We live in a time of dynamic changes and it is quite difficult to keep up with the change in tax regulations, and yet they affect all of us. Although the situation in Europe in terms of providing tax reliefs for private individuals has not changed much in the last 20 years. On the other hand, it cannot be denied that constant changes result in an increase in concerns and many entrepreneurs ask themselves what should they do next. In the context of the current political climate, the question of what is the best place to live becomes even more important.
The dynamic changes over recent years constitute the major challenge not only for entrepreneurs, investors and their advisors, but also for governments competing for innovations and economic development. We do not need to look far, as announced by the authors of the New Deal, and on the basis of its original assumptions, it had the same objectives. However, the scale of the effects exceeded the expectations of its authors, especially the unintended consequences. But I am not going to discuss this issue here. Today, I would like to look at the changes that are taking place in legal terms in Europe and in the world around us. You can read more about economic issues in the paper ‘Simple conservative investments. Historical analysis over the last 20 years‘.
International tax competition in 2022
Despite many demands for the unification of direct taxes, international tax competition between EU countries is still flourishing. This means that many countries are still undertaking measures to attract the most talented individuals. The US is stimulating this process, facilitating the process of getting a green card by outstanding individuals. In Europe, this process is carried out through tax reliefs. Small countries such as Monaco, Liechtenstein, the Isle of Man, which offer beneficial tax solutions, have been joined by Cyprus, Spain, Malta, Luxembourg, Portugal, Switzerland, the UK and Italy. These countries are not only competing with each other in terms of tax exemptions for investors or desirable professional groups. They also offer facilities based on freedom of travel, i.e. they do not require staying there for as many as 183 days in each tax year. They include, for example: Cyprus, Malta, Portugal and the UK.
At the moment, almost every country welcomes new residents with open arms. The only issue they pay attention to is that an individual who invokes tax residency in a particular country shall not stay for 183 days in a different country or obtain tax residence in a different country. It is being investigated, for example, by Cyprus and Malta. Both of these countries are still in the spotlight, so entering into a conflict of dual tax residence with other EU countries is strongly inadvisable for them. However, such verification is no longer carried out by Switzerland. Switzerland will accept any tax from you, but it does not verify at all where is your tax residence, and you have to make sure that you manage your tax residence correctly. Well, Switzerland can afford it…
Right next to Europe
In the era of the pandemic, Dubai has gained great importance among investors and entrepreneurs. The lack of restrictions resulting from the pandemic has attracted many entrepreneurs, and along with them great opportunities for economic development and international networking. The scale of investments in Dubai has increased significantly and this has strongly strengthened its position. And there you go… The UAE Ministry of Finance has just announced the introduction of a 9% CIT tax for companies registered in the UAE in 2023. How is that possible? If tax competition is at stake, and now in other countries CIT is at the level of 12% or more, then 9% tax in Dubai will still be competitive. That is, the pandemic turned out advantageous to Dubai and it does not appear that this change could in any way discourage investors from running their businesses by companies registered there with all the benefits available, which need not be mentioned here.
So, what is the best place to live?
Due to the increase in accumulation of international business in Dubai, more and more people consider the possibility of settling in this city. It is not just a matter of tax issues. It can be observed that if we have to choose between Cyprus, Dubai and the UK, Cyprus may turn out to be in a weak position, even though you only need to say there for 60 days. In the era of a large migration of entrepreneurs (and employees), Dubai is now competing very seriously with the UK.
It is worth pointing out that this week the UK decided to suspend some immigration facilitation. Due to the conflict in Ukraine, the government decided to abolish the immigration visa for investors, which allowed you to reside in London if you had invested at least £2 million in Treasury bonds in the UK. For fear of the inflow of funds from our neighbours derived from money laundering, immigration procedures in the UK were suspended overnight. We all look forward to the implementation of new rules, but at the moment it is possible to move to the UK as an entrepreneur running a business activity with the use of new technologies (innovator visa). This immigration facilitation should rather continue. The legal system of common law in Great Britain creates stable tax rules for residents (non-dom) in the UK. If we add to this a visa for owners of companies using new technologies, the whole system is in line with the current trends in EU countries which welcome talented entrepreneurs and employees.
