Taxing times working abroad

If you emigrate, go on a working holiday or relocate with your job, you need to know the tax implications, writes FIONA REDDAN

WITH UNEMPLOYMENT expected to hit almost 14 per cent, some 40,000 people will leave Ireland this year, looking for opportunities they can no longer find at home.

This return to the 1980s means that every day hundreds of Irish people, young and old, professionals and labourers, are boarding planes for destinations such as Canada, Australia, and the US. Others are availing of opportunities within their companies to relocate to alternative locations for a number of years, while some professionals are looking to enjoy life in one of the tax havens around the world.

So, if you plan to emigrate, go on an extended working holiday, or are set to relocate with your job for a fixed period of time, what do you need to know about the tax implications of such a move?

Determining your residency status

Once you know your destination, the first thing on your mind – apart from how many days of sunshine you can expect – is how much tax you will have to pay in your new host country. However, the first step should be to determine your tax residency status.

“From a tax perspective, the first question an individual normally asks when considering relocating overseas is if they have to pay foreign tax and, if so, at what rate. What they sometimes forget to focus on is how long they will remain within the Irish tax net, and how the Irish and foreign tax rules work to ensure that they are not taxed twice on the same income,” says Jackie Masterson, a tax partner with Russell Brennan Keane.

According to Francis Farrell, a tax director with PwC, if you spend 183 days in any tax year or 280 in any two consecutive tax years in Ireland, you remain Irish tax resident. If you head off to Australia next week for the first time, then you will be Irish tax resident for 2010.

However, you can elect to apply the “split year relief”, whereby you are only taxed on employment income up until the date that you leave. That means your foreign income is not taxable in Ireland provided you intend not to be Irish tax resident the following year.

According to Masterson, in most cases the application of this relief can lead to a tax refund on the basis of unused personal tax credits. Your foreign income will then be taxed under the rules applying in your new host country.

Something else to be aware of is the existence of double taxation treaties, which may either exempt certain income from Irish or foreign tax, or, where it remains taxable in both countries, allow a credit for the foreign tax paid on the same income so the individual is not taxed twice. Ireland currently has treaties with 56 countries.

How much tax will you pay in your new destination?

If you choose to relocate to a tax haven such as Dubai or the Cayman Islands you won’t pay any tax on your employment income, but you will endure a relatively similar tax burden in most of the other popular destinations.

For example, on a salary of €110,000 you can expect to come away with the full amount in Dubai, about €64,000 in Ireland, €60,500 in Germany and €70,400 in the US (New York).

Protecting your entitlements

If you are unsure as to how long you will be living outside Ireland, or intend staying abroad only for one or two years, you may be concerned about keeping your social welfare entitlements.

If so you can elect to stay within the Irish system providing agreement is reached with the Department of Social and Family Affairs.

Moreover, if you move to a country which has a “reciprocal agreement” with Ireland, such as another EU country, or the US, Canada and, to some extent, Australia and New Zealand, social security treaties allow you to stay in the Irish system while availing of non-cash payments in those countries.

So, if, for example, you are based in Canada and have a baby you can avail of the local public health service while drawing your weekly cash maternity benefit from Ireland.

And when you return to Ireland you can aggregate your social welfare contributions, which, says Farrell, may mean that you end up with higher benefits.

Health insurance

If you have a private health insurance policy in Ireland you will generally receive cover for temporary stays abroad in cases of accidents or unexpected illnesses. However, Farrell points out that this usually only lasts for about six months, so you will need to get additional cover.

If your destination is within the EU, Masterson recommends that you should obtain a European Health Insurance card before you leave as this will entitle you to emergency medical treatment without charge.

And if you want to ensure that you don’t have to incur the waiting periods which insurers impose on lapsed policy holders when you come back, Farrell suggests that you upgrade to an international policy. However, he adds the caveat that these can be very expensive.

