Tax Residency Changes and Their Implications for Succession Law
The contemporary mobility of capital and individuals has precipitated an unprecedented surge in tax residency relocations, as sophisticated taxpayers increasingly seek to optimize their fiscal obligations through strategic jurisdictional arbitrage. Jurisdictions such as Cyprus, Malta, and Portugal have developed attractive residency programs that offer substantial reductions in personal income tax liability, creating powerful incentives for cross-border migration. Yet in the pursuit of immediate fiscal advantages, taxpayers frequently overlook a fundamental legal consideration: the potential alteration of the applicable law governing succession matters.
Article by Robert Nogacki, attorney-at-law, in Polish CEO Magazine 
While changes in tax residency may yield significant fiscal benefits, such relocations carry the inherent risk of inadvertently modifying the governing law for succession purposes. This lack of awareness regarding the interplay between tax residency and succession law can generate unexpected legal consequences that materially affect the rights and expectations of heirs.
This issue has assumed particular significance following the entry into force on August 17, 2015, of Regulation (EU) No 650/2012 of the European Parliament and of the Council on jurisdiction, applicable law, recognition and enforcement of decisions and acceptance and enforcement of authentic instruments in matters of succession (“the Succession Regulation”). This regulatory framework fundamentally altered the choice-of-law paradigm for succession matters by adopting habitual residence at the time of death, rather than nationality, as the primary connecting factor for determining applicable law.
The Divergence Between Tax Residency and Habitual Residence in Succession Law
Central to understanding this complex legal landscape is recognizing that the concept of “center of vital interests” employed in tax law diverges materially from the notion of “habitual residence” as construed under the Succession Regulation. While these concepts may coincidentally indicate the same jurisdiction, no automatic correlation exists between them – a disconnect that can produce unforeseen legal ramifications.
The Succession Regulation, in Recital 23, articulates the criteria for establishing habitual residence as requiring “an overall assessment of the circumstances of the life of the deceased during the years preceding his death and at the time of his death, taking account of all relevant factual elements, in particular the duration and regularity of the deceased’s presence in the State concerned and the conditions and reasons for that presence”. The habitual residence thus determined should reveal a close and stable connection with the State concerned.
In practice, this distinction manifests in scenarios where an individual who formally obtains tax residency in Cyprus – satisfying the requisite 60-day presence test and meeting other residency criteria – may nevertheless fail to establish habitual residence there for succession purposes if their genuine life center remains in Poland. Conversely, if the same individual simultaneously loses their center of vital interests in Poland for tax purposes, it becomes highly probable that Poland will cease to constitute their “habitual residence” for succession purposes as well – though Cyprus need not automatically assume this status.
Jurisprudential Analysis: Insights from European Case Law
European jurisprudence provides illuminating examples of this complex interplay. In a decision rendered by the Kammergericht Berlin (Order of April 24, 2016, Case No. 1 AR 8/16), the decedent had resided on the Polish side of the border for over five years due to lower rental costs while maintaining daily employment in Germany, where he derived all his income. Despite lacking formal registration in Germany, the court determined that his habitual residence remained in Germany, considering his absence of social integration in Poland and the maintenance of all substantial connections with Germany.
Similarly, in proceedings before the Higher Regional Court of Hamm (Order of January 2, 2018, Case No. 10 W 35/17), a decedent who relocated from Germany to Spain following divorce and resided there during his final months was nevertheless deemed to have maintained habitual residence in Germany. The court considered the temporary nature of the Spanish residence and the decedent’s ongoing connections with Germany, including pending litigation there.
These decisions underscore that determining habitual residence transcends formal tax residency criteria and necessitates comprehensive analysis of the factual circumstances governing an individual’s life.
The Dubai Paradigm: Complexities in Third-Country Jurisdictions
The situation of individuals obtaining tax residency in Dubai (UAE) presents a particularly instructive example of the challenges inherent in this area, especially given the increasing popularity of Dubai residency among Polish entrepreneurs and investors. Dubai offers compelling tax advantages and various investment-based residency programs.
However, the succession law framework applicable in the UAE introduces additional layers of complexity. Under general principles, if a foreign national dies in Dubai without a registered will, their estate would ordinarily be distributed according to Sharia law as applied in the UAE, which prescribes strict distribution rules that may diverge substantially from the deceased’s personal wishes or the expectations of their heirs.
