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December 21, 2022 Practice Point

US and UK Pre-Immigration Tax Planning for Brazilians with Expiring NHR Status

Christopher Callahan and Stuart Adams

For years, wealthy Brazilians have taken advantage of Portugal’s highly successful golden visa program. It was a way for them to protect their assets and enjoy the special ties the two countries share. But the program, commonly referred to as the non-habitual resident (NHR) tax regime, ends soon for many participants: NHR status expires after 10 years. Now that Brazil’s president-elect has stated a desire to increase taxes, more Brazilians are interesting in exploring residency options elsewhere. There are two countries with a large Brazilian population and high standards of living: the United States and the United Kingdom.

I. United States

The U.S. provides Brazilians with numerous immigration options. The most popular U.S. immigration visas for wealthy Brazilian citizens are the EB-5, E-2, L1-A, and EB-1(c). Some of these visas require an investment in the U.S., whereas others do not. Some of these options (but not all) may allow a Brazilian citizen to gain permanent resident (Green Card) status in the U.S. Anyone considering U.S. visa status should speak with qualified U.S. immigration counsel to learn more about their options.

To make the most of a residency change, it is also helpful to consult with U.S. tax counsel who specialize in such cross-border matters and conduct some “pre-immigration tax planning.” Discussed below are some common strategies to enable a Brazilian citizen to switch their tax residency from Portugal to the U.S. without incurring significant U.S. taxes.

A. Step-Up Tax Basis in Appreciated Assets

The U.S. income tax rules focus on “taxable appreciation” in assets. Thus, one way to minimize U.S. tax is to eliminate any built-in gain in an asset prior to becoming a U.S. tax resident. Importantly, the U.S. tax rules do not accomplish this automatically when a Brazilian immigrates to the U.S. A Brazilian citizen immigrating to the U.S. would need to proactively enter into transactions to accomplish this goal. One transaction is an actual sale. For example, selling and then reestablishing a position in a publicly traded stock is common. In addition, sales structured for U.S. tax purposes as installment sales may enable a Brazilian to recognize for U.S. tax purposes the entire sale proceeds prior to becoming a U.S. tax resident (and thus avoid any U.S. tax on the sale) while still receiving installment payments for the years of the term contract after settling in the United States. Please note that to obtain this favorable tax treatment taxpayers may need to make certain special elections on their U.S. tax returns and appropriately draft the installment sale agreement to satisfy the IRS.

Many clients may question whether there are options if they own appreciated assets that they do not wish to sell. There may be ways to create constructive sales solely for U.S. tax purposes. Even though nothing is sold prior to the Brazilian citizen becoming a U.S. tax resident, the IRS in certain circumstances treats the assets as if they were sold. If successful, this popular pre-immigration tax planning strategy can work to eliminate appreciation in numerous assets.

Note that the opposite strategy is likely preferable for assets that have depreciated since acquisition. Brazilian citizens can postpone selling such assets until after becoming a U.S. tax resident, so that the built-in loss is realized in the U.S. where it can shelter other U.S. taxable gains.

B. Trust Planning

Another popular pre-immigration strategy involves the formation and funding of certain types of non-U.S. trusts to maintain assets outside the U.S. income and/or estate tax systems. The current U.S. estate tax rate is 40%. Although there are some exemptions for U.S. citizens and domiciliaries, many Brazilian citizens seeking U.S. income tax residency status may not qualify for them. They also may prefer to save their U.S. estate tax exemption amount for future gifts/bequests. As a result, many Brazilians choose to put some of their assets into trusts prior to becoming U.S. residents. If done properly, the benefits are significant: (1) avoidance of U.S. estate tax on the value of those assets, (2) avoidance of U.S. income tax and (3) the ability to retain the assets if an “emergency” occurs. Some clients combine these trust strategies with private placement life insurance or other techniques to create flexibility while eliminating a potential U.S. tax burden.

C. Reorganization of Corporate Assets

Many wealthy Brazilians own active or passive companies, entities, or other corporate structures. These structures are generally designed to minimize the Brazilian tax as they may be exempt from Portuguese tax under the NHR regime. A Brazilian owning an interest in such assets may need to reorganize their corporate structures prior to becoming a U.S. tax resident to make them more efficient for both U.S. and Brazilian tax, with the goal being to minimize the global effective tax—that is, the total tax paid worldwide. Restructuring prior to immigration may permit corporate reorganizations without any U.S. tax. In contrast, Brazilians who wait to restructure after they have moved to the U.S. may find that they cannot achieve the same tax efficiency goals once they have become U.S. tax residents.

