3.1.1.1.1 Residence

Unlike income taxation where the residence of an individual is assessed by certain factors,1 sometimes in combination with a day-count test,2 the concept of residence for inheritance and gift tax purposes is a more complex issue. In the course of my research, I identified five categories of states concerning the application of the concept of residence for inheritance and gift tax purposes.

The first category includes states that rely on the income tax concept of residence to determine tax residence for inheritance and gift tax purposes.3 This concept focuses on the physical presence of a person in a state, which is assessed by several, easily observable factors. A day-count rule can also apply in this respect.

The second category refers to states that rely on the civil law concept of residence,4^,5 which evaluates several factual circumstances (the “corpus”) and the intention of the person to stay within their territory (the “animus”).6 The civil law concept of residence or, at least, the consideration of a person’s intention to live in a state for determining tax residence for inheritance or estate tax purposes seems to be more suitable for death tax purposes. Rust noted in that regard that “[a]s all transfers of wealth from one person to another – like bequest, legacy, statutory share and donation [heir, inheritance, timing of death] – are terms used in the civil code, it seems natural to give to these terms the same meaning as in the civil code. It is then only a small step to interpret the term ‘residence’ as well in accordance with the meaning given by the civil code.”7 Inheritance and gift taxes are wealth taxes that are not periodically levied like income tax. In the context of income tax, the attachment of a person to a state needs to be determined every year, and therefore, a factual interpretation coupled with a day-count rule may suffice. However, the residence concept for inheritance and gift tax purposes should reflect, according to Rust, a lifelong or at least a long-lasting connection between the person and state and should ideally consider how much wealth was accrued during that time.8

Notwithstanding the above, I observe that, if for inheritance and gift tax purposes one state applies the income tax concept of residence and another state applies the civil law concept, the cross-border inheritance and/or donation may be taxed by both states given that they could regard the deceased as a resident of their territory – the first by applying a day-count rule, and the latter by assessing his corpus and animus.

The third category refers to states that resort to a more factual interpretation9 to determine the tax residence of a person for inheritance and gift tax purposes. Consequently, they consider that a person is a tax resident in their territory if, for example, he has family relations and/or the centre of his business relations there.

The fourth category includes states where residence for inheritance and gift tax purposes is defined as the possession of housing space.10 Therefore, it can be established very easily, by the performance of certain transactions connected to immovable property located in the state, for instance, by renting a property and using it with a certain frequency. It follows that double taxation may arise if one state applies the civil law concept of residence and the other state defines residence as the mere possession of housing space for inheritance or estate tax purposes. For example, a person, who moves to a state for work (with the intention of staying there twice per week) and dies there a few days after his arrival, may be considered resident for inheritance or estate tax purposes there and, thus, his worldwide property will be subject to inheritance tax or estate tax by that state. However, the state of his “actual” residence may also levy an inheritance tax or an estate tax on his worldwide property as he intended to live there with his family. The same applies if this person dies in the state where his family was residing while possessing a housing space for working purposes in the other state.11

Finally, it is worth mentioning that there are states that apply a concept of residence that is different from that of tax or civil law residence.12

Several variations of the concept of residence exist, the most important being the extended residence rules (usually based on the deceased’s or beneficiary’s nationality), considering that the residence criterion is susceptible to abuse. States thus combine the concept of residence and nationality13 to prevent abusive tax planning and, therefore, impose a worldwide liability concerning the property owned by their nationals or sometimes residents who move to another state some years before their death (trailing tax regime). Such a taxing right is usually retained for a limited period upon the deceased’s immigration to another state. However, if one state levies taxes based on the deceased’s “actual” residence and the other on the deceased’s extended residence, double taxation of the cross-border inheritance is possible.14 This type of double taxation that gives rise to worldwide taxation of the deceased’s worldwide property in both states, may be eliminated if the state that applies the extended residence rules grants relief for the taxes paid in the state of the deceased’s actual residence.