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Short news and ideas

Where should I be tax resident?


23/06/2015

Tax planning over the last 20-25 years has typically been single level. Attempts were made to minimise tax at corporate level, with very little attention being paid to the individuals, shareholders and beneficial owners behind the companies. The situation will change dramatically from 2017, as the exchange of banking information will mean that corporate income which can be linked to its beneficial owners will become subject to taxation, in cases where the individual concerned is involved in a Controlled Foreign Company. Precise planning of personal income tax will take on far greater importance, and the second level of tax planning will be introduced, where it is no longer sufficient to optimise the tax burden at corporate level.

In general, it can be stated that an individual is tax resident in the country in which they spend more than half of the tax year, that is, 183 days. It is important to check whether the tax year coincides with the calendar year, as here it is the former which counts rather than the latter. There are a number of cases where the main rule can be overruled, for example if an individual spends time in a number of countries, without spending 183 days in any one of them. In this case, too, the individual is tax resident somewhere, but more complicated rules have to be applied, taking into consideration the laws of several countries, to determine just where that is. Criteria such as centre of vital interests, or ultimately citizenship can be defining factors. There are also cases where an individual may become subject to tax in more than one country. It is rare for someone not to be tax resident anywhere.

If we take the main rule as the starting point for an individual who spends more than 183 days in a given country and is not tax resident in any other country, then generally this is where they will be required to pay tax. Naturally, there may be certain incomes which can be taxed abroad. One such typical case is with foreign real estate, where the proceeds are generally taxed in the country in which the real estate is located.

There are countries where all of the income of tax residents is free from tax. One such country is the United Arab Emirates, where there is no personal income tax. There is another group of countries where certain types of income are not subject to taxation. In Cyprus, for example, there is no tax on capital gains. This offers an excellent opportunity for asset managers, investors on the stock exchange and currency traders. It is also true that the tax system in Cyprus is also beneficial in that the first 19 500 euros of personal income is tax free.

There are significant differences in the taxation of personal income between the states of the European Union. In an article in the previous edition of the LAVECO Newsletter we highlighted the advantages of the tax system in Malta. Perhaps the most extreme case is France, where income over 1 000 000 euros is subject to personal income tax at the rate of 75%. Bulgarian taxation is particularly favourable, with a tax rate of 10% on corporate profits, while dividends paid out by Bulgarian companies are subject to 5% tax. The taxation of high earners is also favourable in Hungary, where there is currently a flat rate of 16%, and this is due to be reduced to 15% from January 1st 2016.

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