Expatriate Tax Update

This update brings together individual country updates over recent months. As you will appreciate, the wealth of changes across multiple jurisdictions is significant, so to provide easily digestible information, we have kept it to the key developments that are likely to affect your business and international assignees.

Belgium

Protocol treaty Belgium and United Kingdom approved

In June 2009, the UK and Belgium signed a new protocol amending the existing Double Tax Treaty. This protocol has now been ratified by both countries and is likely to enter into force from 1 January 2012. Along with a series of other changes, the new protocol amends the provisions dealing with municipal surcharges and pensions.

Double tax relief

In addition to federal income tax, Belgian residents are also subject to a “municipal tax,” which municipalities may impose on the amount of federal income tax due. This municipal tax varies depending on the commune of residence and generally is between 0% and 10%.

The new protocol foresees the right for Belgium to levy municipal taxes on UK source income earned by a Belgian resident when double tax relief (professional income and pensions) is available under the treaty. This means that for UK income earned as from the moment the amended treaty enters into force, municipal taxes will be due on the tax which would be payable in Belgium if the earned income had been derived from Belgian sources. A similar provision has already been inserted in the treaties Belgium has concluded with the Netherlands, Germany and France.

As a result of the amendment, in the future, Belgian residents who exercise a professional activity in the UK and whose salary or profits are taxable in the UK will suffer a higher Belgian income tax liability.

Pension income

Contrary to the current provision of the treaty, the protocol attributes the right to levy taxes on pensions and similar remunerations to the country of source and no longer to the country of residence.

A transition clause limits the application of this changed provision. Pensions and similar remunerations paid or attributed for the first time before 1 January in the calendar year after the protocol enters into force, will still be taxed in the country of residence based on the old allocation rule. Therefore, pensions paid or attributed for the first time from 1 January 2012 will be subject to the new provision and taxable in the country of source.

European Union

Social Security

New posting guidelines have been issued by the European Administrative Commission for the coordination of Social Security Systems.

When the new European Regulation 883/2004 entered into force on 1 May 2010, a number of practical matters remained to be addressed, resulting in a Practical Guide issued in May 2010 dealing with postings and simultaneous employment in various member states.

Recently an updated version of these posting guidelines has been published, which also covers self-employed activities. A complete and detailed overview of these posting guidelines is beyond the scope of our update. We nevertheless wanted to focus briefly on the following selection of topics.

1. With respect to postings:
   1. Substantial activity: the posting guidelines specify that the company posting employees from one country to another should have substantial activities in the country where that company is established. The purpose is to avoid letterbox companies that are set up and used just to benefit from cheaper social security schemes. A non-exhaustive list of criteria has been added to assess whether a company can be deemed to have substantial activities in the country where it is established.
   2. Prior affiliation: the regulations require that a person posted to another member state is attached to the social security system of the country in which his employer is established, immediately before the start of the posting. It is stated in the guidelines that a period of one month (not necessarily with the same employer) is sufficient to meet this requirement.
   3. Excluded situations: the application of the provisions on posting is excluded in situations where an employee is sent to replace another employee (except in exceptional circumstances); when the employee is sent to an undertaking that places him/her at the disposal of another undertaking (regardless of its location) or when the employee has signed an employment contract with the undertaking to which he is posted.
2. With respect to simultaneous employment:
   1. Simultaneous employment: in the posting guide, the concept of simultaneous employment has been clearly described. The important novelty is that it now also explicitly states that activities of a marginal extent can be disregarded. A marginal activity is an activity accounting for less than 5% of a person’s regular working time or representing less than 5% of the remuneration. Also, the fact that the activity is of a supporting nature, lacks independence, is performed at home or in the service of the main activity can be indicators of a marginal activity.
   2. Substantial activity in home country (country of residence): a number of guidelines and examples have been given to assess whether a person is considered to have a substantial activity (i.e., 25% or more) in his home country. Additional guidance is provided for people employed in transport activities (road, rail, air, water) and in case of changing work schedules.
   3. Concept of registered office or place of business: criteria have been listed to assess where the employer has its registered office or place of business. The correct determination is relevant since the registered office location determines the applicable social security scheme in situations where an employee is working for only one employer in more than one member state while not working substantially in his home country.
3. With respect to procedures:
   1. Competent authority: a person who is involved in a simultaneous employment structure will have to notify the competent authorities in his country of residence. This authority will have to preliminarily determine which member state’s social security legislation is applicable and must inform the designated institutions in each of the member states in which an activity is performed and where the employer’s registered office or place of business is located of its decision; these institutions will have a two month period to react if they disagree with the authority’s view. Requests for a Form A1 should from now on be made in the country of residence, but the actual form will be issued by the country of which the social security legislation applies.

