For many foreign nationals Hong Kong is an ideal place to work and accumulate wealth but most choose to retire elsewhere. Some may go home but many choose to go elsewhere for the climate and possibilities to find good housing at affordable prices. But sometimes they fail to realise that the living costs may be higher than they think due to tax.
Those Dutch nationals returning home are likely to face similar rates of charge. Holland is not a low tax country and charges income and capital gains tax on every worldwide source of income. Generally a person will be considered resident in Holland if he spends more than 180 days a year there but that is not the whole story - as indeed it is not the whole story in most places. If the Dutch authorities conclude that your main residence, family or work are in Holland or your life is mainly in Holland then you will be considered resident even if you do not spend the requisite 180 days there. Rates of tax payable are as high as 52% for higher earners – and most expatriates who have been living and working in Hong Kong will fall into that category.
Dutch inheritance tax is payable by the beneficiary but it is the residence of the donor which is crucial in determining liability into Dutch inheritance tax. Additionally, liability reaches any Dutch national who has been non resident of Holland for less than 10 years. So any Dutch national returning home will find his estate becoming subject to Dutch IHT at a rate of between 23% to 63% for higher amounts, depending on the relationship between the deceased and the beneficiary. This is high and unattractive.
Holland has relatively sophisticated tax laws designed to look through many structures which might, on the face of it, shield a taxpayer from Dutch tax on the underlying income. For example, a simple planning technique would be to transfer assets to an offshore company and allow the company to receive the income generated on those assets. Dutch laws would treat the income as belonging to the Dutch taxpayer in these circumstances so making this type of planning ineffective. More sophisticated planning is available and is required.
Hong Kong has a very lenient system of taxation. The rates are low and tax is charged only on income which has a Hong Kong source. Capital gains are not subject to tax and there is no inheritance tax or estate duty. Very few developed countries offer such a lenient system. There are places which charge no tax whatsoever. Residents of the Bahamas, Turks & Caicos Islands, Monaco and other small island states charge no tax whatsoever but living there is challenging and facilities are limited. In other areas of the world such as Gibraltar it's possible to reside on the basis that you will pay a maximum amount of tax of GBP22,000 per year irrespective of your worldwide income. A great deal but again living conditions are not to everybody's taste. If you move away from Hong Kong, as many do on retirement or after the end of their contracts, you are likely to face a different system of taxation with much higher rates. The most popular destinations are the US, Canada, Australia and the UK. All of these places charge their residents tax on their worldwide income at rates of 30% upwards and make it very difficult to shield income and capital gains from tax by the use of offshore structures and their like. In fact, the income and capital gains tax rate is not the end of the story. We recently conducted a little exercise to try and work out how much of a typical high rate tax payer's income was returned to the government by an UK tax resident. There are breaks for those who are not domiciled in the UK but not living there but if you are both resident and domiciled then you pay tax at the higher rate of 50%, national insurance normally adds another 10% on employed income leaving approximately 40%. Then the government takes another slice on your expenditure. Alcohol, tobacco, fuel and other items have government duty built in. Add in road tax on a car, congestion charges, rates on your house and other items which make up the expenditure of an average resident and then VAT at 14% on everything that you spend and it can be calculated that somewhere between 75% and 80% of your income goes back to the government. It's an horrendous figure.
It is possible to spend a reasonable amount of time in each of these countries without becoming tax resident but it's easy to overstay your welcome and get caught and keeping careful count of your days and avoiding a simple overstay is not the end of the story. For example, in the UK, you would not generally become tax resident unless you spent over half the year in the UK but you will become tax resident if you spend and aggregate of 360 days in the country over any 4 year period. Thus it would be possible to be there 180 days in year 1 and year 2 but then a single day spent in the country in years 3 or 4 would trigger a retrospective tax residency from the day you arrived. Other countries consider you tax resident if that country is your primary residence or centre of main economic and family activity. So unless it's possible to point to somewhere else where you actually live then you can be considered tax resident without spending the minimum required number of days there. Once you become tax resident then different rules apply on losing tax residency. Again using the UK as an example the general advice is that you cannot shed your UK tax residency without spending one complete tax year out of the country and then avoiding going back for the number of days noted above.