II. United Kingdom

The United Kingdom (UK) also provides Brazilians with several immigration options. One of the most popular options in the past was the Tier 1 (Investor) visa (sometimes called the “UK Golden Visa”), which enabled high-net worth individuals and their family members to make a large financial investment in the UK in return for the right to live and eventually gain residency and citizenships. Due to security concerns, the Tier 1 visa system closed to new applicants in February 2022, but it is expected that the Home Office will send plans to Parliament to relaunch the Investor visa. Pending that, other visa options to consider include the Innovator visa, Scale-up visa, Global Talent visa, and Skilled Worker visa.

Brazilians planning to move to the UK, or perhaps to return after a substantial period away, should consider the possible tax consequences before they arrive in order to maximize the chances of reducing or eliminating UK tax. The UK tax code provides a preferential tax regime for those who are residents but considered non-UK domiciled. Although considerable changes have been made to the rules in recent years, it remains an attractive proposition for Brazilians coming to live in the UK.

A. What Is a Non-Domiciled Individual?

In English law, domicile is a distinct concept from residence. A person’s domicile may be thought of as an individual’s jurisdiction of origin, the place in which the person has permanent and enduring family ties, rather than merely the place in which the person happens to be resident, even if that period of residence has lasted for many years. An individual’s domicile of origin is normally (with some exceptions) inherited from the person’s father.

It is relatively difficult to change an individual’s domicile of origin, regardless of where the person chooses to live or how long the person has lived there. The UK courts have generally only recognised a change of domicile where one cuts all ties with the home country (including the sale of investments and homes, cessation of club and professional memberships, etc.) and intends to remain permanently in the country of residence.

B. Deemed Domicile

The favourable non-domiciled regime does not last indefinitely for any one individual. Individuals who have been UK residents for 15 of the previous 20 tax years will be deemed to be domiciled in the UK for all tax purposes. Those 15 years, however, provide a considerable window of opportunity. Indeed, many who are non-domiciled (non-doms) do not intend to stay in the UK beyond 15 years. For those who stay beyond 15 years, there are planning opportunities to minimize tax thereafter.

Finally, becoming a non-UK resident for six complete tax years (four for inheritance tax) will restart the 15-year clock for the deeming of domicile.

C. Remittance Basis for Non-UK Income and Gains

Non-doms who live in the UK may choose, on an annual basis, to be taxed on the remittance basis. The remittance basis of tax restricts the UK tax liability to UK source income and gains, plus any non-UK source income and gains brought into (remitted) to the UK. Thus, any non-UK income and gains retained outside the UK (e.g., in an offshore bank account) will not be taxed. This is a major tax incentive for those with significant sources of income outside the UK or those who (subject to anti-avoidance provisions) can legitimately arrange their affairs such that income is payable outside the UK.

D. Remittance Planning

Many non-doms will wish to bring some non-UK income into the UK to use to fund their lifestyle and/or to purchase property. Non-doms can set up a pre-entry “clean capital” account to contain income and gains arising before becoming a resident in the UK as well as any pre- and post- arrival inheritances. Post commencement of UK residence, no further income and gains should be added to such accounts. Interest should not be added to the capital but credited elsewhere. If such an account is managed properly, the individual will be able to remit money from this account without paying UK tax.

With investment advice, one should consider crystallising assets with gains before becoming resident in the UK. The entire proceeds, including the gain, can then be brought into the UK tax free.

The use of gifts and loans can also be considered in appropriate circumstances to mitigate the UK tax charge on remitting funds to the UK.

In addition, there is now significant relief available to non-doms who remit taxable funds to invest in a UK commercial business. If certain conditions are met, such remittances will not be taxable. This even applies to investments in an individual’s own company.

E. Inheritance Tax Benefits

Non-doms also have the advantage of beneficial treatment for UK inheritance tax (IHT) purposes. Only assets situated in the UK are subject to UK IHT for such individuals. Non-UK assets are excluded. The rate of UK IHT is typically 40%, which means this can be a significant benefit. Once deemed domiciled for IHT purposes, however, individuals are liable for IHT on their worldwide assets.

F. Planning for Individuals Deemed Domicile

Individuals who are nearing their 15th year of UK residence (including part years of residence) should consider settling an overseas trust. Non-UK assets settled upon trust before becoming deemed domiciled will remain outside the UK IHT net indefinitely with careful and timely planning.

In addition, and subject to certain conditions, trusts provide a shelter for overseas income and gains, which will be able to roll up tax free, even after the settlor/grantor has become deemed domiciled.

Christopher Callahan

Fox Rothschild, Miami and New York

Stuart Adams

Mishcon de Reya LLP, London

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