Although the posting guidelines clearly offer some clarification on a number of practical matters, other questions remain unanswered and new questions arise.

One of the new questions is how the different member states will view situations whereby a person is posted from country A to country B but will also spend some of his time still working in country A, or even in a third country C. Bearing in mind the 5% threshold that has been installed to assess whether a certain activity is considered marginal, some countries, including Belgium, seem to take the position that as soon as the activity in country A or C exceeds 5%, the applicable social security scheme should not be determined based on the rules applicable to postings, but based on the rules applicable to simultaneous employment structures.

This can often lead to a different result: if the posting rules are applied in the example above, the social security scheme of country A will apply, regardless of the place of residency of the employee concerned. if however the rules related to simultaneous employment need to be applied, the employee will be subject to the social security scheme of country A when he resides in country A, but to the social security scheme of country B when he moved to country B. At present, the member states have not reached a common agreement on this matter.

Additionally, a number of member states have filed amendments to the substantial activity rule (25%-rule).

This rule states that a person employed by one employer and performing activities in more than one member state shall be subject to the social security scheme of his country of residence when he has a substantial activity in his residence country. If not, he will be subject to the social security scheme of the country where his employer has its registered office.

A proposal has been made to apply this 25% rule also to situations where a person is working for more than one employer in more than one member state. If such an amendment to the current rules were made, split payroll structures whereby a contract with the group entity in the home country is maintained for 10 or 20% of an employee’s time and remuneration while the remainder of the activities are performed under an employment contract with a foreign group entity – relatively popular structures in some parts of continental Europe – will no longer enable these employees to remain under their home country’s social security scheme.

In view of the above, future developments are still expected.

China

Social Security

Historically, foreign nationals assigned to China have not been subject to Chinese social security, but the position has now changed with social security arising effective 1 July 2011.

Netherlands

Amendments to 30%-ruling regime announced

In a letter of 8 September 2011, the State Secretary for Finance announced that changes will be made to the 30%-ruling regime. Details of the changes, which are expected to become effective from 2012, are summarized below.

Employees of foreign companies who are temporarily assigned to the Netherlands can apply for “the 30% ruling regime,” by which 30% of their employment income can be paid tax free to compensate them for specific expatriate costs (referred to as “extraterritorial costs”).

Current conditions

The current conditions for application of the ruling are:

• The taxpayer is hired abroad by an employer resident in the Netherlands: the employer must be an employer which is obliged to withhold wage tax.
• The employee must have specific expertise that is sparsely available in the Dutch domestic labor market. Specific expertise is determined by a combination of the following three conditions:

(i) The employee’s level of education;

(ii) The net level of salary with regard to the employment in the Netherlands corresponding to that in the expatriate’s country of origin;

(iii) The employee’s relevant working experience in respect of the specific employment. If experience is required for an employment, it has, however, been clarified that this condition is deemed to have been satisfied if the expatriate has work experience of at least 2.5 years in a comparable employment.

If condition (iii) is not met, it may still be possible to qualify for the 30% ruling if conditions (i) and (ii) are met.

