income tax while he is living there. Instead, before he departs, he should make sure the portfolio is invested for U.S. tax efficiency.

    If the client is moving to any place other than the United States or the United Kingdom, it's usually simpler to structure the ownership of the portfolio so that the income and gains will be tax-deferred. For example, if he moves to Switzerland and negotiates a forfeit, he could continue using whatever investment structure he's currently using and restructure it after any interim period, because the Swiss will not tax the non-Swiss income of a taxpayer who has negotiated a forfeit. If he moves to Monaco, he's in luck, because the non-Monegasque income of a taxpayer is not subject to tax.

  4. What (if any) changes should I make to how I invest my financial assets? If moving to a high-tax jurisdiction, it will be important to make some changes. There should be little need to change the way a client invests his financial assets if his destination is any place other than the United States or the United Kingdom. Otherwise, he should consider making some changes to how he invests his financial assets in order to minimize tax in his new location.

In the United States, your client should make changes to his portfolio before arriving on U.S. soil. Consider selling any offshore mutual funds and investing in comparable U.S. tax-efficient vehicles before his arrival. He should exchange offshore alternative investment vehicles for the U.S. equivalent and, depending on the tax efficiency, consider liquidating the investment. Cash and fixed income assets should be switched to those that will minimize tax under the rules of the state in the United States, where he'll be a taxpayer.

In the United Kingdom, the changes should be less radical. Because it's so important to keep the trust's capital and income separate, there are some investments about which a client should take care. For example, offshore mutual funds, zero-coupon bonds, structured notes and some hedge funds can pose problems if the client ever should need to remit the proceeds to the United Kingdom. Review the portfolio (and the client's future spending needs) to be sure that he is investing in assets that allow him to keep a strict separation of capital/capital gains and income.

Planning a move from one country to another requires more than consulting lawyers in each place. The interaction of the two systems is often more important than the rules in either place.

JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.