This article came to be written via a chance meeting in a coffee shop between Sarah Lucy Cooper, a family practitioner specialising in international cases, and Dilpreet Dhanoa, a specialist in tax, one early morning on the way to court.

The purpose of this article is not to provide an answer to all and every tax issue in an international context, but rather to ensure that family practitioners are aware of some of the challenges surrounding such issues.

Why do overseas tax considerations matter?

What are the types of tax about which individuals should typically be concerned in a divorce where the parties have some overseas connection? There are usually a few core aspects of taxation that all parties undergoing divorce with an international element should consider:

1. properties overseas;
2. income overseas – remote working – there will be very complex taxation issues where an individual working in the United Kingdom for a UK entity and paying PAYE or other UK tax has spent large periods of time overseas, perhaps in their home country. Anecdotal evidence from 2020 when many white-collar workers spent lockdown overseas suggests that some overseas taxation authorities are actively considering taxing them in their jurisdictions regardless of what HM Revenue & Customs might think;
3. tax on companies registered overseas;
4. future inheritances and trust charges;
5. parties who are physically overseas.

As in relation to any other international issue, there should be no assumptions made in relation to overseas tax systems, so check in relation to the other jurisdiction:

1. Are there joint spousal tax liabilities?
2. Do both parties have to fill in one tax return (joint returns do exist)? If one party has not complied, could this be ‘financial conduct’?
3. Timing of payments – if overseas tax is due, when will it need to be paid?
4. What powers do local tax enforcement tax authorities/agencies have in the overseas jurisdiction? Is there a robust Land Registry system in the overseas jurisdiction against which the tax can be secured?
5. Is the overseas tax effectively a soft liability that will never be paid?

In addition, where marriages which have irretrievably broken down have an international element, there are usually other important aspects to consider which can impact the taxation position:

1. multiple nationalities and hence a multiplicity of overseas tax authorities’ involvement;
2. differing residence qualifications and statutory residence rules in relation to whether UK tax is payable;
3. possibly differing domicile rules for UK tax purposes rather than for the purposes of the jurisdictional criteria for divorce in England and Wales.

The impact of double taxation treaties

Double taxation arises if two jurisdictions seek to levy tax on the same income or chargeable gain (that is, the taxpayer could end up paying income tax and/or capital gains tax (CGT) twice on the same income or disposal of an asset). Many jurisdictions tax individuals, companies and other entities that are ‘resident’ in their jurisdiction on all of their worldwide income or profits, irrespective of where they arise. Additionally, many jurisdictions tax profits and income resulting from an economic activity carried on in their territory or profits arising from a source in that jurisdiction.

Double taxation treaties (DTTs) are agreements between two states, designed to protect against the risk of double taxation where the same income might be taxable in the two states. DTTs exist to provide certainty of treatment for certain cross-border trade, investment and to limit or avoid double taxation. So why could this be relevant to couples going through a divorce? If one person or both in a couple is resident (or deemed to be resident) for tax purposes in two countries at the same time, and/or they own property (separately or jointly) in a country, resulting in income and gains (from one country or both), the individuals may be liable to tax on the same income in both countries.

In divorce proceedings, which can often be complex and financially messy, this adds another layer of consideration that is worth thinking about: What is the tax liability in cases for couples with ties, assets and/or connections in more than one jurisdiction?

Other common examples to bear in mind where DTTs can assist (along with specialist tax advice) is where an individual is non-resident in the United Kingdom for tax purposes, but has UK-source income. For example, suppose a husband residing in France owns a rental property in the United Kingdom and receives rental income from it. If the husband is tax resident in France he will also pay income tax there, but would also be liable for tax in the United Kingdom, hence the necessity of a DTT.

The DTTs tend to follow standard models (such as the Organisation for Economic Co-operation and Development (OECD) Model1) with appropriate edits as agreed by the two states in question. They cover a wide range of taxes to assist in facilitating cross-border trade and investment, so not all the taxes and reliefs covered will necessarily be relevant to divorcing couples. Having said that, if there are complex business interests tied up in such divorce proceedings, then more of the Articles in a DTT may apply. Typically, though, the taxes one might expect to be covered and which will be of particular relevance are CGT reliefs and income tax reliefs.

