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RESIDENCE PLANNING FOR ENTREPRENEURIAL CLIENTS - A SUMMARY

Updated: 16 Mar 2017

Roy Saunders, IFS Consultants, opened the floor by introducing the audience to a case study that involved a wealthy family with business and investment activity worldwide and possibilities to choose any country as their home. He explained that the panel would describe advantages of several countries where the protagonists of the case study could move.

To begin, Roy asked his colleague Dmitry Zapol, IFS Consultants, to give a short overview of the state of affairs with the UK’s non-dom regime. The picture that Dmitry painted was contrasting. On the one hand, the UK is still welcoming newcomers whose use of the remittance basis of taxation — the right not to pay taxes on foreign income not brought in the UK — has remained largely unrestricted. On the other hand, long term residents, namely those who have lived in the UK for 15 years and more face the wrath of worldwide taxation with income tax rates reaching 45 percent. To compensate for the curbing of the beneficial tax regime that used to be lifelong, in the next two years such persons can rearrange their affairs to achieve a step up in the base value of some of their assets together with separation of the mixed funds accounts.

Next Ali Kanani, Bonnard Lawson, took the lead with an overview of the benefits that the Swiss tax system offers foreigners moving to its territory. By default, Switzerland imposes taxes on the worldwide basis. However, a few cantons allow a so-called lump-sum system of taxation, also known as the forfait. Broadly, income tax is paid on a certain pre-agreed amount, whose method of calculation differs between cantons.  Basically, the taxable basis amounts to the annual expenses of the family of the taxpayer.  However, the tax base cannot be lower notably than seven times the deemed rental value of the taxpayer’s accommodation in Switzerland.  Moreover, the annual tax liability based on the forfait cannot be lower than the result of the so-called control calculation that takes into account the person’s annual tax liability on the actual Swiss source income and wealth. The lump-sum taxation is available to those who spend at least 90 days in Switzerland and take their domicile in Switzerland. It comes with important limitations — the taxpayer cannot pursue lucrative activity in Switzerland, such as being a director of an active business, although management of their own wealth is allowed. The taxpayer is free to carry out a lucrative activity outside Switzerland and still benefit from the lump sum tax regime. The taxpayer also cannot become Swiss citizens for whom the forfait system is not available.

Following referendums, the lump-sum taxation regime has been abolished in several cantons uprooting individuals living in their territories who would want to continue avoiding worldwide tax liability forcing them to move to a different part of Switzerland.

In the end, Ali referred to the case study. In his view, if the patriarch wants to move to Switzerland, he may wish to opt for the ordinary tax regime. This will allow him to run his own business in its territory and also to apply for the Swiss citizenship. Finally, in the absence of capital gains taxation especially on sale of shares in the domestic tax regime, certain planning opportunities exist.  Alternatively, he can apply for a Maltese passport, in case an EU citizenship is seeked for personal or security reasons, and elect to be taxed on the lump-sum basis in Switzerland.

Next, Dharshi Wijetunga-Frei, Anaford, took the floor with an overview of the residence programmes in the South-East Asia. She explained that the route to citizenship begins with establishing residency under one of the investment programmes. In New Zealand one can choose to invest NZ$1.5 million for at least four years or NZ$10 million for at least three years. There are additional requirements attached to the length of presence in the country which are fairly benign in the case of the larger investment. Normally, the citizenship is granted in the end of the respective four or three-year periods. Singapore offers the Permanent Residence status to those who apply through the Global Investor Programme. The applicant must invest at least S$2.5 million in Singapore-based businesses and demonstrate a good business record. It is possible to apply for Singapore citizenship after a few years of permanent residency, however, Dharshi warned that one would have to give up their original citizenship and males would have to do national services. Australia offers permanent residency to persons willing to invest AU$1.5 million, AU$5 million or AU$15 million in the local economy. Depending on the amount of the investment, the citizenship may become available 4 years or in as little as 12 months.

Both New Zealand and Singapore can be attractive from the tax point of view for the new immigrants. The former offers a temporary tax exemption for foreign income to fresh New Zealand tax residents for the first four calendar years. The latter has a permanent territorial system of taxation where foreign source income is not liable to tax in Singapore. Unfortunately, there are no similar tax benefits in Australia and one must check that their visa presence requirement does not lead to an unexpected tax residency.

Matt Ledvina, also from Anaford, spoke next and described the new territorial system of taxation in Italy, dubbed the “non-dom” regime, aimed at attracting wealthy new migrants. Subject to paying a €100,000 annual charge, the taxpayer is exempt from tax on the non-Italian source income that is not remitted to Italy. It is also possible to obtain a tax ruling in respect of the Italian source income to agree a beneficial tax rate with the tax authorities.

Unlike in Switzerland that forces the lump sum taxpayer to live in a particular canton, the Italian regime is available in its entire territory for the maximum of 15 years. In order for the family members to benefit from the regime, they each have to pay an annual charge of €25,000. Beside income tax, the new system applies to inheritance tax, which is charged only on the Italian assets of the deceased.

Italy’s residence by investment is not as widely known compared to say Spain’s and Portugal’s “Golden Visas”, however, it is available subject to having a sufficient amount of funds that can be invested in the Italian economy and remain available to sustain an applicant’s lifestyle. It takes 8 to 10 years to become an Italian citizen, 6 years to become a Portuguese citizen and up to 10 to become a citizen of Spain.

Portugal and Spain also offer inpatriate tax regimes under which foreign source income may be exempt from domestic taxation. However, there are many limitations and out of the three, the Italian new regime is the simplest to apply.

Caroline Bennett-Akkaya, Praxis IFM, talked about immigration and taxation in Malta, also an EU State. Subject to making a €650,000 contribution to the Maltese Government — treated as a non-refundable commitment — the immigrant becomes a Maltese citizen after spending only 12 months in the country. There is no need to spend too many days in the Maltese territory during the year to meet the residency requirements. The Government aims to pick the best applicants and limits the overall number of newcomers to 1800 leading to concerns that soon it will be exhausted. Like the UK and Italy, Malta offers the remittance basis of taxation under which foreign source unremitted income is not liable to tax and the remitted income is taxed at a flat rate of 15%. This offers an opportunity say to sell shares offshore, bring the proceeds to Malta and pay the modest amount of tax on the resulting capital gains. Also, Malta has no inheritance tax.

Roy Saunders concluded the panel proceedings by mentioning Israel’s 10-year tax moratorium for the new residents together with Cyprus’s remittance basis of taxation and absence of tax in Dubai, UAE. He also spoke about Madeira’s attempt to gain recognition and offering beneficial individual taxation, particularly to the retirees. Finally, he explained the importance of having a broad double tax treaty network, however, warned that frequently individuals using the remittance basis of taxation would not be able to profit from the tax treaty benefits.

In the end, the floor was opened for a discussion. Dmitry described the benefit of Dubai’s double tax treaty with Switzerland and the UK and explained how it can help with taxation of dividends. Matt also touched upon the use of the double tax treaties expressing concerns that users of the Italian new tax regime might not be able to obtain the benefits. However, it could take a few years for Italy’s treaty partners to amend terms of the double tax agreements during which Italian’s “non-doms” would profit from the lower withholding tax rates. Ali added that normally treaty benefits are not available to Swiss tax residents using the lump sum taxation. Roy concluded the seminar by mentioning corporate redomiciliation with a warning of the potential tax consequences arising on corporate relocation.