At the end of the summer of 2022, the Finnish authorities proposed introducing a new tax. This is exit tax, also known as expat tax, for persons who decide to renounce tax resident status and leave the country. The rate of such a tax can reach 30-34% and will concern all movable assets owned by a person directly or indirectly.
Many countries are protecting themselves from capital outflows. Some create attractive conditions, while others introduce protective administrative and tax barriers.
Finland may soon join the club of countries with a tax barrier. Under the new proposal, persons who decide to renounce citizenship or tax residency will have to pay an expat (exit) tax.
The new rule will apply to people who have been tax residents in Finland (that is, lived in the country for more than 183 days per year) for 4 of the last ten years. This tax will be collected as a capital gains tax. Usually, it is 30-34%.
All movable assets under direct or indirect control will be taxed: stocks, bonds, futures, insurance policies, pensions, and virtual currencies. The conditionally good news is that the tax will apply when the total value of assets exceeds EUR 500,000 and when the capital gain is more than EUR 100,000.
The estimated profit will be treated as income for the tax year when the person renounced tax residency. The taxpayer may request a delay until the actual sale of the asset. In this case, the capital gain will be recognized in the tax return for the year the asset was sold.
An asset can be fully exempt from tax if it is not appropriated within eight tax years after the tax residency has been renounced.
Experts suggest that the proposal will meet resistance (at least it provides for the possibility of double taxation), but the topic is being actively discussed. If the law is passed, it will enter into force in early 2023.
What does expat tax mean in practice?
Any country wants money to work for it: these are taxes, turnover, business activity, and new investors. Often, interest in the economy of a particular country is achieved through competition, creating a favorable, safe investment climate.
However, it is not always possible to keep it for decades, and investors can find a new place to store and increase their capital. There can be many reasons for moving: from personal (health, relationship, raising children) to professional (changes in legislation or the business paradigm).
And countries seek to limit the outflow of money, in the moment or in advance.
Exit tax is a way to force you to pay for your earned money on which you have already paid taxes.
Finland is not a unique example, but only the most recent. The country’s authorities feel the changes and seek to protect themselves and complicate the life of persons who earned money, at least temporarily, on its territory.
Who knows if your country will be next? Consider getting money out of the country before the country takes money out of your pocket. How to do it? Read below.
What countries have already introduced exit tax?
Canada collects a departure tax on those who renounce tax residency. This is the capital gains tax that would result if a person sold their assets on the day they renounce residency. The amount is calculated based on the difference in the asset value at the time of arrival in Canada (at the time of purchase) and at the time of departure.
Germany has had experience with a similar tax in the past, introducing it in 1931 to keep the money flowing away during the crisis. Then it was also used to confiscate property after the Nazis came to power. Nowadays, in some cases, company shares can be considered a taxable asset during expatriation.
The Netherlands has signed agreements with Belgium and Portugal that a tax is levied if Dutch residents move to these countries. The main goal is to avoid tax-free cashing out of Dutch pensions.
Norway collects exit tax on unrealized capital gains that appear on the day of departure. The increase amount must exceed NOK 500,000. Tax payment can be deferred without security if the subject resides in another EEA member state and with security if they reside outside the EEA. If taxable profits are not realized within five years, emigration will be deemed not motivated by tax purposes, and the tax will be waived or refunded.
South Africa has introduced controls on the outflow of capital that leaves with people. The first 4 million RAND (about USD 225 thousand) are considered exempt (8 million for the family). Having renounced the resident status in South Africa, a person receives the emigrant status. The emigrant is required to declare all assets worldwide to an authorized dealer of the South African Reserve Bank and obtain a tax certificate from the South African Revenue Service.
Spain introduced a similar tax in 2014. It concerns persons who have shares worth over EUR 4 million, or 1 million if the person owns 25% of the company. Tax must be paid if a person changes their place of residence and renounces tax residency after residing 10 of the last 15 years in Spain.
USA, Myanmar, Eritrea – what do these countries have in common? The fact is that citizens of these states must pay taxes even if they permanently reside abroad. Eritrean citizens pay 2%, while US citizens pay the full rate (you can only ask for a tax exemption for the first USD 100,000). In addition, wealthy US citizens must pay a significant tax when they renounce citizenship. A similar tax can be paid by those who live in the country permanently (8 tax years out of the last 15 years until the status was waived).
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How to protect assets before the state got into my pocket?
The government will find any legal way (after all, it issues laws) to keep capital in the country and get deeper into your pocket. Even if you decide to leave the country, it will figure out how to reduce your wealth.
What can be done to prevent this from happening? You need to act in advance.
One of the best ways to protect assets from greedy governments, tax officials, creditors, ex-spouses, and partners is to use foreign asset protection structures.
In particular, one of the most reliable options is combining a Nevis offshore trust and LLC. It allows to separate property from you and therefore protect it against illegal judgments and encroachments, maintaining a high degree of control over assets.
Why the registration of a Nevis LLC with the addition of a trust is the best and most modern solution for asset protection? In short: Nevis does not recognize judgments of foreign courts; a fee of $100,000 is required to initiate in-country court proceedings; even if you lose (which is unlikely), the creditor will be able to claim only payments from the LLC but not the assets themselves; 1-2 years after the transfer of assets to an LLC or trust, it is no longer possible to return them back.
Learn more about asset protection with our expert assistance by booking a consultation at email@example.com.