The United Kingdom has a prolific network of tax treaties. At the time of writing, there are over 100, and a complete list country by country can be found on the Government’s website.2 In the first instance, individuals should always seek to obtain tax advice in conjunction with their divorce proceedings – particularly if there is a real risk that the divorce could include assets and/or tax liabilities located in more than one jurisdiction. The next step would then be to identify potential tax liabilities that could arise. Where the United Kingdom is one such jurisdiction, the next would be to check if there is a tax treaty in place that might offer some relief from the risk of double taxation. Lastly, where an expert may be needed to offer advice on DTTs and their application, the Bar has several such experts, and it is worth instructing a single joint expert with tax expertise to assist the parties and the court in providing guidance and clarification as to the interpretation and application of a DTT.

Jurisdiction for divorce and the impact on tax overseas

In order to divorce in the jurisdiction of England and Wales it is necessary to show that one or both parties are either habitually resident or domiciled in this jurisdiction. An assertion of either habitual residence or domicile whether in this jurisdiction or another may, of course, be hugely interesting to tax authorities both here and overseas.

Take an example of a husband, H, who wishes to contest jurisdiction in England and Wales and who asserts that both parties are in fact habitually resident or even ‘domiciled’ in Vietnam instead as he holds a Vietnamese passport. The wife, W, on the other hand, asserts that they are both habitually resident and/or domiciled in England and Wales. Clearly, there exists the potential for these assertions of residence/domicile/nationality to be highly relevant to the tax authorities in both Vietnam and the United Kingdom, given that they will rely on a factual matrix.

Residence and domicile for tax purposes

It is crucial to understand that these two concepts (residence and domicile) are not equivalent to similar concepts in family law. For tax purposes both concepts rely on further statutory legislation in addition to the common law.

A person’s tax residence status or their tax domicile status will, of course, affect the extent to which someone is liable to tax in the United Kingdom.

Tax residence is a more short-term concept. It is assessed and determined for each tax year in isolation, and usually reflects where you reside. It is therefore possible albeit inconvenient to have more than one tax residence.

Tax domicile is a longer-term concept. The Dicey test for domicile reflecting common law states:3

‘A person is in general domiciled in the country in which he is considered by English law to have his permanent home. A person may sometimes be domiciled in a country although he does not have his permanent home in it’

In contrast to family law, in tax law there is also a statutory deemed domicile provision which covers more taxpayers than those who are actually domiciled in the United Kingdom as a matter of common law.

It is also important to remember that the tax domicile is UK-based, whereas the test in relation to family law jurisdiction is whether an individual is domiciled in one of the territorial units, for example, England & Wales. In other words, in relation to taxation the UK tax authority – HM Revenue & Customs – is interested in whether an individual has a ‘UK domicile’. The same is not true for the jurisdictional criteria for divorce (or children either), as for family law purposes the United Kingdom is split into territorial units, i.e. England & Wales, Scotland and Northern Ireland. The term ‘domicile’ therefore means something very different in taxation and family law, and it is important for advisers to be cognisant of this.

As already noted, income which arises in the United Kingdom is generally treated as being taxable in the United Kingdom. A person’s residence and domicile statuses are therefore particularly important for determining the extent to which any overseas (that is, non-UK) income is taxed in the United Kingdom. The starting position for tax purposes is usually if a person is resident and domiciled in the United Kingdom, then they are liable to tax on their worldwide income and gains. If individuals were born in the United Kingdom and have lived in the United Kingdom most or all of their lives, it is highly likely they will be considered to be both resident and domiciled in the United Kingdom. Alternatively, individuals who come to the United Kingdom for a short period of time, or do not spend much time in the United Kingdom at all, may not be considered domiciled or possibly even resident (again, depending on the application of the residence rules). Where an individual does not become tax resident in the United Kingdom, their foreign income and gains generally do not fall within the scope of UK tax. Where an individual is resident but not domiciled in the United Kingdom, then the ‘remittance basis’ rules may apply to a person’s foreign income and gains. This means an individual may not have to pay any UK tax, or otherwise a reduced amount on their foreign income and gains unless remitted back to the United Kingdom.

