Expatriation Tax – Renouncing a Tax Treaty

16 Pages Posted: 22 Jan 2012 Last revised: 23 Jan 2012

See all articles by Oz Halabi

Oz Halabi

University of Michigan Law School

Date Written: January 1, 2012


Exit Tax (known as expatriation in the U.S.) is a tax rule (and a tool) used by governments to prevent taxpayers from changing their country of domicile solely for tax benefits. A person is usually subject to taxation in his country of domicile on his worldwide income. Since there is a broad variety of tax systems in the world, in which some countries impose higher income tax rates on its residents and others impose lower rates or even no tax on certain classes of income, people might choose to change their country of domicile to a more favorable jurisdiction when they expect a big taxable gain.

The Exit Tax applies to the person’s entire assets appreciation without regard to the fact that some assets might not be sold yet, meaning the taxpayer has not realized the gain. In general, this imposition of tax applies when a country considers a change of residency to be a deemed assets sale - therefore, the government taxes notional transactions. The notional transactions are affective only in the country imposing and applying the Exit Tax. The new country of residency may choose to accept the outcome of the Exit Tax or not at its discretion. If it chooses to accept the Exit Tax imposed by the former country, it may, for example, step up the cost basis of the asset deemed sold for a future gain calculation. Exit Tax is a domestic rule promulgated by the domestic legislator which disregards any bilateral agreement that might be affected by the enactment of such a law.

Tax treaties are agreements negotiated and signed by countries in order to provide countries useful tools to avoid double taxation and prevent tax evasion. After such an agreement is signed, countries should respect and obey its rules. However, countries currently still use the Exit Tax tool although the tool might override a tax treaty they are bound to respect. By using the Exit Tax tool, countries violate not only the tax treaty between them and the new residence country but also treaties signed with third party countries that have no relation to the taxpayer change in residency. These third party countries were not the abandoned or the absorbed country and nonetheless they are affected by the Exit Tax regime of the abandoned country.

Since the Exit Tax is a domestic rule, I believe that the country adopting such a regime should provide assistance to the taxpayer to help them avoid potential double taxation. I believe that neither the responsibility to eliminate the potential double taxation nor that of implementing a remedial procedure should be borne by the new country of residence.

Keywords: Tax Treaties, Exit Tax, Expatriation Tax

Suggested Citation

Halabi, Oz, Expatriation Tax – Renouncing a Tax Treaty (January 1, 2012). Available at SSRN: https://ssrn.com/abstract=1961445 or http://dx.doi.org/10.2139/ssrn.1961445

Oz Halabi (Contact Author)

University of Michigan Law School ( email )

Ann Arbor, MI
United States

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