Special Personal Tax Programs in Europe



I have previously written about 

But let's look at Europe as a whole as various jurisdictions compete to attract higher income earners with territorial tax schemes which are different to the normal high, worldwide tax system that Europe is known for.

There are basically two options to avoid high taxes in this set-up of residence-based taxation of worldwide income. 

  • The first is to receive income from a country that does not tax it at the source and illegally hide it in a secret bank account that the tax agencies in your home country of residence is ignorant about.

  • The second option for individuals to avoid high taxes is to acquire a new tax residence.  This often, but not always – means moving to a country with lower taxation and leaving home.  Consider Cristiano Ronaldo. He was introduced by Real Madrid on 6th July 2009 (with only 177 days remaining that year) and quit the UK on 26th of June the same year for a holiday (with only 179 days of residence there). As he spent less than half a year (or 183 days) in any of the two countries, this might mean that he avoided residence in both. 

While the standard argument says that moving to another country to change tax residence is too cumbersome to happen regularly, some tax avoidance advisors see a “coming era of ‘relocation’ tax planning”.







Historical roots in the British empire


The UK was one of the first countries in the world to introduce a personal income tax in 1799 to finance the wars against Napoleon. The respective law had at least two essential flaws that remain to this day – first, the exemption from capital gains that was abolished in the UK in 1965 after many of its colonies had copied it, and, second, the non-taxation of foreign possessions (and income from it) for people resident but not domiciled there. Throughout its evolution in case law, domicile has roughly been interpreted as the residence of the parents at birth (domicile of origin) or the place chosen with the intention to live there permanently (domicile of choice). This distinction and the related special tax schemes for people without a domicile in a particular country (so called ’non- doms’) make it possible for the beneficiary to live in the UK, Ireland or Malta – the three European countries that apply this distinction – often for very long periods of time whilst paying taxes only on the income earned or transferred there. Anyone who keeps his or her investments neatly separated in Jersey or the British Virgin Islands whilst living a comfortable life in London or in the pleasant climate of Malta can thus make huge profits without paying any tax there or in any other place.







Special tax schemes helping to rebuild the Netherlands and Belgium after World War II




In the aftermath of the destruction wreaked by World War II, some countries resorted to using tax incentives for highly skilled foreign employees to increase their attractiveness. Starting from individual rulings with investors, these schemes have become generalized in both countries over time. They now include tax-free allowances exempting about one third of salaries from income tax as well as the possibility for the beneficiaries to claim the status of non-resident for tax purposes while still living and working there. These options are available practically indefinitely in the case of Belgium and have been recently limited to being available for a period of eight years in the Netherlands. Similar to the ‘non-dom’ regimes in the UK, Ireland, and Malta, this allows the beneficiaries in Belgium and the Netherlands to exclude their income from foreign savings and investments from taxation. In Belgium, this even includes the foreign-source labour income.







Athletes : a new wave of special tax schemes


In the 1990s, high-tax Denmark, Finland, Italy and Sweden started attracting foreign, high- skilled employees with tax incentives but with a much shorter validity of the benefits and taxing foreign-source income at the high local rates – if it was declared properly. When France introduced its special scheme for expatriates seconded to France in 2004, it was merely a tax-free allowance similar to that initially applied in the Netherlands or Sweden but France extended it to include a 50% rebate for the tax on foreign-source capital income in 2008 (still charging social security though) and included French people who had returned to live in France. With Real Madrid competing with Manchester United and other British clubs for the best paid footballers in Europe, Spain introduced its scheme for highly-skilled expatriates.







Now Portugal, Malta, Italy and Cyprus are competing for the most attractive scheme


The Portuguese scheme introduced in 2009 was similar to the Spanish in its basic design – with a tax reduction for local employment income and the exclusion of foreign-source income – but had two main differences.  

First, athletes and footballers were not allowed to benefit from the reduced tax rates on local employment from the outset but can, to this day, benefit from the exclusion from taxation of their foreign-source income as long as it does not come from a tax haven or a country that has no right to tax it. 

Second, and new in the EU, buying or renting a house in Portugal was enough to become tax resident and obtain the special tax privileges as a non-habitual resident – an idea that was duly optimised in the Maltese residence for investment schemes. Applications for the Portuguese scheme took off after 2012 when it was confirmed that foreign pensions were also excluded from tax and some very well paid retirees from Finland and Sweden caused diplomatic tensions, although they were not the biggest group of beneficiaries at the time.








Challenges to the UK’s ‘non-dom’ regime and Brexit-induced competition


In the meantime, several scandals in the UK prompted the UK Government to restrict its scheme. Those scandals included the heir of the Swedish inventor of Tetra Pak, who was living in his UK castle, paying very little tax, members of the House of Lords claiming ‘non-dom’ status and a British employee of HSBC claiming only a temporary relocation after more than ten years living and working in London and despite becoming the bank’s CEO. 

As a reaction, the UK introduced a minimum tax, forced members of parliament to be domiciled in the UK and most recently introduced the concept of deemed domicile. The new concept of deemed domicile declares that anyone who has been resident in the UK in 15 out of 20 years is fully liable to UK tax. 

The British restrictions and the approach of Brexit might have prompted Cyprus to create arguably the most beneficial scheme for the very rich and mobile with high capital incomes – with virtually no tax and minimal payments even for remitted income combined with a short residence requirement of only two months. Cyprus’s approach makes even the new Italian scheme, with its lump sum payment of €100,000, look unattractive unless that is a cost you are ready to pay for the Italian dolce vita (a lifestyle based on enjoying life to the full), or there is a football club willing to pay astronomical salaries until your retirement





Ireland


Ireland’s Income Tax Act of 1967 contains a clause (76 (2)) on remittance- basis taxation for non-domiciled tax residents using the concept of foreign securities and possessions inherited from the UK. Ireland has slightly restricted its scheme by excluding income from foreign employment received or performed in Ireland (2006), by excluding non-resident Irish citizens and later non- resident Irish domiciles as well as by charging a rather unsuccessful domicile levy on them (2010). The Irish Government also closed a loophole that allowed the tax-free remittance of foreign income through loans or gifts to spouses and civil partners (2013). On the other hand, Ireland extended the kinds of income sourced in the UK falling within the scope of the remittance basis (2008) and promotes itself as an alternative to the UK without the complicated residence test applicable there. Ordinary tax residence in Ireland is acquired after three years of physical residence - staying in Ireland for either 183 days per year or 280 days over two years - and can be kept for three years after leaving. As in the UK, domicile is not defined in tax law but is generally acquired at birth (usually it is the domicile of the father) and kept until an individual chooses to move to another country with the intention of staying there permanently. Also similar to the UK, capital acquired before becoming an Irish tax resident or income already taxed abroad can be remitted free of tax to Ireland.

There is a special assignee relief program (SARP) introduced in 2012 and extended until 2020. It is available for employees that fulfill specific criteria. First of all, they must be sent by a company incorporated in a country with which Ireland has a double tax treaty or an information exchange agreement. Second, they must have been sent to work in Ireland for at least six months, earning a minimum gross salary of €75,000. Third, the tax exemptions only apply if the employees have not been tax residents in Ireland for the last five years.



Stay tuned for more....

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