Remaining with the issue of jurisdiction, once jurisdiction has been seised in the divorce, the parties are, of course, free to relocate and many will do so, confident in the knowledge that it will be the English courts now dealing with their financial claims. It might be assumed at this point after the new tax year that if neither of the couple remain in the United Kingdom, there will be no liabilities for UK tax – this is, however, most definitely not the case if some assets remain in the United Kingdom, in which scenario there is still a risk that UK tax will arise.

It is worth bearing in mind that the helpful change coming into force in April 2023 in relation to extending the time frame for divorcing spouses to effect transfers between them and not incur CGT will be particularly helpful in relation to complex cases where there are tax issues involving overseas tax authorities.

Inheritance tax

Issues in relation to inheritance tax (IHT) on divorce are also more complex when there are overseas connections.

In contrast to income tax and CGT which rely on the date of permanent separation, IHT relies of the date of the final order in the case of divorce. If the divorce is in the United Kingdom, then until the final order, transfers between divorcing partners are legally not liable to IHT as the parties are still married. However, even after this date, if a transfer is made pursuant to a court order in respect of divorce proceedings, then such transfers are still considered to be exempt for IHT purposes by HM Revenue & Customs. Watch out though for cases where one spouse is UK-tax domiciled and the other is not, as there are restrictions on how much can be transferred. Again, specialist tax advice should be sought in such circumstances.

Maintenance

The tax treatment of maintenance can be very different overseas which can be very relevant to final orders as the English court will be interested in the net effect on both parties. Broadly speaking, jurisdictions provide for one or more of the following:

1. taxing the payer of the maintenance such that all maintenance is paid from taxed income – the United Kingdom being such an example, as are Chile, the Dominican Republic and Mexico;
2. providing tax relief for the payer of the maintenance – Argentina and Ecuador are examples of jurisdictions where the maintenance can be set off by the payers as against their gross income;
3. taxing the recipient of some or all of the maintenance – in Spain, some types of spousal maintenance are taxed on receipt whereas child maintenance is not.

Complex tax issues will, no doubt, arise in relation to maintenance orders made in relation to same sex relationships where such an order is not recognised by an overseas jurisdiction where the payer is based.

Disclosure to and from overseas tax authorities

Disclosure to overseas tax authorities

We are in an era where unprecedented levels of information are now exchanged between tax authorities globally. This may come as a nasty surprise to some divorcing litigants who might be hoping to hide their assets and income from the prying eyes of other tax authorities or their ex-spouses.

The Common Reporting Standard (CRS) is a global initiative launched by the OECD, designed to prevent tax evasion using Automatic Exchange of Information (AEIO) between countries’ tax authorities. As of 2021, over 100 countries had signed up to applying the CRS for sharing information, including all member states of the European Union, the United Kingdom, India, China, Hong Kong and Russia. The United States of America had previously implemented its own version of reporting with the Foreign Account Tax Compliance Act, which generally requires foreign financial institutions and certain other non-financial foreign entities to report on the foreign assets held by their USA account holders, or be subject to withholding on withholdable payments. The United States of America is not signed up to the CRS, but the United Kingdom has a reciprocal agreement with the United States of America in any event.

The CRS and AEIO apply to any person with financial accounts or responsibilities outside their country of tax residence. For UK residents, this is likely to impact those with undisclosed assets overseas, and/or those with complex structures in place involving overseas assets as these are likely to be reported to HM Revenue & Customs possibly for the first time. The sort of information exchanged automatically under the CRS and AEIO is as follows: the taxpayer’s name, address, date and place of birth, country/countries of tax residence, tax identification number or national insurance number (or other equivalent), bank account details, total account balance/value of accounts calculated at the end of the calendar year (including any interest, but excluding the balance of any excluded accounts4).

