Expatriation Tax
The expatriation or exit tax involves persons who cease to be tax residents of a country. This tax often takes the form of a capital gain imposition attributable to the residency period of the country in question. Often, expatriation or emigration tax is assessed upon change of domicile or habitual residence in a country. The United States, which is in the minority of countries to tax its overseas citizens, applies this exit tax upon renunciation of U.S. citizenship.
The American Jobs Creation Act of 2004 amended Section 877 to include any citizen with a net worth of $2 million or any average income tax liability of $139,000 for the five previous years. Another new law passed in 2008 automatically assumes that a rejection of citizenship was done for tax avoidance reasons. The taxpayer’s net gain is computed as if that person had liquidated his assets on the day prior to his expatriation.
The tax is based on the difference between fair market value (theoretical selling price) and the taxpayer’s cost basis (actual purchase price). Any net gain in excess of $600,000 is taxed as income in that calendar year. The tax applies whether or not an actual sale occurs, and even if notional gains arose on assets in the taxpayer’s home country before immigration to the U.S.
The new law also applies to deferred compensation such as 401(a) and 403(b) plans, pensions, stock options, etc. The taxpayer must carefully analyze the value of these assets, privately held securities or options to acquire the same. Where the taxpayer has waived the right to a lower withholding rate, then the covered expatriate is charged a 30% withholding tax on his deferred compensation. If the covered expatriate does not meet the aforementioned criteria, the deferred compensation is taxed as income based upon the present value of the deferred compensation.
The Mentor Group is very experienced in private business valuations in and outside the U.S., as well as valuing options, warrants and financial derivatives. Some of critical aspects of these hypothetical sales are as follows:
- How is future value impacted by the departure of the key owner?
- Is there a legitimate buyer(s) for this business, especially if it is a personal service firm?
- How does the date of expatriation affect the known value at that time? Does the valuator consider unknown but potential and near term, significant contracts (or loss thereof), regulatory events, etc.?
- Are there value issues in estimating or establishing the cost basis, particularly if the business was operating in another country when brought to the U.S.?
- If the business still resides in a foreign country, to what extent can the appraiser assess revenue projections, cost efficiencies, cost of capital, etc.?