I hope you have had a great summer wherever you are. We have had one of the best summers I can recall (and I have many to choose from!). And now it is time to turn my attention to a very busy autumn that is looming for IFS and the IBSA.
I have not actually been idle this August as Nick and I have been putting the finishing touches to the new edition of ‘The Principles of International Tax Planning’ which hopefully will be in print by the end of September. The book chronicles the international tax exploits of a very inventive family, the loveable rogue grandfather Papa Filipe, his entrepreneurial son Giuliano, and his grandchildren, the now infamous footballer Paolo and the beautiful model Renata.
The eight chapters explain the principles of international tax planning and then reveal how these have or have not been adopted by the Filipe family. As an incentive to existing and future IBSA members, IFS will proudly send them a signed complimentary copy of the book.
One of the major issues discussed in the book is the question of residence, both corporate and personal. The current topic of US corporate inversions has attracted vociferous altercations in the US Congress, but elsewhere corporate re-domiciliation is accepted as the consequences of a level playing field where tax rates are nevertheless the prerogative of particular jurisdictions.
As for individuals, the European Court of Justice has upheld the right of individuals to move from one European country to another without having to pay exit taxes when they leave a particular country until the relevant assets are eventually sold. Quite how this will be policed is a different issue, but the principle of being able to move from one European country to another without tax impediments has been upheld. This month’s article reviews some planning opportunities which may be adopted by individuals migrating to and from the EU and focuses on those coming to live in the UK via an intermediate country of residence. Indeed, in the past year IFS has helped many Eastern Europeans and Asians who have decided on a life changing transfer of personal and family residence.
I will be discussing fiduciary relationships in international business structures with some professional colleagues and also with a representative from HMRC on 16 September at an evening discussion group of the IBSA to be held in Mayfair, London. We will be reviewing the role of conduit companies, the concept of beneficial ownership, exchange of information and FATCA rules, and it promises to be a very stimulating discussion of these topics. The meeting is open to all IBSA members and to guests invited by me, so please let me know if you would like to attend (click here).
Two days later, on 18 September, I will be hosting a webinar with John Timpany of KPMG Hong Kong to discuss double tax treaties in general but specifically how Hong Kong’s network of double tax treaties has proliferated, and how they may be used in international business structures. We will specifically discuss the role of Hong Kong for Chinese inward and outward investment, and compare Hong Kong’s treaty arrangements with those of Singapore, the UK and elsewhere. Again, if you would like more information on this please let me know (click here).
What I would really like to draw to your attention to is the annual conference of the IBSA (previously known as the ITSAPT annual conference) which we are holding on 19 November 2014 at the Mandarin Oriental Hyde Park Hotel, London. The conference details are on the IBSA website (click here) and for those booking by 16 September 2014, there is a reduction from the standard £875 + VAT to £438 + VAT for IBSA members and £700 + VAT for non-members. We have had some amazing feedback from prior conferences such as “Thank you for a remarkable conference – possibly the best one I’ve attended in the last 20 years”, so I do hope that you will register and take advantage of the reduced price for what promises to be a fascinating day.
I always think that September heralds a new year (perhaps from my school days or those of my children), so I wish you all a happy new business and professional year.
With my best regards
PERSONAL MIGRATION 2
Readers of our newsletters may recall our fascination with tax planning achieved through corporate and personal re-domiciliation. We wrote articles in October 2010 (click here) and April 2011 (click here) covering these issues in detail and addressed tax driven migration at numerous conferences. Over the years we have helped many clients overcome the complex issues inherent in a change of personal residence and we are happy to share a few interesting observations with our readers.
Exit taxes and residual tax liability
In the April 2011 article we talked about exit taxes that some countries, including Canada, Israel and the US, impose on the departing individuals. On becoming non-resident in a particular country the person will be deemed to have sold and reacquired their assets at the current market value therefore potentially creating a deemed capital gain liable to tax. For those considering migrating to the UK and enjoying the benefits of the non-domiciled but resident regime, a problem could arise. What if they sell the relevant assets when resident in the UK and remit the proceeds to the UK? Can they credit the foreign tax on a deemed liability against UK tax on an actual one? The answer is no, and what they should consider is selling the relevant assets prior to migration so they have what is known as ‘clean’ capital to bring into the UK tax free, but more on this below.