Many use offshore structures to shield their income and capital gains from tax once they become tax resident but anti-avoidance rules now look through most of these structures and treat the underlying income rolling up within a trust or company offshore as belonging to the taxpayer and assume he is receiving that income and tax accordingly even if in fact he is not. Previously many have set up these non compliant structures and assume that the confidentiality afforded offshore will protect them but there is an accelerating process in place whereby the onshore country is able to obtain information from anywhere in the world about who is behind a particular structure. Recent examples of this can be seen in the UK where UK banks have been forced by HMRC to reveal details of all UK residents who hold accounts with them in their offshore branches. HMRC estimate that there are 500,000 such accounts and they are currently offering a second chance for those who have had such accounts and not declared the income in them to come clean, pay reduced penalties and start afresh. Many are expected to take up that opportunity encourages by the threat that if they don't then they could face penalties of up to 100% and criminal prosecution. The US is likewise forcing Swiss banks to reveal details of US account holders. Liechtenstein has recently been forced to sign tax cooperation agreements which will force it to reveal details of foreign account holders upon request. Recently one of the employees of a major Liechtenstein bank sold stolen information about foreign account holders to the tax authorities of both Germany and the UK. My legal study suggested that it was quite illegal to receive stolen goods but clearly the normal rules of law don't apply when a government is involved. What I wrote about in an earlier piece all Offshore Financial Centres (OFCs) are being forced to sign tax information exchange agreements which give the right to onshore countries to obtain details about ownership of hitherto confidential structures set up in their jurisdiction and pass those to the local onshore revenue authority. The EU has forced it's member states and territories under their control to automatically pass details of any bank account held by a resident of another EU state back to the country of his residence. Switzerland is being forced to sign up to this initiative. So, for example, a resident of Germany who has a bank account in Cayman Islands which generates income which might be taxable automatically has details of that account and the income generated by it passed back by the Cayman Island institution to the German tax authorities.
For residents of Hong Kong who move away and settle in another country this can all come as a nasty shock. And a nasty tax bill.
Many simply do not realise the additional tax cost of moving to another country as well as the additional living cost. Many also do not realise that the days of hiding money in secret accounts or structures is now well and truly gone and attempts to do so are only likely to increase the tax which would follow from having the details of that structure or account revealed and then having to pay penalties on top of the tax which would normally be payable on income and capital gains lodged there.
Another commonly held misconception is that the remittance of the money to your new country has any effect whatsoever on it's taxation. If you have accumulated money while in Hong Kong or elsewhere and then move to a new country it matters not one bit whether or not you bring that money into the country or not. If it has already been taxed before you became a resident of your new country then it isn't taxable once you are there but if you leave it offshore then the income generated on the capital sum is taxable irrespective of whether you spend it in that country, bring it into the country or whatever else you do with it.
Careful planning is everything. Before you move to your new country there are structures which you can set up which will be effective in mitigating or avoiding tax. Insurance structures work particularly well for most countries but a carefully tailored policy which allows you freedom to invest in what you wish and do not limit you to a list of mutual funds with high entry and annual charges is necessary. Those structures work because your asset becomes the insurance policy rather than the assets in which the insurance premium is invested. As most, if not all, developed countries allow individuals to roll up income and capital gains within an insurance structure with tax only being payable once the money is taken out.
Attempts to control an offshore structure from onshore is problematical though. Most countries consider that any offshore structure which is managed and controlled from within their jurisdiction becomes tax resident in their jurisdiction and subject to tax there. For example, a BVI company which has directors based in the UK is considered by the UK HMRC to be tax resident there and therefore taxable on it's worldwide income at the usual rates of UK corporate tax. So in this case it's not the individual who is taxable on the underlying income, although he may also suffer that tax, but it's the company itself which is liable to UK corporation tax by virtue of it's management and control being in the UK. So any person who is going to become UK tax resident and has offshore companies can no longer act as director and must appoint professionals to act in his place and actually manage and control that company on his behalf. Attempts to control the activities of the directors means that whoever is controlling them is the actual controller of the company and therefore the same rule applies so it's not enough just to arrange the appointment of "nominee" directors, who do as they are told. Control has to be given up.
So, if you come to retirement or to the end of your contract and you are going to move countries then a careful examination of the relevant tax laws applicable in your new country is an absolute necessity if you are to avoid some very nasty tax consequences. A review of existing structures is a must as is consideration of what new structure should be put in place to avoid the worst aspects of the tax system of your new country of residence.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.