UAE law does provide mechanisms for non-Muslims to elect the application of their nationality law to assets located within the UAE, provided such choice is expressly indicated in a will. Moreover, recent reforms introduced through Federal Decree No. 41 of 2022, effective from 2023, have afforded non-Muslims greater flexibility, such that Sharia law no longer applies automatically to non-Muslim estates in the absence of a registered will.
This scenario illustrates the profound legal consequences that may flow from tax residency changes, particularly when involving non-EU third countries. An individual obtaining Dubai residency for tax optimization purposes may inadvertently subject their estate to an entirely foreign legal system absent appropriate succession planning measures.
The Cyprus Conundrum – Unawareness of Compulsory Share System
Equally problematic, though for different reasons, are the situations faced by Polish tax residents in Cyprus, who frequently remain unaware of the specificities of Cypriot inheritance law. While Cyprus, as a European Union member state, falls under the succession regulation, it simultaneously operates a forced heirship system with compulsory share rules that may be entirely foreign to Polish taxpayers.
Under Cypriot succession law, an estate is divided into two distinct portions: the statutory portion reserved by law for forced heirs, primarily spouses and children who cannot be completely disinherited, and the disposable portion that may be freely distributed through testamentary disposition. When a deceased leaves behind a spouse and children, three-quarters of the estate (75%) must be allocated to them according to statutory shares, while only one-quarter (25%) remains freely disposable.
Such a regime may come as a profound shock to Polish testators accustomed to the considerably greater testamentary freedom provided under Polish law, where only limitations arising from the institution of zachowek apply – amounting to half of the statutory share and concerning only the closest family members in specific circumstances.
While EU citizens residing in Cyprus may opt for the law of their nationality under the succession regulation (Brussels IV), thereby excluding the application of Cypriot forced heirship rules, such choice must be made consciously and explicitly in a will. Moreover, this option does not extend to immovable property located in Cyprus if the deceased had his habitual residence there.
Practice demonstrates that the majority of Polish tax residents in Cyprus remain unaware of these regulations and may inadvertently expose their estates to the application of the Cypriot compulsory inheritance system, potentially leading to outcomes entirely at variance with their intentions and their heirs’ expectations.
Legal Consequences of Miscalculation
The failure to appreciate the distinction between tax residency and habitual residence can generate serious legal ramifications. Most fundamentally, an entirely different succession law regime than anticipated may govern, which may have various consequences.
From a substantive law perspective, the application of different rules regarding intestate succession, divergent inheritance shares, or varying forced heirship provisions may apply. An individual who relocates to Malta or Dubai for tax purposes may remain unaware that, should their habitual residence be established in that jurisdiction, local law will govern their succession.
Procedurally, succession proceedings may need to be conducted before authorities of a different state than originally contemplated. The Succession Regulation establishes the principle of forum-ius convergence – courts of the state of habitual residence possess general jurisdiction over succession matters and apply their own substantive law.
Additionally, issues regarding the recognition of succession documents may arise. While documents issued by competent authorities pursuant to the Succession Regulation benefit from automatic recognition in other Member States, documents issued by authorities lacking jurisdiction may encounter recognition difficulties.
The Challenge of Legal Awareness and Advisory Responsibilities
Practice reveals that both affected individuals and, frequently, their tax advisors lack comprehensive awareness of the potential succession law implications of residency changes. Tax advisors typically concentrate on optimizing current fiscal obligations without necessarily considering long-term legal ramifications for succession planning.
This problem is compounded by the fact that habitual residence determinations occur posthumously, when corrective measures are no longer possible. Unlike tax residency, which can be planned and controlled through satisfaction of specified criteria, habitual residence is established ex post through overall assessment of factual circumstances.
Particularly problematic are situations involving individuals who formally obtain tax residency in one state while effectively continuing their lives in another. Polish entrepreneurs who obtain Cypriot residency for tax purposes while spending most of the year in Poland, conducting business activities and maintaining family connections there, exemplify this challenge.
Recital 24 and Complex Cases
The Succession Regulation’s Recital 24 explicitly addresses situations that may prove particularly problematic for individuals changing tax residency. This recital acknowledges that “in some cases determining the deceased’s habitual residence may prove complex”, particularly “where the deceased for professional or economic reasons had gone to live abroad to work there, sometimes for a long time, but had maintained a close and stable connection with his State of origin”.