Other countries, including Germany and Italy, retain the so-called residual taxation rights towards their departing citizens or former long-term residents. As a result, income or gains realised after the departure might still be subject to tax in the original State.
Pursuant to the EU Treaty protection of the fundamental freedoms, tax assessments on deemed gains have to be deferred when the person moves to a different member state, until the relevant assets are eventually sold. Quite how this will be policed is uncertain, especially for those assets held for many years after migration. Also, the terms of a double tax treaty may state that the taxing rights are solely with the country where the individual is now resident: do treaties have to be renegotiated to comply with the ECJ rulings?
For those who migrate outside of the EU, the exit tax often hits like a tonne of bricks. And the exit tax materialises on the day of departure, whilst the individual is resident in the relevant country.
What about those countries which do not have an exit tax for individuals, such as Ireland? It is well known that the Emerald Isle attracts many entrepreneurs with its broad double tax treaties network and benign tax regime. Although the country has a swingeing 33 percent capital gains tax rate, which makes the disposals of businesses problematic, in its recent eBrief No. 01/14 (click here) the Irish Revenue have informed taxpayers about entrepreneur’s relief from capital gains tax, introduced to encourage entrepreneurs to reinvest proceeds from the sale of certain assets in assets used in a new business. However, unlike the UK’s entrepreneurs’ relief, which allows for up to £10 million of chargeable gains to be taxed at 10 per cent instead of the normal 28 per cent, the Irish relief does not allow the taxpayer to simply dispose of business and keep the proceeds after paying a beneficial rate of tax: the proceeds need to be reinvested.
Such entrepreneurs may therefore consider leaving Ireland for another country. What they may not realise is the consequences of the lasting effect of Irish ordinary residence. A person is ordinarily resident in Ireland if he has been resident in the country during the three tax years preceding the year of assessment. If the person is leaving Ireland, he will not cease to be ordinarily resident until he has been Irish non-resident for three continuous tax years.
Now a person who is ordinarily resident in Ireland is liable to tax on his worldwide gains. Therefore, for three years following his move to a different country the same individual will be liable to Irish tax on capital gains realised during this period. While double tax treaties often prove useful in planning residence through the tie-breaker clauses that can override domestic residence determination, they often contain carve-outs that allow the participating States to keep the residual taxing rights in respect of the non-resident individual.
Many of Irish double tax treaties contain such a carve-out clause. For example, Article 13 of the Ireland–Canada double taxation treaty says:
5. Gains from the alienation of any property, other than that referred to in the preceding paragraphs of this Article, shall be taxable only in the Contracting State of which the alienator is a resident.
6. The provisions of paragraph 5 shall not affect the right of a Contracting State to levy, according to its law, a tax on gains from the alienation of any property derived by an individual who is a resident of the other Contracting State and has been a resident of the first-mentioned State at any time during the five years immediately preceding the alienation of the property if the property was owned by the individual before becoming a resident of that other State.
Essentially, the treaty allows Ireland to keep its residual taxation rights until the person becomes not ordinarily resident there after the three year period of regular tax non-residence.
If during the period of Irish ordinary residence the individual realises the gains while being resident in a different country, he might incur double taxation, arising in Ireland and in the State of immigration, although this is normally relieved under domestic unilateral provisions or under the applicable double taxation treaty.
Unfortunately, there is no satisfactory solution to the issue we raised above. Unless the individual holds off selling the property for three years following his departure from Ireland, he will be liable to the Irish capital gains tax regime. Even if this is avoided, the gain might be liable to tax in the country of the new residence, unless a domestic relief such as entrepreneurs’ relief or the remittance basis of taxation applies. Some countries, such as Canada or Malta, allow a step up in the base value of the person’s assets upon the move in their territory. This might prove useful to minimise the amount of the chargeable gain in the absence of other reliefs if the individual delays selling particular assets until after the three year period.
Migration to the UK via Spain
The UK attracts a large number of foreigners thanks to its migration scheme aimed at high net worth individuals and to the remittance basis of taxation that allows non-domiciled individuals to avoid taxation on their non-UK income and gains. Our August 2013 newsletter (click here) looks into tax planning considerations for the HNW migrants in detail.