Duration

The 30% ruling is granted for a period of 120 months, starting from the date of employment in the Netherlands. A reduction to this period applies if an employment or stay in the Netherlands has terminated within a period of 15 years before the start of his new employment and the employee was appointed or residing in the Netherlands 10 years before he was hired.

Proposed changes

• The condition that the employee has specific expertise, which is sparsely available in the domestic labor market, will be deemed to be met if the employee earns a minimum salary.
• The period which is taken into account for a reduction of the duration of a 30%-ruling will be increased from 10 to 25 years.
• Employees living within 150 km from the Dutch border are no longer entitled to the ruling.
• It will become possible to obtain the ruling for young employees which took a Ph.D. in the Netherlands and thereafter obtained a job there.

Further details of the changes will be included in the Tax Plan 2012.

United Kingdom

Consultative document on residence status

UK Statutory Residence Test

Residence for the purposes of UK taxation has never been defined in UK law. Consequently, determining an individual’s UK residence status with a high degree of certainty has become increasingly difficult. This is particularly so in more recent years when HM Revenue & Customs (HMRC) has been persistently seeking to establish individuals’ continuing residence in the UK when those individuals might otherwise have considered that they met all the conditions to be treated as a non-resident in the UK.

There have been a number of high profile court cases held in the UK where agreement as to an individual’s residence status could not be reached; most notably the case of Mr. Robert Gaines-Cooper v HMRC. These cases have centered on the questions of whether or not an individual’s lifestyle has sufficiently changed, what constitutes ‘full time working abroad’ and whether sufficient ties have been severed from the UK in order for them to be treated as a non-resident for UK income tax purposes. These are in addition to the more familiar day counting rules, which are more easily understood and applied.

The feasibility and relative merits of a Statutory Residence Test (SRT) in the UK have been discussed for many years but on 17 June 2011 the UK Government released a consultation document outlining their proposals for an SRT and seeking responses by 9 September 2011.

The Government’s current proposals are for the new SRT rules to come into effect at the start of the 2012/13 UK tax year on 6 April 2012. It is also proposed that the new rules will not apply retrospectively and there will be no transitional rules in relation to earlier years or the current year. It is likely that responses to the consultation document may include a counter-proposal for transitional rules to apply, as in certain cases this may be beneficial and provide greater clarity for taxpayers.

The aim of the SRT is to provide certainty as to an individual’s UK residence status, whether that individual is a UK national who is leaving the UK or a foreign national who is arriving in the UK. While the SRT is expected to vary slightly depending on whether an individual is arriving in the UK or leaving the UK, in either case under the current proposals, they will fall into one of three categories:

Part A – conclusively non-resident
Part B – conclusively resident
Part C – residence dependent on a mixture of connecting factors and day counting

Part A

It is proposed that an individual will be conclusively non-resident if they meet any of the following conditions:

• They were not resident in the UK in all of the previous three tax years and are present in the UK for fewer than 45 days in the current year.
• They were resident in the UK in one or more of the previous three tax years and they are present in the UK for fewer than 10 days in the current year.
• They leave the UK to carry out full-time work abroad (minimum 35 hours per week), provided they are present in the UK for fewer than 90 days in the tax year and no more than 20 days are spent working in the UK in the tax year.

Part B

It is proposed that an individual will be conclusively resident if they meet any of the following conditions:

• They are present in the UK for 183 days or more in a tax year.
• They have only one home and that is in the UK (or they have two or more homes, all of which are in the UK).
• They carry out full-time work in the UK.

Part C

An individual whose residence position is not determined by the tests in either Part A or Part B will have to look to Part C to determine their residence position. The government has identified certain factors that connect individuals to the UK, which they propose are to be taken into account together with the amount of time spent in the UK to decide whether or not they are resident. The connecting factors are:

• The presence of family in the UK
• The availability of accommodation in the UK, which is used during the tax year
• Substantive (but not full-time) work in the UK
• Presence in the UK for more than 90 days in either of the previous two years
• More time spent in the UK than in any other single country

The factors will be applied differently depending on whether an individual is an ‘arriver’ (not resident in all the previous three years) or a ‘leaver’ (resident in one or more of the previous three tax years).

