Tax Optimization Through Residence Permits and Citizenship in Other Countries

Obtaining a new status in Europe means new obligations, rights, and privileges. It is not uncommon to obtain a residence permit/permanent residence permit or a European passport precisely to preserve and increase personal capital. From this point of view - the right decision, because the legislative tax base of the former CIS countries can hardly be called progressive in this regard. 

There are a lot of European countries with a loyal tax climate, where tax rates are minimal or absent for some categories. Often the new status allows to optimize taxation and reduce costs for businessmen.

Often lawyers of GARANT.IN migration agency face the fact that our clients do not quite correctly understand the concepts of "citizenship" and "tax residency". In particular, if a resident has obtained a new status in another country, he automatically becomes a taxpayer and is now subject to taxation in several countries. In reality, this is not quite right. Today, we will understand who tax residents are, how to become a tax resident, how to maintain this status, and other related issues.

Tax residency - general rules

Over the past few years, many media outlets have been actively discussing the topic of Russia's accession to the Organization for Economic Cooperation and Development (OECD). Within its framework, the acceding countries will be able and obliged to exchange data on tax residents. What does this threaten those people who have more than two passports or a passport and residence permit from another country? Everything is not so terrible, just a resident needs to determine exactly in which country he will be a taxpayer. 

Obtaining a new status in another country, particularly in Europe or the Caribbean, does not automatically make the recipient a tax resident in the other country. To apply for or become a tax resident, one must live in the chosen country for more than 183 days per year. If this period is shorter, the new resident will still be a taxpayer in the home country.  

How to start paying taxes in Europe?

If you have decided to become a taxpayer in a European country for any reason (e.g. the chosen country has low or zero rates), you need to become a tax resident. To do so, you must live in the chosen country for more than 183 days per year and have a long-term authorization/basis for this - residence permit, residence permit, passport of the country, or nationality.

Tax residency without citizenship

We have already discussed that tax residency is not only related to other states but also to the amount of time spent in the new country. To qualify for tax benefits, one should spend more than half a year in a European country. The question is different - on what basis can an applicant stay in a European country for such a long term? Visa authorization is time-limited.

A residence permit is an ideal solution to the task at hand. The status of a residence permit allows you to live or not live in the chosen country for at least a year and formalize tax residency. In some European countries, the current tax system includes such a specific term as "Non-Habitual Resident" (Non-Habitual Resident). Domicile will be determined by a person's permanent place of residence. A Non-Habitual Resident is a person who does not reside permanently in the territory of the chosen country.

A "tax haven" - what is it?

Dealing with the topic of tax residency and taxation in European countries, it is impossible not to touch upon the subject of the tax haven. The fact is that the tax rates in some European countries on domestic and global income are significantly different. The tax on world income may be nominal or may be close to zero at all. In some cases, income from renting out property, receiving dividends from stocks and bonds, and gifts are not taxed. 
Tax incentives can be developed and implemented for business projects in the form of a refund of the main share of listed tax liabilities. For example, a full or partial refund of VAT.

Of course, such a taxation system does not work in every European country. States that implement such preferential schemes are called tax havens. Now the islands of Cyprus and Malta belong to such countries. The resident transfers tax liabilities only from the income that was brought to the territory of the state or received in this country:

• When receiving income within the country, the resident will have to pay tax at the applicable domestic rate. In Cyprus, the domestic income tax rate is around 30%. The exact rate will depend on the amount declared.
• If income is received outside Cyprus or Malta, the amount received is not subject to tax. The capital mustn't be brought into the country.

To formalize the status of a tax resident, the applicant will need a legal basis - residence permit, residence permit, or passport of the country.

Tax residency in two countries - is it possible?

Unfortunately or fortunately, it is not possible. A candidate can only establish tax residency in one country. Usually, the status is determined by the number of days spent per year in a particular country. Live more than 183 days per year in the chosen country? You become its tax resident. 
It is important that some types of tax liabilities can be paid in several countries at once. For example, a person owns real estate in different countries, so he or she will pay taxes in each of them. 

If the applicant plans to maintain the status of tax resident in the chosen country, he can not leave it for more than 183 days a year. The exception is a formalized business trip abroad of employees of state authorities.

Visiteur visa in France (Carte de sejour temporaire) or residence permit for financially independent persons occupies a special position in the issue of tax residency. It is possible to get a new status in the chosen direction for 2 years at once and to prolong it annually an unlimited number of times, provided that the applicant meets the stated requirements of the program. It is noteworthy that for this type of residence permit the applicant himself decides - whether to formalize his tax residency in France or not. He can live in the country for more than 183 days a year and not be a tax resident. Changing this status and transferring taxes to the French treasury is a personal initiative of the resident.

Which European countries have a loyal tax regime?

It is impossible to answer this question unambiguously, as each country has different tax rates for different types of income. If we consider income tax, it is often calculated according to a progressive scheme - the more a resident earns, the higher the tax rate will be for him. 
To reduce tax pressure and optimize costs, residents often choose Portugal, Hungary, Andorra, Malta, and Cyprus.

There are a number of countries with special tax regimes. For example, in Portugal, an applicant can obtain a special Non-Habitual Resident (NHR) status. Having received it, the holder can be exempted from paying tax on global income. And the income received in Portugal will be subject to a fixed rate of 20%. Also in Portugal, you can count on a preferential tax regime for foreign residents - the first 10 years for persons in the status of residence permit tax rates are reduced.

Malta and Portugal offer in addition to preferential tax rates and tax deductions. In Malta, there is a possibility of tax optimization. There is no taxation on inheritance, gifts, and certain types of property. For other types of income local authorities offer a number of exemptions. When receiving a Maltese residence permit for investment, the tax rate on income received abroad and transferred to a bank account in Malta is 15%. Income earned domestically is subject to a rate of 25-30%. 

Friends, if you are planning to optimize taxation by obtaining status in another state, do it with the support of specialists. Our lawyers will not only analyze your type of activity and help you choose the optimal type of taxation. We will help you to formalize a new status in the chosen country, rent/buy housing, relocate your business if necessary, formalize tax residency, open accounts in European banks, and pay taxes correctly and on time. With our support, you will be able to run a successful and profitable business in any country without worrying about the correctness of the calculation and payment of tax liabilities.