What opportunities does Spain offer?
Spain, a dream come true for many of us, has a special tax regime for foreigners (The Beckham Law). I wrote more about this issue in the article “Is it worth living in Spain? The Beckham Law, or how to avoid paying taxes in Spain“. Thanks to these quite old regulations, people who acquire a tax residence there, will be able to benefit from a tax relief entitling them to tax exemption from all income except for employment income (in Spain, employment income is taxable regardless of the place where income was generated). You may apply for such a tax relief within 6 months of moving to Spain, unless you have been a resident of Spain for the last 10 years. You can benefit from the tax relief within a year of moving to Spain and during the next 5 years (i.e. for 6 years in total).
How about Portugal?
If you prefer a bit windier climate and enjoy having dinner while listening to the sound of the ocean waves crashing on the rocks, you might consider moving to Portugal. To that end, you should obtain the status of non-habitual resident. It should be noted that despite good intentions, the current Portuguese tax regulations for non-habitual residents require some amendments. The recent changes implementing capital income taxation are not flexible enough for investors with substantial assets.
So, what does Portugal have to offer?
The acquisition of a tax residence in Portugal is possible for a person who has not been a Portuguese tax resident for the last five fiscal years and has submitted a relevant application for inclusion in this tax system. You can obtain a non-habitual resident status for a maximum period of ten years.
The taxable income in Portugal is a subject to a flat rate of 20%. Income earned abroad, which may or may not be taxed at source, is tax exempt in Portugal, and includes income from real estate, dividends, work outside Portugal, business operations, etc. You can read more about the tax system in Portugal in the article “Portugal – non-obvious direction to change tax residence“.
The islands in the Mediterranean Sea have much more to offer
If you obtain the non-domestic status in Cyprus, you shall neither pay a tax on dividends nor the tax on interest. Moreover, like any Cyprus resident, you shall not pay a tax on capital gains as well. Moreover, Cyprus has not introduced a CFC personal income tax yet. On the other hand, Malta, following the example of the UK, offers a tax exemption for the income earned abroad and not brought to Malta. In Malta, similarly to the UK, you will have to pay a minimum tax. In the case of both Malta and Cyprus, the period of residence of 183 days is not required. In this case Cyprus is the leader in the EU, as the minimum period of residence required in Cyprus is 60 full days in a given calendar year.
The range of possibilities to change the residence is wide. There are many possibilities to choose from
Today, together with our customers, we wonder how to escape the current turmoil and where is it possible to reside safely. The growing range of offers of EU countries indicates that this is a trend of recent years and any rapid change is quite unlikely. However, when customers ask about the stability of the introduced solutions, I look many years back. Ten years ago, in my book, I described the best European tax solutions for high net worth individuals, i.e. people with significant assets. Analysing the regulations in today’s Europe, it is worth emphasizing the advantage of the countries building their tax systems slowly, i.e. gradually and sensibly. These include the UK, Germany and Cyprus. Many of them have not changed for over 10 years.The amendments that have been implemented since then result from the policy rather than a sudden turning point.
Besides the benefits offered by these tax systems, their stability seems to be an additional guarantee for people considering the change of their tax residence. Only such an approach ensures that you will not throw the baby out with the bath water, as in the case of the capital income taxation in Portugal.
You can find more information about the advantages and disadvantages of the most popular residence directions on the blog. I invite you to further reading:
- Cyprus vs. United Arab Emirates. Where to reside?
- Business scaling. Taxes in Estonia, Italy, the UK, Malta and Cyprus – comparison
- Next door expansion – Czech Republic, Slovakia, Germany, Romania
- Business expansion outside the EU. Let’s take a look at other continents