The proposals have been generally positively received and represent a clear step in the right direction. Naturally clarification on certain points or relaxation in various areas would be welcomed. Once the consultation deadline has passed and the government has considered the responses, further announcements are expected.

Whilst many wish a pure day count was to apply in determining residence status going forward, the proposals have been generally positively received and do represent a clear step in the right direction.

Ordinary residence and short-term assignees – proposals for clarity

As mentioned at the outset, the rules relating to ordinary residence, which provide relief for non-UK workdays, have also come under much scrutiny of late and the consultative document includes proposals to clarify these.

The good news is that the government has stated that they wish to retain the concept of overseas workday relief for at least short-term assignees to the UK. It has proposed new rules to include exclusions from being not ordinarily resident and therefore eligible for such overseas workday relief if the individual:

• Is resident in the UK on the basis that their only home is in the UK; or
• Has more than one home and all of their homes are in the UK.

There were two main options proposed:

1. Abolish ordinary residence for all tax purposes except overseas workday relief.
2. Retain ordinary residence for all current tax purposes and create a statutory definition.

With regard to assignees to the UK, the key point is that under both proposals, continuing relief should still be available for the tax year of arrival and potentially up to a further two UK tax years. With the UK marginal tax rate of 50% already being much higher than the rates of tax in other countries, confirmation of the retention of this valuable relief to attract short-term assignees to the UK is most welcome.

Consultative document regarding the taxation of non-domiciled individuals

Various proposals are contained within the consultation document regarding the taxation of non-domiciled individuals. Whilst many of these are likely to have significant impact for longer-term residents or wealthy individuals residing in the UK, we wanted to highlight a few of the key features in so far as they affect employees on short-term assignments to the UK.

Currently many such assignees retain bank accounts outside the UK, into which their employment earnings may be paid. Where an individual is on short-term assignment to the UK and has non-UK workdays, they may be eligible for UK tax relief on such workdays, but in order to do so they must not remit such earnings to the UK. Detailed HMRC guidance on remittances runs to over 300 pages, so the current position is undoubtedly complicated. The consultation document therefore includes:

• Proposals to simplify the existing remittance basis rules – foreign currency bank accounts
• Proposals to replace the current non-statutory practice for dealing with remittances from a mixed fund with legislation

At present, bank accounts denominated in a currency other than sterling often require convoluted calculations to determine the foreign currency gain or loss that may arise on a withdrawal of funds. Fluctuations in exchange rates therefore need to be monitored and calculated, including non-UK/non-sterling accounts into which an assignee’s salary only is paid.

These rules are widely regarded as nonsensical and their proposed demise is warmly welcomed.

Proposals to revise the current statement of practice and enshrine it within legislation are sensible, as are suggested relaxations to remittance rules in situations where automatic scheme transactions are routed through assignees’ bank accounts by their employer. Unfortunately the government’s fixation with remittances remains. A major opportunity to simplify the rules for overseas workday relief and slash the extensive guidance on remittances is most likely being missed.

Summary

In general, both consultative documents represent a positive step forward. Naturally, clarification on certain points or relaxation in various areas would be appreciated. For example:

• In what way do the proposals support the concept on independent taxation for spouses?
• The separate residence factors – presence of family and availability of accommodation – are likely to go hand in hand. This will severely limit return UK visits. How does this sit with modern assignments?
• What happens if someone works non-standard hours or periods?
• How do you address countries where rental of property is the norm? Why should a short-term single assignee have to retain an empty property in their home country to get overseas workday relief?
• The definition of a working day is any day where more than three hours of work is undertaken. How can this really be measured given modern communication methods? Why is 2 hours 59 minutes acceptable but 3 hours 1 minute a potential problem?
• Why should an individual have to spend more time in a single country other than the UK? What if their employment requires them to work across multiple countries?
• Why have remittance rules for overseas workday relief – surely it would be better for individuals to get an expatriate relief which encourages assignees to spend their money in the UK?

