Technical briefing - 11/04/2014
Tax competition is a hot topic at the moment and there has been much huffing and puffing by the OECD and the EU about its allegedly harmful effects.
For instance, in February 2014, the European Commission issued a press release in which it calls for solidarity between member states on tax policy and warns that the EU “cannot accept national measures that encourage tax shopping by citizens and businesses, or that are designed purely to steal the tax base of neighbours”.
Now it must be recognised that these communiqués are heavily influenced by the concerns of the ‘big beasts’ of the EU – Germany, France, Italy and so on – those countries with the biggest, most inefficient and most hostile tax regimes. Not surprisingly, they feel threatened when neighbouring countries wish to roll out the welcome mat for wealthy foreigners.
The EU’s smallest member state, Malta, felt the wrath of the European Commission recently over its Individual Investor Programme. The concern was that Malta was giving away its citizenship too easily to non-EU nationals. The government of Malta has been forced to tighten up the rules – including a new requirement that the applicant must be resident in Malta for at least 12 months before he or she can apply for citizenship. There was also a request that Malta put a cap on the number of individuals who will be allowed to apply, leading to an upper limit of 1,800 admissions over the life of the programme; as of November 2016, over 800 applications had been made.
But what Malta is doing is nothing new – a number of EU member states are offering residency and/or passports in return for cash.
In Spain you can obtain residency through the Special Investor Residence Visa, which is also known by the more colourful name of the “Golden Visa” programme. This programme is open to EU and non-EU nationals who invest the required amount of money into the Spanish economy. In return the investor gets residency for one year initially, but this is renewable for another two years subject to the investment being maintained.
So how much do you need to invest? The answer is – not much. You can qualify if you make either one of the following investments: (i) real estate of EUR500,000; or (ii) EUR1m in bank deposits or companies in Spain; or (iii) EUR2m in Spanish government bonds or certain local bonds; or (iv) the creation of local jobs.
The Spanish Golden Visa scheme was heavily influenced by that of its neighbour, Portugal, which introduced its own Golden Visa scheme a year or so earlier. The minimum investment criteria remained largely the same as those for Spain until Portugal introduced several new and cheaper options in 2015. Examples include a EUR350,000 investment in properties older than 30 years or in ‘urban regeneration zones’ and a EUR350,000 investment in scientific or technological research.
The Portuguese scheme only obliges the applicant to reside in the country for seven days during the first year, with another 14 days over the following two years. That’s a remarkably short period of time. Individuals become eligible for permanent residence after five years, although applicants must meet certain criteria such as a basic knowledge of Portuguese, and passports are available after six years.
This period of time before qualification for a Portuguese passport is about consistent with other EU member states (including the UK). One of the reasons Malta got into trouble is that under what has now been dubbed the “Golden Passport” scheme, it was prepared to dish out passports almost straight away in return for a cash payment of EUR650,000.
But is the Maltese scheme worth looking at? If you are a non-EU national looking for an EU passport then the answer is yes. You will have to pay a total of EUR1.15m, which includes a EUR500,000 investment in the local economy and a fee of EUR650,000, but that’s about it.
Another consideration when weighing up the options is what you will pay in taxation once you become a resident of one of these countries. This is where the Maltese scheme becomes more interesting as although the up-front cost is higher, you will end up paying less in taxation and will qualify for the passport more quickly.
The problem with both Portugal and Spain is that they have world-wide models of taxation – this means that once you become a resident you will be liable to tax on all of your income, regardless of where it arises. This is a big blow if you have substantial sources of foreign income or gains. Malta, on the other hand, has a remittance basis of taxation and that means you are only taxed on foreign income or gains that are actually brought into Malta. As you can imagine, that makes a huge difference to your potential tax liabilities.
To be fair, Portugal has tried to ameliorate its normally high rates of tax by introducing special low rates of tax for individuals who are working in certain sectors. This can lead to a top rate of tax of 20% on such income, but the fact remains that for most kinds of foreign passive income or gains, the full rates of tax will be payable.
One of the other players in this market is Cyprus, which has for some years offered attractive packages for HNW individuals. To get residency in Cyprus is pretty easy – you need to acquire property of at least EUR300,000 and be able to show annual income of at least EUR30,000 (plus EUR5,000 per dependent and EUR8,000 for a dependent parent or parent in law). In addition you must make a deposit of EUR30,000 to a Cypriot bank, which will be blocked for the first three years. Like Malta, Cyprus has a remittance basis of taxation that means that you will normally escape taxation on your non-Cyprus income.
Getting a passport is less easy as it requires a hefty investment in the local economy which, given the collapse of its banking system and much of the local economy with it, doesn’t look attractive. I don’t know about you, but investing EUR2m in the Cypriot economy doesn’t fill me with either hope or joy.
Another drawback of Cyprus is that, like Malta, it’s an island in the Mediterranean with limited connectivity to Europe (compared to, say, Madrid, and Lisbon). This is an issue for the internationally mobile individual.
Of course, the most international of all cities in Europe is London and despite all the recent changes in the UK’s legislation it remains an attractive place to live. The UK has its own investor programme (called the Tier 1 Investor Visa) and in return for an investment of £2m (which can just be a deposit in a UK bank) you can get a visa to live here. The UK also has a remittance basis of assessment that means for the first seven years as a resident, you can enjoy freedom from taxation on your foreign income or gains, provided they are kept outside of the UK. Thereafter an annual fee is payable (called the ‘remittance basis charge’), which starts at £30,000 per annum.
The final EU contender is Ireland, which recently introduced its own investor programme. You can invest either EUR1m in a government bond or EUR1m in an Irish business and this will get you residency. Ireland also has the benefit of a remittance basis of taxation, but without the annual fee after seven years.
These schemes are all targeted at non-EEA nationals and they share the same objective – to lure wealthy foreigners to their shores. Of course, if you are already an EEA citizen then you do not need any of these schemes because the EU Treaty gives you complete freedom of movement within the EEA. There is plenty of evidence that EEA citizens are moving to save tax - witness the large number of French people who have moved to the UK since Francois Hollande declared war on the rich.
Of course, following the UK's decision to leave the EU the free movement of individuals to and from the UK could be seriously hampered. At the time of writing it is unknown what the future arrangements will be for Europeans coming to the UK, but the worst case scenario is that they will have to apply under the Tier 1 Investor Visa rules.
Whatever happens after Brexit, there will still be competition for high net worth individuals and their businesses, perhaps even increased competition. This is a good thing - without competition countries can become sclerotic, inefficient and complacent. The EU Commission may not like it but tax competition is healthy – not harmful – and it’s definitely here to stay. Three cheers to that!
Correct as of May 2017.
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