Information is automatically exchanged with other jurisdictions on an annual basis. It therefore permits countries (and specifically their revenue authorities) to know the true value of a resident taxpayer’s wealth, and to therefore ensure they pay the right amount of tax. The key element is that the information is shared automatically, and not on request or in return for anything.

It should also be noted that competent revenue authorities can also make specific information disclosure requests to another revenue authority. If the information is publicly available or held on a database or source to which the revenue authority has access, the competent revenue authority is likely to reply directly. If this arises, the relevant tax authority may also write to the taxpayer to establish the facts in circumstances where it does not have (full) access to the information being requested.

Interestingly, for HM Revenue & Customs’ purpose, it is not obliged to disclose everything to the taxpayer about what information that has been requested by an overseas tax authority. It is only obliged to disclose the minimum amount of information necessary, and the letter from the overseas competent revenue authority should not be shown to the UK taxpayer (nor does the jurisdiction from which the request came from need to be disclosed).

It is therefore entirely possible that in the context of divorce proceedings a litigant might have far larger overseas tax liabilities than those of which they were aware and that unbeknown to them HM Revenue & Customs has, indeed, provided a great deal of information to another tax authority.

Furthermore, there is a large network of intergovernmental agreements for mutual assistance in the collection of tax debts. That network of arrangements has grown in recent years, particularly with the inclusion of a provision on assistance in the collection of taxes in the OECD Model – which, as noted above, forms the basis on which most DTTs are now negotiated.

Disclosure from overseas tax authorities

So what of the divorcing spouse who suspects that there is relevant information held by an overseas tax authority? Can this be disclosed to the Family Court?

Family Procedure Rules 2010 (SI 2010/2955) (FPR) 21.2 provides in terms for disclosure from a third party:

‘(1) This rule applies where an application is made to the court under any Act for disclosure by a person who is not a party to the proceedings.

(2) The application—

(a) may be made without notice; and

(b) must be supported by evidence.

(3) The court may make an order under this rule only where disclosure is necessary in order to dispose fairly of the proceedings or to save costs.

(4) An order under this rule must—

(a) specify the documents or the classes of documents which the respondent must disclose; and

(b) require the respondent, when making disclosure, to specify any of those documents—

(i) which are no longer in the respondent’s control; or

(ii) in respect of which the respondent claims a right or duty to withhold inspection.

(5) Such an order may—

(a) require the respondent to indicate what has happened to any documents which are no longer in the respondent’s control; and

(b) specify the time and place for disclosure and inspection.

(6) An order under this rule must not compel a person to produce any document which that person could not be compelled to produce at the final hearing.

(7) This rule does not limit any other power which the court may have to order disclosure against a person who is not a party to proceedings.’

Interestingly, the Red Book5 identified in terms that this may be from HM Revenue & Customs. This will come as no surprise to the seasoned financial remedy practitioner well used to dealing with the non-disclosing litigant.

While FPR 21.3(1) also provides for that third party to withhold disclosure in certain circumstances, it is telling that none of the reported cases on this provision references HM Revenue & Customs:

‘A person may apply, without notice, for an order permitting that person to withhold disclosure of a document on the ground that disclosure would damage the public interest.’

The vast majority of the cases engaging this provision have been in relation to information held by the police, for example Chief Constable of West Midlands Police, ex parte Wiley; R v Chief Constable of the Nottinghamshire Constabulary, ex parte Sunderland [1995] 1 AC 274, which sets out the three-stage test for arguing public interest immunity:

1. whether the information is sufficiently relevant to require disclosure in the interests of justice;
2. whether there is a real risk that disclosure would cause ‘real damage’ or ‘serious harm’ to the public interest; and
3. whether the public interest in non-disclosure is outweighed by the public interest in disclosure for the purposes of doing justice in the proceedings.