Responses to the consultative documents have been submitted by many different parties and all now await the publishing of the summary of such responses, together with the draft legislation for the 2012 Budget.

United States

New IRS Reporting Requirements for Specified Foreign Financial Assets – Draft IRS Form 8938

Beginning with the 2011 tax year (tax years beginning after 18 March 2010), U.S. citizens and residents who have an interest in a “specified foreign financial asset” during the tax year must attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets is greater than US$50,000.

The IRS has recently posted a draft of new Form 8938 Statement of Specified Foreign Financial Assets on its website www.irs.gov/pub/irs-dft/f8938--dft.pdf and this form must now be included with an individual’s annual federal tax return. At the time of this publication the IRS had not yet released the final instructions for the new form.

This new reporting requirement was enacted under the hiring incentives to restore employment act of 2010 (HIRE Act, P.L. 111-147) and, under these rules, a “specified foreign financial asset” generally means:

• Any financial account maintained by a foreign financial institution
• Any stock or security issued by a person other than a U.S. person
• Any financial instrument or contract held for investment that has an issuer or counterparty which is other than a U.S. person
• Any interest in a foreign entity (ex., corporation, partnership, trust, etc.)
• It appears that financial assets includes all rental property, but not raw land or homes for personal use

U.S. citizens and residents will continue to be required to file all other applicable informational tax reporting forms in addition to the new Form 8938, such as the following:

• Foreign Bank report (FBAR) form TDF 90-22.1
• Form 5471 – certain interests in foreign corporations
• Form 8621 – interest in a passive foreign investment company (PFIC)
• Form 3520 – transactions with foreign trusts and receipt of foreign gifts
• Form 8865 – interest in foreign partnerships

In order to comply with the new reporting rules, the IRS has drafted a two-page form with four sections:

Part I: Foreign deposits and custodial accounts – The first section of the form requires information on the account. Accounts are classified as either deposit or custodial.

Part II: Other foreign assets – a description of the asset, the date it was acquired and, if applicable, the date of disposal. An estimated value (US$0-$50,000 to US$150,001-US$200,000) is required for each asset. For assets valued over US$200,000, a specific value is required.

The foreign currency in which the asset is denominated must be provided as well as the foreign currency exchange rate used. The source of the exchange rate must be specified if not from the U.S. Treasury’s Financial Management Service.

If the foreign financial asset is a stock or an interest in a foreign entity, the following information will be required:

• Name of the foreign entity
• Type of entity (i.e., corporation, partnership, trust or estate)
• Indication if the entity is a PFIC
• The address of the foreign entity

It appears that assets that are not stocks or interests in a foreign entity will require the name of the issuer or counterparty; the type of issuer or counterparty (i.e., individual, partnership, corporation, trust or estate); specification as to whether or not the issuer is a U.S. person; and the address of the issuer or counterparty.

Part III: Summary of tax items attributable to specified foreign financial assets – information is required on the amount of interest, dividends, royalties, other income, gains or losses, deductions and credits received during the year. The amount of income reported on the annual tax return forms or schedules including the specific line where such information was entered is also required.

Part IV: Excepted specified foreign financial assets – Interests and assets reported on other informational reporting forms as listed above need not be reported on the new Form 8938. The penalties for failure to comply are severe. An individual could end up paying significant penalties for negligence, or a ‘willful’ failure to comply with these new reporting rules.

The information required will significantly increase the time and amount of data to be collected to file a completed return for U.S. expatriates and residents with foreign financial assets in excess of US$50,000.

So what’s reportable? What’s not? U.S. citizens and residents need to know the answers. MFA will watch for the final form and instructions to be released and advise our clients accordingly. We know the reasons our clients invest offshore, such as reduced portfolio risk, access to investment and business opportunities not available in the United States and to achieve foreign estate planning objectives. We will ensure that our clients stay compliant and know the applicable reporting requirements.