The Common Reporting Standard: A Catalyst for Tax-Advantaged Residence
For those concerned about new regulations regarding the cross-border sharing of financial information, an alternative residence can provide peace of mind
Nigel Barnes, Managing Partner at Henley & Partners on behalf of Moore Stephens
While tax planning has always been a major part of managing one’s financial portfolio, alternative residence – and the fiscal benefits associated with it – is opening a world of new opportunities for high net worth individuals.
Increased pressure from various geo-political and -economic events, such as the triggering of Brexit, US President Donald Trump’s policy shifts, and, critically, the automatic exchange of information under the Common Reporting Standard (CRS), are now more than ever driving the world’s wealthy and talented individuals to seek alternative residence and tax optimisation opportunities.
Introduced by the Organisation for Economic Co-operation and Development (OECD), the CRS requires financial institutions to report account holder information to local tax authorities who, in turn, automatically exchange this information with the tax authorities, where those account holders are tax resident. The first phase of the CRS was initiated earlier this year and is in the process of coming into force in almost every significant economy, except for the US.
With the second wave of CRS adopters – including Switzerland and other countries with potentially favourable tax systems – expected in 2018, there is an increased emphasis on how the sharing of information will affect investments and the wealth managers who look after their clients’ portfolios.
The risks driving alternative tax residence
The exchange of information on income earned and assets held, can threaten the security of wealthy individuals and their families, especially those in developing countries, where there is a higher risk of this information becoming available to the wrong sources. The more parties with access to information and the further this financial data travels (especially across borders), the more likely that it can be corrupted, breached and subjected to cyber theft. Regulatory bodies do not always have sufficient cyber-security safeguards in place and, as a result, have experienced breaches affecting millions of people and their personal data. For high net worth individuals, the main concern centres around who will ultimately have access to the information exchanged – and what will be done with that information if it falls into the wrong hands.
The counter move to protect financial information
Alternative residence and citizenship provides an attractive solution for wealthy families, who have growing security concerns. Acquiring an additional passport also gives them access to a country where the overall situation is more favourable in terms of their security, tax, lifestyle and the quality of education available to their children.
Historically, the only way to reduce one’s tax burden legally, would have been to relocate. Now, with the CRS, the only way for individuals to have any control over which tax authority will be getting access to their information, is to change their tax residence. Generally, this can only be done by physically relocating and then spending at least half the year in the preferred tax jurisdiction.
There are various residence programmes worldwide that not only offer individuals the opportunity to become tax resident in countries that have more favourable taxation regimes, but more importantly, give the opportunity to control the exchange of their fiscal data and provide themselves and their families with better opportunities, should conditions in their native countries deteriorate.
Although one’s citizenship does not directly impact the automatic exchange of information (the CRS is based on tax residence and not citizenship), an additional tax-advantaged residence provides an invaluable bridge to ensuring a lasting financial legacy.
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MALTA
- Non-domiciled residents do not pay tax on foreign-sourced income, unless it is remitted to Malta
- Permanent residents pay income tax on their worldwide income at progressive rates of up to 35%
- No inheritance, gift or wealth taxes are levied
- Stamp duty is only paid on transfers of Maltese property (5%) and on transfers of certain shares in Maltese companies (2%)
- The acquisition of citizenship does not trigger tax residence and even if you decide to take up permanent residence in the country, you would normally still retain the status of a non-domiciled person, insofar as taxation is concerned
CYPRUS
- A corporate tax rate of just 12.5% – among the 20 lowest in the world
- Individuals are considered tax resident if they spend more than 183 days per annum in the country. Tax residents are taxed on all chargeable income that is accrued or derived from any source in Cyprus and abroad
- Any foreign taxes that are paid, can be credited against personal income tax liability
- Non-tax residents are only taxed on certain income accrued or derived from sources in Cyprus
- Personal tax on income generated in Cyprus is taxed at progressive rates up to 35%
THAILAND
- “Resident” taxpayers are those who reside in the country for a period (or periods) aggregating more than 180 days in any tax year
- “Non-residents” are only subject to tax on income from sources within Thailand and may transfer foreign-sourced income to Thailand without restriction
- Residents are liable to pay tax on income from sources in Thailand, as well as on the portion of income from foreign sources that is remitted to Thailand in the same year of earning. Delaying remittance of earned income to Thailand to the following year is, therefore, an attractive tax benefit to a resident
- Personal income tax rates are progressive up to a maximum of 35%