Letters of request to overseas authorities

Albeit not in family context, this is a procedure used relatively frequently between tax authorities and there is no reason in principle why it should not be used in a divorce case to extract information from the overseas tax authority.

The 1970 Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters (Hague Evidence Convention) provides that signatory states can make letters of request to any signatory state where the evidence is located without having to rely on consular and diplomatic channels.

There are 64 contracting parties to this Hague Convention including not only the majority of EU states, but also the United States of America, China, Kuwait and much of Latin America.

FPR 24.10 provides:

‘(1) This rule applies where a party wishes to take a deposition from a person who is out of the jurisdiction—

(a) out of the jurisdiction; and

(b) not in a Regulation State within the meaning of Chapter 2 of this Part.

(2) The High Court may order the issue of a letter of request to the judicial authorities of the country in which the proposed deponent is.

(3) A letter of request is a request to a judicial authority to take the evidence of that person, or arrange for it to be taken.’

No order will be made without evidence that the overseas court will be receptive and amenable to that request. At the hearing of the application for the issue of the letter of request the applicant will need to address: the procedure that will be followed by the foreign court, whether any special procedure is sought, how long the entire process will take and how much it will cost. Evidence from a foreign lawyer experienced in the execution of a letter of request in the jurisdiction in which they practise will be helpful.

Once an order is made by the High Court, FPR PD 24A provides a template for the letter of request itself, which is then signed by the Senior Master of the Queen’s Bench Division.

The Court of Appeal in Honda Giken Kogyou Kabushiki Kaisha v KJM Superbikes Ltd [2007] EWCA Civ 313 clarified that the court should subject each request to four specific considerations:

1. whether the request would be oppressive;
2. whether the request is too wide;
3. whether the issue of a letter of request would be inappropriate for some other reason, for example, because the cost of obtaining the evidence would be disproportionate or because the evidence is unnecessary to resolve the issues in dispute; and
4. the effect of any delay in making the application for the letter of request.

While a request must be for specific documents, this does not mean that every document must be listed in the request. The documents may be described compendiously (SL Claimants v Tesco PLC [2019] EWHC 3315 (Ch)). It is also important to note that in Charman v Charman [2005] EWCA Civ 1606 itself the President indicated that in family cases it might be less necessary to list documents as the requesting party would have less knowledge, which is also in line with the Family Court’s quasi-inquisitorial role pursuant to section 25(1) of the Matrimonial Causes Act 1973.

It is, however, important to note that pursuant to Article 12(1) of the Hague Evidence Convention, a letter of request may be refused on the following grounds:

1. the ‘other judicial acts’ required to fulfil the execution of the request do not fall within the functions of the judiciary in the state of execution;
2. the state addressed considers that its sovereignty or security would be prejudiced by the execution of the request.

It is also important to note that the execution of a letter of request requires cooperation from the person required to provide the documents set out in the request. Article 11(1) provides that a person may refuse to do so if they are protected by privilege or if they have a duty to refuse under the law of either the state of execution or the state of origin. It is therefore particularly important for there to be clarity as to the extent of such privilege and whether they that person would be permitted to disclose such information prior to the application being made.

It is also important not to overlook the Crime (International Co-operation) Act 2003, which was considered in CPS & Anor v Gohil & Anor [2012] EWCA Civ 1550. In Gohil, evidence had been disclosed from the authorities in the United States of America to the Crown Prosecution Service (CPS) via a letter of request. This was then utilised by the wife in her financial remedy proceedings, presumably via third party disclosure from the CPS. The Court of Appeal was very clear that this should not have happened, and that the wife had no right to have used this evidence, which had not been disclosed for this purpose.

Conclusion

In summary, tax and divorce are complex and when there are overseas issues, it is even more complex.

While there is a flow of information between tax authorities which litigants may well not be aware of, there are huge complications for an individual litigant who seeks to investigate the overseas tax affairs of their divorcing spouse.