Imitation is the sincerest form of flattery. And with governments in almost every country desperately seeking new revenues, it was only a matter of time before they begin imitating the U.S. example of imposing tax on the worldwide income of it citizens.
The United States is one of the very few countries that impose income tax on the worldwide income of its citizens, no matter where they live. Even if you haven’t lived in the United States in decades, you must pay tax on your worldwide income as if you never left. Individuals born overseas with at least one U.S. parent, and who never set foot in the United States, must file U.S. tax returns if the U.S. parent registered their birth with a U.S. consulate or embassy. Beneficiaries of a deceased U.S. citizen living abroad must prepare a U.S. estate tax return and possibly pay estate tax, even if they’re non-U.S. citizens who never lived in the United States.
Now, the EU nation of Hungary has started to enforce a provision in its tax law that imposes tax on its non-resident citizens as if they were resident in Hungary. While income tax rates is relatively low (16%-20.3%), Hungary's inheritance tax is a whopping 40%, although the first $90,000 of a resident's estate is exempt from inheritance tax for property inherited by close relatives.
Those persons considered taxable as residents and thereby subject to income tax and inheritance tax are:
- Individuals present in Hungary for at least 183 days in a calendar year,
- Foreign nationals holding a residency permit
- Stateless persons living in Hungary
- Individuals maintaining their usual domestic residence in Hungary;
- Individuals whose "center of vital interests" is Hungary if they have no permanent residence or in Hungary
- Individuals domiciled in Hungary if their center of vital interests is unknown. (Your domicile is your permanent home—the country to which you eventually intend to return).
- Hungarian citizens.
Non-residents must pay income tax only on their income earned in Hungary.
The requirement that non-resident Hungarian citizens pay tax on their worldwide income isn't new. But until earlier this year, tax authorities made no serious effort to collect tax from Hungarian citizens living in other countries. That changed with the Hungarian tax administration began sending reminders to its citizens notifying them of this obligation.
Unlike the United States, Hungary doesn't reserve the right to tax Hungarian citizens who live in a country that has signed a tax treaty with Hungary. Those individuals are taxed according to the terms of the treaty. For instance, Hungarian citizens residing in the United States need only pay U.S. tax on income generated outside Hungary. See the full list of Hungarian tax treaties here and treaty updates here.
Hungarian citizens living in a country that doesn't have a tax treaty with Hungary must continue to pay Hungarian income tax. They can credit 90% of the foreign taxes paid toward their Hungarian tax obligations, although this credit can be no more than the Hungarian tax that would be due on the foreign income.
Fortunately, Hungary doesn't require that Hungarian citizens renounce citizenship to end these obligations. They merely need to obtain a second passport and also avoid having their domicile or "regular place of abode" in Hungary. In contrast, the only way that U.S. citizens can end lifetime servitude to the IRS is to give up their U.S. citizenship and passport.
Other countries are considering following the U.S. and Hungarian examples. For instance, in the recently-concluded presidential campaign in France, incumbent Nicolas Sarkozy proposed that French citizens who relocate abroad be forced to pay any tax savings to the French government. Those who failed to do so would forfeit their French citizenship and passport.
One thing is for sure: as the global financial crisis depends, governments will beg, borrow, or steal revenue from any source possible, including their non-resident citizens. That makes acquiring a second nationality and passport important not only for U.S. citizens, but for citizens of any other country. You never know when the country issuing your passport will demand you pay tax merely for the privilege of using it, even if you reside thousands of miles away. A second nationality and passport gives you the option to give up your current citizenship and passport, if that's the only way to escape the clutches of the issuing government.
Copyright © 2012 by Mark Nestmann
P.S. Sign up now for my upcoming conference Oct. 26-27, “Escape From America—The Second Passport, Expatriation, and International Tax Planning Seminar.” We’ll be covering the economic citizenship programs of both St. Kitts & Dominica, and featured speakers include the Honorable Roosevelt Skerrit, the Prime Minister of Dominica. Learn more about this conference here. Click here for the list of speakers and here for the conference agenda.