Key tax considerations for high-net-worth individuals (“HNWIs”) who relocate to mitigate their taxes include assessing the tax rules in the country they are leaving, relocating to and the myriad of assets, properties and vital interest ties they have. As governments globally try to increase their tax base, affluent individuals are looking at making the right tax residency choice.
Governments taxing the wealthy
The Covid-19 pandemic has created havoc for governments who are salvaging their economies by issuing furlough payments, unemployment cheques, deferring tax payments and distributing funds to businesses that have been impacted.
But at the end of the day there is no such thing as a free lunch, the bill will eventually come and it will do so in the form of taxes.
As funds run dry, several countries have opted to attract high-net-worth individuals through favorable tax regimes whilst others are targeting the rich through increased corporate and wealth taxes. The aim of these special tax regimes is to lure affluent retirees, senior executive expats, and global entrepreneurs, HNWIs and investors to their shores.
Special Tax Regimes for HNWIs
Italy for example has a Special Tax regime for HNWIs that have not been tax resident in Italy in 9 out of the previous 10 years.
They can pay EUR 100,000 per annum as a net tax on their foreign income and continue to do so for a period of 15 years, without having to report on their foreign income. Any capital gains that are realized on foreign assets in the first five years under this special tax regime are taxed under the standard Italian tax rates.
Greece also has a tax exemption for HNWIs where qualifying individuals can pay a lump sum tax of EUR 100,000 per annum for up to 15 years and do not need to report on their foreign income.
The criteria includes that they must invest within the first three years a sum of at least EUR 500,00. One important point, which is further discussed below is that any foreign taxes paid cannot be offset against the individual’s tax liability in Greece.
There are several other countries that offer special tax regimes in Cyprus, Malta and Portugal amongst others.
Read more: Benefits of transferring tax residency to Greece under the Non-Dom scheme
Tax Residency Considerations for HNWIs
Though each individual’s particular circumstances differ, the four key areas that must be closely assessed before a tax-motivated relocation occurs are set out in the below tax residency quadrants:
- Physical Presence – In certain cases, spending 30 days in a jurisdiction within the same tax year can have implications from a tax residency perspective so it is imperative that individuals keep proof of their travel movements and record of their trips.
- Citizenship – passports have a substantial weight on assessing an individual’s tax situation. One key example being the US passport which places extensive reporting requirements on the passport holder.
- Habitual Abode – assessing where an individual has their place of residence (predominantly).
- Vital Interests – taking into consideration where an individual has their social security registration, personal or economic relations, investments, property, cultural or political associations. Whilst this is a more subjective element it is essential in providing a holistic review of an individual’s tax situation.
Assessing Income Streams
Taxes are calculated on a few elements but predominantly on income so it is imperative to asses HNWIs income streams. These normally take the form of active income, passive income and capital.
- Passive – Dividends, Interest, Rental Yields, Capital Gains
- Active – Remuneration, Stocks/Trading, Bonuses
- Capital – Immovable Property, Wealth/Inheritance
Other considerations when relocating for tax purposes
Advice should be sought to identify the new taxes that will apply for the HNWIs and their family when they arrive in the new jurisdiction. The arriving jurisdiction’s wealth taxes and inheritance taxes should be reviewed, the tax treatment of crypto-assets, property taxes, capital gains taxes and municipal taxes.
Although the tax framework in the new relocation jurisdiction is significant, the first priority is to ensure that all tax matters have been cancelled in the departing country. The HNWI should be removed from the departing country’s tax register and any taxes due should be settled including exit taxes, if these apply.
The tax assessment for HNWIs should also extend further – to nexus ties (economic, family, social, political) in any related jurisdictions.
Read more: Greek Tax Exemptions for HNWIs
Finally, though tax is likely the key driver for a HNWI to relocate, it will not be a sustainable move unless other softer criteria are also met. These include family considerations, quality of life, travel connectivity, spousal career opportunities, education facilities and childcare availability amongst others.
At a time when many countries are looking at raising their taxes, a reliable tax or global mobility expert should be engaged to ensure the right tax regime, residency permits and tax considerations are met.
