Philippe Kenel

Relocation: which country should you choose?

Philippe Kenel, Doctor of Law, Attorney-at-Law in Lausanne, Geneva and Brussels, Python & Peter

When someone decides to relocate for fiscal reasons they make a shortlist of attractive countries from the point of view of capital tax and tax on income from capital on the one hand, and inheritance tax on the other hand.

The countries on this shortlist, several of which are EU member states, divide into two categories: those offering special tax rates for foreign nationals, and those offering lower tax rates for wealthy taxpayers.

Traditional examples of the first category are Switzerland and the UK. In Switzerland, a foreign national who is not engaged in activities on Swiss soil can benefit from a tax concession called lump sum taxation, by virtue of which such person does not pay tax based on wealth or income, but on the person’s living expenses. Although inheritance tax is levied at canton level, the rates are generally very low. In the UK, under the tax regime called "non-domiciled resident" the taxpayer pays tax only on their UK income and wealth located in the territory of the United Kingdom. Upon his death, the heirs of a taxpayer benefitting from this tax regime do not pay inheritance tax on assets located abroad. This inheritance tax exemption does however end after seventeen years. The crucial difference between the UK system and the Swiss system is that, unlike Swiss taxpayers who are taxed based on living expenses, a “non-domiciled resident” may engage in gainful employment in the UK. In recent years, both Switzerland and the UK have tightened the conditions which must be met in order for a person to benefit from these advantageous forms of taxation. In Britain, from the eighth year, in addition to the taxes mentioned above, the taxpayer must also pay £30,000 per adult. This amount increases to £50,000 from the twelfth year. In Switzerland, the expenditure based on which the taxpayer is taxed must not be less than five times the rental value of the property where the taxpayer resides. As of 1^st January 2014, this floor will increase to seven times the rental value. Moreover, while the cantons are free to determine the minimum amount of expenditure which constitutes the tax base for canton and municipal taxes, direct federal tax, corresponding to around one third of total tax, will be payable on a minimum expenditure of CHF 400,000. In addition, the cantons will have an obligation to levy wealth tax, which will be calculated based on a fictive wealth whose amount is determined by reference to the source of expenditure.

As of 1^st January 2013, Portugal, which as should be noted is also an EU member state, introduced a very attractive system for individuals who have not been domiciled in Portugal in the last five years. The main idea of this new tax scheme is that income from Portuguese sources, including income from work, is taxed at a rate of 20% whereas, if certain conditions are met, income from foreign sources are not taxed in Portugal. Moreover, there is no wealth tax or inheritance tax for direct heirs.

Apart from these countries, which have a special status for a certain category of taxpayer, there are numerous countries that offer very lenient wealth and income tax rates. The most frequently cited example is Belgium, which has neither wealth tax nor capital gains tax. Interest and dividends are taxed at a maximum rate of 25%. Belgium has high rates of inheritance tax. The tax rate for direct heirs, for example, is 30%. However, it is possible to avoid it in a perfectly lawful manner by way of donations which are not subject to taxation if the donor lives three years as of the moment when the donation is made, or subject to a very low rate if the donations are declared when made. The Grand Duchy of Luxembourg has rules similar to Belgium. However, there is no inheritance tax for direct heirs. An overview of fiscally attractive countries would not be complete without mentioning the Principality of Monaco and the countries of Eastern Europe. The Principality of Monaco, which is not interesting for French nationals because of the double taxation treaty between the two states, has no wealth tax, income tax or inheritance tax. The vast majority of the countries in Eastern Europe has a flat rate taxation system by virtue of which the taxpayer pays a flat rate of 15% on all revenue.

Once the shortlist of fiscally attractive countries is complete, a taxpayer wishing to relocate should contact a specialist in order to determine which system is best suited to his situation. If several countries remain in contention, the taxpayer should make a choice based on subjective criteria such as the spoken language, the distance between his new home country and the one he is leaving, the degree of legal and political stability, the price of real estate, quality of life etc.