Is Situs a Silent Tax?

The term “situs” generally refers to the location or place where something exists or is considered to exist for legal purposes. It is commonly used in law to determine jurisdiction, taxation, and property rights.

In determining jurisdiction for purposes of taxation, Situs is sometimes referred to colloquially as a "silent tax", a term used to describe taxes that are not immediately obvious to the taxpayer and may therefore go unnoticed. Whilst some investors are simply unaware of its ramifications, others face issues when determining the situs of certain assets, especially intangible assets such as shares, bonds, or intellectual property. This process can be complex and may require expert advice and reference to case law, statutory guidelines, and international treaties.  

Situs rules are established principles within international tax law, explicitly defining the location of assets for tax purposes. Taxpayers holding assets across multiple jurisdictions are generally advised to be aware of these rules and factor them into their financial planning, specifically for inheritance and estate planning purposes. 

For instance, investments in jurisdictions such as the US and UK may attract inheritance or estate taxes based on their situs, highlighting the direct nature of these taxes. A recent case study highlighted how an individual UK-expat, who was resident in Dubai and who had accumulated over GBP1 million in UK shares, alongside other investments, faced a potential 40% tax liability on the value of the UK-listed shares.

In these more intricate scenarios, and without specific knowledge or guidance, the complex tax implications as a result of the situs of assets on one's tax liability may not be immediately obvious.

What’s the background?

With easy access to foreign investment markets, international investing is a viable option for those looking to diversify and externalise their wealth. Whilst the reasons for offshore investing are clear, what to consider when selecting an international investment product or service for your clients can be less clear.

Situs is an essential consideration. Not only does it create complex international tax reporting during a person’s lifetime, particularly when the assets are held in a trust, but it can also create unnecessary tax liabilities on a person’s demise.  

Is there a solution?

The use of trusts, corporate vehicles and life bonds can help to mitigate potential tax liabilities brought about by virtue of the situs of assets; however, these are not without an additional cost and administration layer , a loss of flexibility due to lock-in periods or restricted investment choices.

An alternative solution is to place the relevant assets into a principal contract.  

Capital International’s Kinesis Service, which utilises principal contracts, can assist to mitigate tax liabilities based on situs whilst providing flexibility to change the underlying investment and investment goals. It offers a cost-effective solution that allows intermediaries to decide their own investment strategy within the principal contract utilising Capital International’s international investment platform.  Additionally, the Kinesis Service offers simplified administration, client retention and portability benefits for your clients.

Want to learn more?

If you or your clients hold UK or US assets and are concerned about potential situs tax exposure, Capital International’s Kinesis Service could be the solution.

To find out more about how Capital International may assist, please contact platform@capital-iom.com

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of Capital International Group Limited (Group) and/or any of its subsidiary companies and as such are neither given nor endorsed by the Group or any company within the Group. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Group to buy or sell any product or security or to make a bank deposit. Any reference to past performance is not necessarily a guide to the future. The value of investments may go down as well as up and may be adversely affected by currency fluctuations. The Group, its subsidiary companies, clients, and officers may have a position in, or engage in transactions in any of the investments mentioned. Opinions constitute views as at the date of issue thereof and are subject to change.

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