Your Estate: Which Country Taxes What?
Herrick, David C., Hunter, J. Dave, Journal of Accountancy
Practice expansion: estate and gift taxation across international borders.
While most CPAs recognize the international aspects of income tax compliance, it's not unusual for little or no attention to be paid to the transfer tax implications of being a foreign executive. As commerce becomes more international in scope, executives must increasingly be mobile on a global scale and be prepared for the possibility that they could die while on assignment in the United States. The U.S. estate and gift tax system applies to either citizens or residents, regardless of where their property is located. The system also taxes property transfers of nonresident aliens if that property has a "situs" or is physically located (situated) within the United States.
This article describes the U.S. estate and gift tax concerns international executives face and offers valuable information CPAs can use to advise this growing segment of the corporate population.
CITIZENS AND RESIDENTS
The determination of whether a person is a U.S. citizen is made under federal nationality and immigration laws. Whether someone is a resident for estate and gift tax purposes, however, is determined by domicile. Under Treasury regulations sections 20.0-1 (b)(1) and 25.2501-1 (b) and applicable state law, a person is domiciled where he or she resides with no definite current intention (the crucial factor) of moving. State laws generally look to things such as location of the principal residence and tangible personal property; memberships in civic, social and religious organizations; place of business; voting registration; financial relationships and driver's license. (See "Factors in Establishing a New Domicile," JofA, Dec.95, page 8.) Before applying these domicile tests, however, any tax treaty between the United States and the other country where domicile may exist should be examined since treaty provisions, if a treaty exists, are determinative.
ESTATE AND GIFT TAXATION OF RESIDENT ALIENS
If a noncitizen is found to be a U.S. domiciliary, then the federal estate and gift tax generally applies to transfers of all property, irrespective of its situs. Obviously, this leads to the possibility of double taxation:
* To the extent property has a situs in a particular country, that country also may impose a tax on that property's transfer.
* A foreign country may tax the worldwide transfers--at death or by gift--of both its citizens and its domiciliaries. Thus, if a person is a U.S. citizen but a foreign domiciliary--or vice versa--each country may assert worldwide taxation.
* Two or more countries could determine that a particular person is a domiciliary or citizen.
In such situations, applicable tax treaties must be consulted. Generally, when a country asserts taxation based only on situs, the country asserting a tax based on citizenship or domicile will allow a credit to the extent of the situs-based tax. When both countries assert a worldwide tax, treaties generally grant a credit that effectively apportions the more burdensome tax between countries proportionate to the tax each would assess independently.
For nonresident aliens, the U.S. estate and gift tax rules apply to estates and gifts having situs within the United States. Under Internal Revenue Code section 2501(a)(2), the gift tax does not apply to transfers of intangible personal property, such as royalties and copyrights, even though such property may have U.S. situs.
Otherwise, application of the situs rules depends on the property's character.
Real property. Real property that is located in the United States has U.S. situs. The determination of whether property is real depends on local lax~; which may vary from state to state for items such as condominiums and longterm leases.
Tangible personal property. If such property is physically located in the United States, it generally has U. …