In such circumstances, the deceased might be considered as maintaining habitual residence in the State of origin, where the center of interests of his family and social life was located. This suggests that formal tax residency changes may prove insufficient for succession law purposes.
The Recital further provides that for persons living alternately in several States or traveling between them, particular weight in the assessment may be accorded to the deceased’s nationality or the location of their principal assets.
Legal Solutions: Choice of Law Under Article 22
Awareness of these potential complications necessitates consideration of legal mechanisms designed to mitigate them. The most significant is the choice-of-law provision contained in Article 22 of the Succession Regulation.
Under this provision, individuals may choose as the law governing their succession the law of the State whose nationality they possess at the time of making the choice or at death. This choice must be made expressly in a declaration in the form of a disposition of property upon death or must be demonstrated by the terms of such a disposition.
For individuals changing tax residency while seeking certainty regarding applicable succession law, executing a will with an express choice of Polish law may prove crucial. This approach avoids uncertainties associated with habitual residence determinations and ensures predictability in succession matters.
However, choice of law has inherent limitations. First, only the law of a State of nationality may be selected. Second, the choice does not affect jurisdiction – even with a choice of Polish law, if habitual residence is established in another State, that State’s courts will possess jurisdiction and will apply the chosen Polish law.
The Closer Connection Clause as Additional Protection
The Succession Regulation also provides for application of a closer connection exception (Article 21(2)). Under this provision, where it is clear from all circumstances that, at the time of death, the deceased was manifestly more closely connected with a State other than the State of habitual residence, the law of that other State may apply.
This clause may provide protection in situations where formal habitual residence is established in the State of tax residency, but the deceased’s actual connections with the State of origin were substantially stronger. However, application of this exception remains extraordinary and requires demonstration of a manifest, stronger connection with another State.
Practical Recommendations
In light of this analysis, individuals contemplating tax residency changes should adopt a comprehensive approach to succession planning. Conscious planning of habitual residence, rather than mere satisfaction of formal tax residency criteria, appears essential. If the objective includes transferring habitual residence to the State of tax residency, genuine relocation of one’s life center may be necessary, encompassing family, social, and professional dimensions.
Alternatively, where transferring one’s life center proves impossible or undesirable, executing a will containing an express choice of the law of nationality becomes crucial. This preserves predictability in succession matters regardless of habitual residence.
Equally important is regular verification of the effectiveness of adopted solutions. Changed life circumstances may affect habitual residence assessments, potentially requiring updates to succession planning strategies.
Conclusion
The intersection of tax residency and succession law presents a complex legal landscape requiring sophisticated planning and careful consideration of multiple jurisdictional frameworks. As cross-border mobility continues to increase, driven by fiscal optimization strategies, the importance of understanding these interconnected legal regimes cannot be overstated. Legal practitioners and tax advisors must adopt a holistic approach that considers not merely immediate fiscal advantages but also long-term succession implications. Only through such comprehensive planning can individuals successfully navigate the challenges posed by multi-jurisdictional legal frameworks while achieving both tax efficiency and succession certainty. The evolution of European succession law, particularly through the Succession Regulation, has created both opportunities and pitfalls that demand careful navigation by sophisticated legal counsel.
Founder and Managing Partner of Skarbiec Law Firm, recognized by Dziennik Gazeta Prawna as one of the best tax advisory firms in Poland (2023, 2024). Legal advisor with 19 years of experience, serving Forbes-listed entrepreneurs and innovative start-ups. One of the most frequently quoted experts on commercial and tax law in the Polish media, regularly publishing in Rzeczpospolita, Gazeta Wyborcza, and Dziennik Gazeta Prawna. Author of the publication “AI Decoding Satoshi Nakamoto. Artificial Intelligence on the Trail of Bitcoin’s Creator” and co-author of the award-winning book “Bezpieczeństwo współczesnej firmy” (Security of a Modern Company). LinkedIn profile: 18 500 followers, 4 million views per year. Awards: 4-time winner of the European Medal, Golden Statuette of the Polish Business Leader, title of “International Tax Planning Law Firm of the Year in Poland.” He specializes in strategic legal consulting, tax planning, and crisis management for business.