Before becoming UK resident, the expecting migrants should create a sufficient amount of clean capital, which will not be subject to UK tax upon its remittance to the country. This is the principal planning technique, which might be costly and time-consuming. Sometimes the circumstances are such that the individual is forced to leave his country of origin but not ready to become resident in the UK due to the insufficient amount of such clean capital. In such circumstances, the individual might consider making a temporary stop-over in another country prior to committing himself to his new life in the UK.
For several of our clients, we have considered recommending a temporary sojourn of say a couple of years in sunny Spain, and not just for tanning purposes. Spain has a special tax regime aimed at attracting foreign executives to work on the Spanish soil (known to many as the ‘Beckham rule’), otherwise the ‘impatriate regime’ provided in article 93 of the Impuesto sobre la Renta de las Personas Físicas (click here). Our colleague Florentino Carreño, of the Spanish law firm Cuatrecasas, has provided us with a useful summary of the regime.
Spanish non-residents who, due to the signing of a labour contract or being instructed to do so by their employer, transfer their residence to Spain and become Spanish tax residents, may apply the regime, provided certain requirements are met. These might be substantially revised in the light of the amending legislation which will become law in 2015. The “impatriate” individual will only be taxed on Spanish source income and at the rates applicable to non-residents without any remittance rule being applicable.
This means that the migrating individual can sell his assets after emigration (subject to the relevance of the exit tax described above), yet not be subject to Spanish tax which is normally taxed on a worldwide basis — assuming the assets are not Spanish source, no capital gains tax will be payable in Spain. The individual may then migrate to the UK, his final port of destination, with an abundance of clean capital with which to start his new life.
The basic requirements to apply the impatriate tax regime are as follows:
- The individual must not have been tax resident in Spain in the ten years prior to his entering into Spain.
- The move to Spain must be a consequence of an employment contract (or as a consequence of a letter instructing to do so by the employer).
- The work must be effectively performed in Spain; however, up to 15 percent of the employment income may derive from work carried out outside Spain (30 percent in the case of group-related activities). In the proposed amendments this requirement is removed.
- The work must be performed for a company resident in Spain or for a Spanish permanent establishment of a non-resident entity. This is no longer an express requisite according to the proposed amendments.
- The employment income must be subject to and not exempt from Spanish non-resident income tax.
- The expected employment income in every given year cannot exceed €600,000. If it exceeds this threshold, the regime does not apply to any amount. Under the proposed wording if the impatriate earns more that €600,000, he will not lose the entitlement to the impatriates regime. Up to €600,000 will be taxed at 24 percent and the excess will be taxed at 45 percent.
- To benefit from the impatriate tax regime, the taxpayers must file their application within six months of commencing their activities in Spain.
- In addition, the proposed amendments introduce the restriction whereby the impatriate aiming to benefit from the regime cannot own over 25 percent of the company that employs him.
The regime operates for up to five years. Considering the amount of Spanish tax revenue potentially lost, it is common to discuss the individual application of the regime with the Hacienda. Also, as explained above under the proposed amendments the regime will not apply where the individual has a controlling stake in his employer directly or, we presume, through his connected persons. This means that the employment must be on truly commercial terms with the justification for the relocation.
This is of course only one country which encourages foreign individuals to take up residence within their shores. Our advice to clients centres not only on where they have chosen to live, perhaps with a tax motivation, but more importantly where their spouse or partner wishes to live. Many a divorce trail begins with disaffected partners incarcerated, so they think, in an offshore island where travel opportunities are restricted, and where sometimes their foreign language skills are severely tested. Not that Spain qualifies as an offshore island, but other tax beneficial jurisdictions I can think of certainly do.
Article written by Dmitry Zapol
21 August 2014
Roy Saunders, Chairman, IFS and IBSA. IBSA is the network for international business advisors and their clients, bringing together specialist advisors to enable businesses to optimise the structure of their international operation by enhancing resilience in tax planning, mitigating regulatory and market risk and enabling sustainable multi-jurisdiction growth.