Relocation package

If your move abroad is being instigated by your employer you may be in line for a tax-free relocation package.

“If an employer reimburses certain expenses which arise in relation to moving house for work purposes, that payment may be received free of tax as long as it is operated within the host country revenue guidelines,” says Masterson.

According to Farrell, under Irish rules you can receive a package tax-free reimbursed on a receipted basis for most related expenses, such as relocating your belongings, temporary accommodation, and travel for you and your family. Beyond those expenses, he notes that tax treatment can be “hit and miss”.

Property issues

If, like so many other people, you own a home but are floundering in negative equity, it can make your move abroad more difficult. For one thing, unless you have a significant cash sum, which you can inject to pay down the mortgage, it is unlikely you will be able to sell. So, your options are to either leave it unoccupied or rent it while you move abroad.

Doing so raises several tax issues as, according to Farrell, you always have to pay Irish tax on property regardless of how long you have been out of the country. But if you do end up paying additional tax on your rental income in your destination country, you may get a double tax credit for the tax you pay in Ireland.

As a non-resident landlord, your tenant is supposed to deduct the standard rate of tax from the rent bill and pass this onto the Revenue. Another option is to appoint an agent – such as a relative for example – to act on your behalf with the Revenue.

However, you will still be entitled to the various reliefs available. For example, you can get relief for 75 per cent of your mortgage interest payments against your rental income if you are registered with the Private Residential Tenancies Board, and you can also generally get relief for any expenses related to the letting of the property.

If at some point in the future you sell the property while abroad and make a gain on the sale, that gain will be subject to Capital Gains Tax (CGT) in Ireland and may also be subject to foreign tax, depending on the existence of a double taxation treaty.

“If the house is regarded as a ‘principal private residence’ the amount of the taxable gain is reduced based on the percentage of occupation over total ownership,” says Masterson, although she adds that, in certain circumstances where the individual takes up employment abroad, the period of absence does not negatively impact on the percentage tax relief available on sale.

Under this “deemed” period of residence, if you reoccupy your house before selling you can calculate the gain as normal, explains Farrell. So, if you spent four-fifths of your time in the house, four-fifths of the gain will be exempt from CGT. However, he adds that if you go abroad to set up your own business, you won’t qualify for this relief.

If you have rented out your home before selling it, the stamp duty which was due on purchase of the property may be clawed back, says Masterson.

Investments

For the first three years of your sojourn abroad you will still need to pay Irish tax on your investment income as you will be treated as an ordinary resident, although amounts less than €3,810 won’t be liable for tax.

If, however, you live abroad long enough to become non-Irish tax resident you may no longer have to pay Irish tax on your investment income. For example, while living abroad, if you sell non-property related assets you can escape Irish CGT, instead paying tax on the gain in your new home country.

Moreover, you can avoid Deposit Interest Retention Tax (DIRT) by completing a Non-Resident Declaration Form with your bank, says Masterson, although you may still be taxed on this income in your county of residence. In addition, Irish source dividends paid to non-residents and non-ordinary residents who are resident in an EU country or a country with which Ireland has a double taxation agreement may be paid free of withholding tax and may be exempt from Irish income tax provided certain conditions are met.

International commuters

One other category of people which may be on the increase given the current economic environment are those who commute internationally for work.

According to Farrell, for those flying to London every Monday morning, or those crossing into Northern Ireland every day for work, there is a tax relief available aimed at ensuring that Irish residents won’t pay Irish tax on top of the UK tax coming out of their pay every month. Given that the standard rate band is a lot wider in the UK, Farrell says this cross-Border workers’ relief can lead to some savings for commuters.

Coming home

While coming home is not on the agenda for many going abroad for work – at least not in the short term – if you are on a fixed term contract, or simply aim to come home by a certain date, Farrell advises that it can pay to do your homework on when exactly you should time your return as there may be tax advantages available.

For example, if you come back midway through the year you may still be entitled to your full year tax allowances.