Some EU Member States have responded to this new trend by introducing into their legal systems special tax regimes for individuals who transfer their tax residence there in order to attract large amounts of capital and help to boost investment, local tourism, consumption, and thus the economy.
There is some debate as whether these special tax regimes fall within the scope of so-called ‘harmful tax competition' and whether they violate the principle of equality and ability-to-pay . and consequently, some doubts regarding their constitutional legitimacy could be raised However, this is not the most appropriate context where to discuss this subject, indeed here we would like just to remark as those tax regimes, introduced a few years ago in some Member States (e.g. Portugal), have in fact helped to boost the economy, to encourage the internal investment and consequently generating a movement of wealth, increasing employment rates etc.
It is important to stress that this is not a completely new phenomenon.
The origin of special tax regimes for individuals
The United Kingdom (“UK”) introduced the first special tax regime for non-domiciled individuals as far back as 1799, during the reign of George III.
At that time, resident individuals were only taxed on foreign income only if transferred within United Kingdom (remittance basis). In 1914, the remittance basis was limited only to residents who were not domiciled or not ordinarily resident in the United Kingdom (UK non-domiciled).
Since then, and with successive changes, the UK non-domiciled tax regime has been one of the main factors which has attracted huge fortunes into the UK from all over the world.
Features of the most famous special tax regimes for individuals in Europe
Following in the footsteps of the United Kingdom and for the reasons above mentioned, Member States such as Portugal, Italy and Greece and others have more recently introduced specific tax regimes for individuals and their families transferring in their tax residence.
We will briefly describe the features of these various tax regimes.
Portugal: Non-habitual resident regime
The individuals who transfer their tax residence in Portugal may benefit from the Non-habitual tax regime for 10 consecutive years as follow:
- the application of a reduced tax rate of 20%, on income from employment and self-employment activities ( “high added value” activities, as defined in the list approved by decree of the Minister of Finance); and
- an exemption for income deriving from foreign sources (e.g. dividends, interest, etc.).
In order to benefit from the Non-Habitual tax regime, the following conditions have to be met
- The individual has not been resident in Portugal during the previous five years.
- The individual must be resident in Portugal for more than 183 days per year and register with the Tax Authorities as Portuguese tax residents.
For those individuals who benefit from pension income, a tax rate of 10% applies (originally pension income were not subject to any tax).
The regime for Non-Habitual resident enable to remit income from foreign sources in Portugal and still to benefit from the above tax exemptions.
Tax regime for “New Residents”
The New Resident tax regime introduced by Law no. 232 of 2016 (Budget Law 2017) provides that individuals who transfer their tax residence to Italy may benefit from a substitute tax on foreign income amounting to €100,000 .
The tax regime for new residents has a term of 15 years and may also be extended to family members by paying a tax of €25,000 (for each family member who wishes to benefit from this option).
The individuals may access to the regime :
- submitting an advance tax ruling to the Italian Revenue Agency or ;
- exercising the option for substitute taxation in their tax return in the year during which tax residence was transferred to Italy, or the following year.
To benefit from the regime for New Residents some conditions should be met:
- The individual has not been tax resident in Italy for at least 9 years out of the 10 years preceding their transfer to Italy.
- Being Italian tax resident according to internal rules.
The substitute tax of €100,000 must be paid for each tax period during which the regimes is valid.
Optional tax regime for foreign pensioners
The Budget Law of 2019 introduced a new tax regime for individuals who are entitled to receive pension income. In particular, Article 24-ter, paragraph 1 provides that individuals who
- receive pension income paid by foreign entities, and;
- transfer their residence to Italy in one of the municipalities within Sicily, Calabria, Sardinia, Campania, Basilicata, Abruzzo, Molise and Apulia with a population not more than 20,000 inhabitants,
may benefit from an optional tax regime which provides for the application of a substitute tax of 7% tax rate on foreign income, for each of the nine tax periods during the validity of the option.
The option shall be exercised in the tax return relating to the tax period during which residence is transferred to Italy and is effective from that tax period.
The following conditions have to be met to benefit from the foreign pensioners tax regime:
- The individual has not been resident in Italy in the five tax periods prior to the one in which the option has been exercised.
- The individual transfers his tax residence to Italy from an administrative cooperative country.
- They are entitled to a pension income (pension payments of all kinds and those equivalent to them) which is paid by foreign entities.
Regime for Non-Domiciled Individuals
Individuals who transfer their tax residence to Greece may benefit from a substitute tax on foreign income amounting to €100,000 to be paid for each tax period during which is the regime is effective.
The Non-Domiciled may also be extended to family members by paying a tax of €20,000 (for each family member who wishes to benefit from this option).
The related application for the transfer of tax residence and for obtaining Non-Domiciled status must be submitted by 31 March of each tax year.
The conditions for benefiting from the Non-Domiciled regime are:
- The Individual has not been resident in Greece for at least 7 years out of the 8 years preceding the start of the tax regime.
- The individual must transfer his tax residence to Greece.
- The individual must invest at least €500,000 either in real estate or in bonds, or in shares of companies established in Greece, either directly or through family members or a company.
The payment of the substitute tax in the amount of €100,000 must be made in a single instalment, for each tax period during application of the regime.
Scheme for non-domiciled pensioners
Individuals, who benefit from pension income paid by foreign entities who transfer their tax residence to Greece, may benefit from a tax regime which establishes that foreign income may benefit form a reduced tax of 7% for 15 years.
The related application for the transfer of tax residence and for obtaining non-domiciled status must be submitted by individuals by 31 March of each tax year. The conditions to benefit from the Non-Domiciled pensioner regime the following
- The individual has not been resident in Greece for five over the six years preceding the year in which the tax regime becomes effective.
- The individual transfers his tax residence to Greece from Countries with which administrative cooperation agreements are in force.
- The individual is entitled to pension income.
An appropriate wealth planning is necessary
In such economic globalisation growing and international mobility, an individual who decides to transfer his tax residence to another country needs adequate and flexible wealth planning which must be adapted to different legal and fiscal environments.
In this regard, currently one of the most efficient and widely adopted solution is the unit-linked life insurance policy.
A life insurance policy would make it possible to invest in a varied and diversified financial portfolio (e.g. UCITS, ETFs, AIFs) and to benefit from tax deferral upon death or total/partial redemption
Furthermore, the policy would not normally be caught by the Exit Tax which has increasingly been introduced world widely in the recent years.
Finally, thanks to its features, the policy can be easily adapted (with the right precautions and a case-by-case analysis) to different legal and tax contexts. Indeed, it is possible for a policyholder, transferring his tax residence from one country to another within the European Union, to continue benefit from the legal and tax advantages of a unit linked life insurance policy.