The taxman cometh

Just as businesses strive to attract the best employees, countries strive to attract the best taxpayers.

In recent months, two European countries regarded as having some of the best tax regimes for wealthy newcomers surprised observers by deciding to do away with these schemes. One was Portugal, which had introduced its non-habitual resident (NHR) regime in 2009, and the other was the UK, which has had a non-domiciled resident (’non dom’) scheme in place for over 200 years.

Other countries, especially in Europe, are rubbing their hands in glee – rather like companies hearing that brilliant top executives are back on the market. This is particularly the case for Switzerland, Italy, Monaco and Greece, all countries with their own attractive regimes for wealthy new residents. Other countries may also spot opportunities. These are ones whose tax systems may appear burdensome but can actually be flexible – in certain circumstances and/or thanks to certain special arrangements – and where many ‘non-doms’ originate, such as France, Spain and the Scandinavian countries.

The taxpayers exposed to the changes in Portugal and the UK need to analyse their options in detail before making any decision, especially since nothing is certain yet.

In fact, Portugal has almost immediately replaced the NHR regime with a system similar to Spain’s ‘Beckham law’—in other words, one that favours sports stars and highly qualified people liable to create jobs in the country. Although the taxpayers now being targeted are not exactly the same ones as under the NHR scheme, wealthy people from outside Portugal who are not economically active could still benefit from this new regime. After the slim win by the centre-right in the recent Portuguese elections, it will be worth seeing what happens in a country that has been a top destination for the very wealthy over the past 15 years.

Meanwhile, the UK has effectively abolished the existing tax regime for ‘non doms’ and replaced it with another. Known up to now for its particular interpretation of the terms ‘domicile’ (a term that can mislead the unfamiliar) and ‘remittance’ (a concept that encourages the wealthy to keep their money abroad), the UK seems to want to move to a system more closely aligned with that of other countries. This means the tax treatment of incomers is to be more closely based on their actual tax residency instead of the nebulous ‘non dom’ concept and without reference to their spending and investment in the UK.

However, the UK’s new tax regime is more straightforward and even more favourable than the previous one in certain respects. In essence, it exempts new residents from all tax on foreign income and capital gains, even if they are repatriated (‘remitted’)—albeit only for the first four years for individuals who have not been resident in the UK for the previous 10. Yet, as in Portugal, there may soon be political changes in the UK, since Labour appears poised to take power in the forthcoming election. Will it want to go beyond the ‘non dom’ tax changes announced by the Tories?

Some wealthy people who appreciate predictability and stability will no doubt be attracted to Switzerland or Monaco. Although Switzerland’s taxation system is not the least expensive (there is a minimum taxation threshold) nor the most flexible (there is a ban on engaging in gainful activity), it has the virtue of stability, having been in existence for over 150 years. Monaco is certainly very small and the cost of living is extremely high there, but its climate and exceptional stability are very tempting.

Overall, in light of the changes in the UK and Portugal, those who have less issues with changing taxation regimes and are more interested in remaining economically active in Europe are now perhaps more willing to consider Italy, Spain or even Greece for residency purposes.