For many of us, the Covid pandemic has provided a very practical demonstration that it is not only possible, but equally productive, to work remotely. Some have been forced to work from home, some have chosen to work from home, but a significant number have decided to take the experiment one step further – if they are no longer required to commute to an office, they might as well take the opportunity to experience a different country, lifestyle, culture or climate. A good portion of remote workers now prefer not to go back to the office, even when they are permitted to do so.
The Internet has given us all a lot more freedom of choice. Some may miss the human interactions at the office – the camaraderie, the buzz and the absence of domestic distractions. Others would rather trade these benefits for the freedom of working where they want and when they want – as long as they get the job done. And for employers, of course, lockdown has amply demonstrated that it is possible to cut overheads significantly by reducing office space and, when and where necessary, implementing 'hot desking'.
Those who have taken the chance to work in a new country may find they have already become tax resident there and are subject to local tax rules. They may also remain tax resident in their 'home' country as well. It is perfectly possible to be tax resident in two or more countries at the same time and to be subject to tax on the same income in more than one place at the same time.
If there is a double tax treaty in force between the two countries, this would generally determine where tax has to be paid. Sometimes tax treaties work on a credit system where credit is given for tax paid in one place against the tax due on the same income in another. Tax treaties are specifically designed to prevent double taxation but can result in the highest rate of tax applicable in both countries being paid.
Most tax treaties contain a 'tie-breaker' clause (under Article 4) which gives the sole taxing rights to:
- The country where the taxpayer has a permanent home available;
- If the taxpayer has a permanent home in both countries, the country where the taxpayer's 'centre of vital interests' (personal/economic ties) are closer;
- If it is not possible to determine at which permanent home the centre of vital interests lies, or if the individual does not have a permanent home, the country where the individual has an habitual abode;
- Where the habitual abode test is not decisive, the country where the taxpayer is a national;
- If the individual is a national of both countries (or of neither), then the countries must settle the matter by mutual agreement.
For UK citizens, the standard advice is that to lose your UK tax residency it is necessary to make a clean break with the UK and, ideally, not return to the UK much (or at all) in the first year of foreign tax residency. This would certainly apply to an individual who wishes to lose their UK tax residency without acquiring another tax residency (or possibly who moves to a country that does not have a tax treaty with the UK).
There used to be considerable interest in the idea of the 'perpetual traveller'. This was an individual who spent insufficient time in any country to establish a tax residency and was therefore thought to be tax resident nowhere. In theory this is still possible but it is increasingly less likely to be achievable. Any country in which such a person spends any amount of time is likely to take the view that, if that person is not demonstrably tax resident somewhere else, they will be tax resident in that country.
For individuals who have already moved but have not yet done enough to establish a new tax residency, or for those who are thinking of moving, there are opportunities to mitigate tax before they become tax resident somewhere new. There are certain general principles that either will or could apply. Obviously, tax systems vary enormously from country to country, so it is not possible to be too specific in this article but it is sensible to be aware of the possibilities.
Exit charges – On leaving certain countries, there is a deemed sale of any and all assets. Capital gains taxes are charged accordingly. The exit charge is becoming increasingly rare but it is worth checking because moving under these circumstances can be very expensive.
Uplift on arrival – Certain countries, by contrast, will allow a revaluation of all assets upon arrival. This means that on a subsequent sale, capital gains tax is only charged on the difference between the value of the asset when you arrived in the new country and the actual sale price (or deemed disposal price). An automatic revaluation of all your assets in this way is obviously extremely beneficial.
Sell everything – If there is no exit charge in the country you are moving from and no re-evaluation in the country you are moving to, you can create a rebasing of valuations by disposing of all assets after leaving your existing country of tax residence and before becoming tax resident in the new country. This could be achieved by an actual sale of assets, which may no longer be needed if you are not going to be living in the country, or by transferring the assets into a suitable structure – typically a pension, insurance wrapper or trust. Beware of anti-avoidance provisions aimed at such techniques but this can often be very effective and ideally will also protect the profits of any future sale from tax.
