What triggers an exit charge when we move a function abroad?
Movement of something of value, rather than the paperwork that records it. If a local company stops performing a function, bearing a risk or holding an asset, and a related company abroad begins to do so, the question is whether an independent enterprise in the local company's position would have accepted the change without compensation. Often it would not, because it is giving up a profit stream it could have continued to earn. The charge attaches to that transferred value. A reorganisation that only renames entities or redraws a group chart, with the same people making the same decisions in the same place, transfers nothing and supports no charge.
Is an exit charge the same as selling goodwill?
They overlap and are not identical. An exit charge is a transfer-pricing conclusion about compensation for value that has left a jurisdiction; it can be satisfied by a payment for intangibles, but it can equally arise where no asset in the legal sense moved at all. A local company that loses its customer relationships, its trained workforce's output or its risk-bearing role has given up future profit whether or not anything appears on a bill of sale. Conversely, a sale of goodwill between related parties is priced as a transaction in its own right. The practical difference is the starting point: one begins with an asset, the other with a change in who earns what.
Do we owe an exit charge if no assets moved?
Possibly. Functions and risks are the other two things the concept covers, and both can move without a single asset changing hands. A subsidiary converted from a full-risk distributor into a limited-risk one keeps its premises, its staff and its stock, and still surrenders the upside it previously carried. Whether compensation is due turns on whether the entity gave up something an independent party would have been paid for, and on what its contracts actually allowed the other side to do. A distributor whose agreement was terminable at short notice by either side has less to surrender than one with a long protected term.
How is an exit charge valued?
By reference to the profit that has been given up, not to the cost of moving. The usual approach compares what the local entity could have expected to earn had the arrangement continued against what it will earn afterwards, over the period the old arrangement would plausibly have run. That period is where most disagreements sit, because it depends on the contractual notice rights and on commercial reality rather than on a formula. Options realistically available to both sides matter: if the local entity could have refused, its position is stronger. Keep the valuation and its assumptions in the file at the time of the restructuring, because the same exercise repeated later reads as advocacy.
Will the other country give us a deduction for it?
Not automatically, and this is the practical trap. One authority may assert that value left its jurisdiction and tax a charge, while the authority on the receiving side declines to recognise the same amount as a deductible cost or an amortisable asset, because on its analysis nothing was acquired. The result is tax on an amount that is relieved nowhere. The two positions are usually reconcilable only through the treaty's mutual agreement procedure, which works from the documentation each side holds. That is why the receiving entity's own file should record what it believes it bought, in the year it bought it.
Does simply closing a subsidiary avoid an exit charge?
Closure changes the question rather than removing it. If the business genuinely stops, and the customers, contracts and know-how stop with it, there may be nothing transferred and nothing to charge. If the same customers are served the following quarter from a related company abroad, using the same product and often the same account contacts, an examination will treat the closure as the mechanism of a transfer. What decides it is where the business went, evidenced by customer lists, employment moves and order flow, and not by the wording of the board minutes.
How would a foreign tax authority know I am resident there?
Mostly from information you or your bank already provided. Account-opening forms ask you to self-certify tax residence, and that certification is reported between authorities under the Common Reporting Standard or, for US accounts, under the FATCA framework. Beyond that: employer and payroll filings, property registries, immigration records and the tax filings of anyone who paid you. The realistic planning assumption is that the data arrives. See FATCA and information reporting.
I have not filed for several years while living abroad — what are my options?
Both countries have routes back, and using one before they contact you is what preserves the relief. On the US side there are procedures aimed at taxpayers whose failure was not wilful, including one designed for people living outside the country, and separate procedures for late account reports and information returns alone. Canada has its voluntary disclosures programme and taxpayer relief for penalties and interest. Filing quietly and hoping is the one approach with no protection attached to it. See catch-up filing.
