A sound and well-considered residency change to a new country may potentially result in tax benefits for both business ventures and property purchases. To prevent higher taxes, be prepared to renounce your previous tax residency once a new one is established overseas. Key considerations include the purpose of changing jurisdictions, the scale of the involved capital and income, and whether moving is required.
Tax residency, citizenship, and place of residence
An individual is initially deemed a resident of their citizenship country, where they typically pay global income taxes. Citizenship and residence are interconnected yet distinct:
- Citizenship grants the right to live, work, own property, and benefit from social services like education and healthcare in a particular country. It’s usually lifelong and challenging to renounce.
- Place of residence is your living location, which might differ from your citizenship country. For example, a Spanish citizen could reside and work in Germany. Residence permits allow legal residency but don’t equate to tax residency. They require physical presence but do not automatically confer tax residency status.
- Tax residency is the jurisdiction where you’re legally bound to pay taxes. Countries have unique tax residency criteria, separate from residence permit requirements. It’s possible to hold a residence permit without being a tax resident and vice versa.
It is quite common for people to shift their tax residency to capitalize on more advantageous tax conditions. Trying to protect their earnings, high-net-worth individuals commonly choose to become citizens of nations like Malta or Cyprus, known for their reduced tax rates.
Establishing fiscal residency
Tax residency varies by country, each setting unique criteria. A taxpayer’s status is often evaluated on their center of vital interests and the main residence they have, considering time spent (i.e., time criterion).
Centre of vital interests
Tax authorities determine a center of vital interests based on several factors:
- real estate ownership or leasing agreements
- the location of family members’ residence
- the main source of income
- financial ties, including bank accounts and investments.
In Switzerland, the center of vital interests is key for tax purposes, with the family being the taxed entity, not individuals. Say, when one spouse lives in Switzerland more than 183 days a year, the other is also deemed a tax resident by default.
Time criterion
Typically, spending at least six months in a country qualifies one as a tax resident. Yet, Cyprus’s 60-day rule is an exception, allowing residency status after just two months for individuals who:
- stay over 60 days in Cyprus
- are not tax residents elsewhere
- hold property in Cyprus
- conduct business or have employment in Cyprus.
Earnings under EUR 19,500 annually are not taxed. Corporate profits face a 12.5% tax rate. The Cyprus Tax Department website lists all required payments.
Property ownership or leasing may also determine tax residency. This criterion is applicable in many European countries, including Austria, Germany, and the Netherlands.
Portugal and Greece offer Golden Visa programs that allow residence permit holders to establish a special tax status, significantly lowering their tax liabilities for a specified number of years. For those about to obtain this status, verifying the corresponding requirements is a great idea, as they are subject to change.
Citizenship-based taxation
The United States is unique because it taxes its citizens on their income, no matter where they live. American citizens must declare and pay taxes on worldwide income, even when residing or working abroad. This approach aims to curb tax evasion via offshore accounts and mandates that citizens financially support the nation, irrespective of where they live.
Zero taxation
Tax havens like Antigua and Barbuda, the UAE, Vanuatu, and Nevis offer exemptions from taxation on certain incomes or transactions. In these countries, individuals and corporations enjoy zero tax liability on earnings, investments, and financial activities. What’s more, this exemption status qualifies as legal tax residency and facilitates the provision of required documents to European banks.
Avoiding double taxation: strategies and solutions
Occasionally, fiscal duties may arise in several countries at once, especially if a person resides in one but operates a business or owns property in another. This situation has the potential to lead to double taxation, meaning the same income might be taxed in multiple jurisdictions.
International treaties help prevent this by allowing residents of one country (the source country) to avoid taxes on specific income earned in another (the recipient country). Likewise, recipient country residents may be exempt from taxes on certain income from the source country.
Tax regulations in a particular jurisdiction usually tax residents on global income, whereas non-residents are taxed only on local earnings.
To avoid double taxation, be sure to confirm your residence and tax payments made.
Here’s what you should do to determine the tax rules that apply to you:
- Contact your local tax office for required documents.
- Check for any double taxation treaties and their terms.
- Learn about diplomatic agreements to identify potential tax advantages.
EU countries regularly share tax data to guarantee compliance and prevent tax fraud and evasion.
Tax and residency rules do change often, so it’s important to stay updated. Considering a tax residency change? To make things easier for you, here’s what the Q Wealth team recommends:
- Consult a legal or tax professional to identify the best choices for your situation.
- Learn about the laws of the country you’re about to move to.
- Carefully map out your strategy, weighing all advantages and disadvantages.
Thinking about changing your tax residency? Let’s figure it out together! Contact the Q Wealth seasoned expert team for advice that’s just for you, and make only smart tax choices from now on!
16 May 2024 