Special tax regimes – Many countries offer special tax regimes to new residents and there are often straightforward ways to obtain residency through 'golden visa' schemes or their equivalent.
All EU nationals can still obtain residency in any other EU member state as of right and with a minimum of formality. All other nationals will need to go through the usual immigration procedures.
Greece will grant permanent residency to anybody who invests €250,000 in real estate and there are a number of tax incentives available to new residents, which include: pensioners are only taxed at a rate of 7%; entrepreneurs are only taxed on 50% of their income.
Italy offers new residents a flat rate tax charge of €100,000, irrespective of income, for the first 15 years. This will appeal to wealthy expats. Those earning a living income, however, can have up to 70% of their income exempted from tax for five years. The exemption can be 90% to a deprived region.
Portugal offers the Non-Habitual Resident (NHR) regime which, with careful structuring, provides a ten-year tax free holiday to new residents (apart from pension income, which is now taxed at 10%). The Golden Visa scheme also offers permanent residency to new non-EU residents in return for an investment of €350,000 - €500,000 in an approved investment which includes real estate.
The UK will generally treat any new resident from a foreign country as non-domiciled in the UK and therefore only subject to tax on income arising in the UK or foreign income that is remitted to the UK. In practice, it is relatively simple for high-net-worth individuals to structure their affairs so that they pay little or no tax in the UK and also remain outside the scope of the UK inheritance tax (IHT) regime which is 40% of the capital value of a worldwide estate. This "non-dom" status can, with a little planning, last indefinitely and certainly for 15 years.
Many countries in the Far East – notably Hong Kong, Singapore and Thailand – only tax territorially. It is therefore relatively simple for those who are not working in the country to avoid all tax.
Finally, of course, there are a large number of countries or territories that do not charge any sort of tax. These include Dubai, Monaco and many of the Caribbean countries.
Capital taxes. Care should be taken to ensure that it is not a case of 'out of the frying pan and into the fire'. It could be the case that having achieved substantial savings on income and capital gains tax, new immigrants find themselves exposed to additional wealth or capital taxes and/or inheritance tax/estate duties. Countries such as Spain and France, for instance, charge an annual tax that is based on the capital value of a taxpayer's worldwide estate. The rate of such taxes may be low but can add considerably to the overall tax burden.
UK nationals, on the other hand, generally remain domiciled in the UK and therefore subject to UK IHT at 40% of their worldwide estate even after having lived abroad for many years. Moving to a new country permanently presents an opportunity to shed their UK domicile and consequent liability to UK IHT, but it takes time to establish a new domicile. A UK national moving to Portugal could (or should) be able to establish a Portuguese domicile of choice after residing there for, say, five to seven years provided that they intend to remain in Portugal indefinitely. This would be massively advantageous as Portugal does not levy either wealth taxes or estate duties. Thus this is out of the frying pan and out of the fire. This might, on its own, be a compelling reason for UK persons to move.
What is clear is that many countries are actively competing to attract high net worth individuals by offering them substantial tax breaks. Without such special treatment, many taxpayers are going to face increased tax bills as countries around the world seek to raise as much revenue as possible to pay for the support they have given out over the pandemic.
We are already seeing that some of these tax breaks can be a little divisive. The 'locals' justifiably complain that whilst they are facing increased tax bills, their government is giving tax breaks to wealthy new immigrants who do not need them.
This view is perfectly understandable and not unreasonable. But the reality is that wealthy immigrants inject a lot of money into an economy through investments, purchases, VAT, job creation and employment and generally make a sizeable contribution to their new country. Without such tax breaks, they will not come and the locals will be left to pay even more tax.
Some taxpayers who can move and save tax, may feel morally obliged to stay in their home country or may feel guilty about not continuing to contribute to their home country's revenues. An alternative might be to move, save tax and send the tax authorities of the country you have just left a large voluntary as compensation. There are always choices but, as ever, early planning and sound advice is essential to good outcomes.
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.