World Wide Taxation

The UK domicile (more specifically, non-domicile) system has been the subject of much criticism over the years. Seen as a means of attracting wealthy individuals to a country, yet allowing them to retain their overseas residency, there are many pros and cons. Those under the impression that the UK is the only country to operate such a domicile system will be surprised.

While the details and formalities may be different, we will now look at similar schemes across the world.

Portugal

The Portuguese system, known as the Non-Habitually Resident (NHR) tax regime, was introduced in 2009. The scheme lasts for ten years and targets high net worth individuals, pensioners and professionals with skills that are scarce in Portugal from time to time. Under the qualification criteria, you must not:-

• Be classed as a tax resident under Portuguese domestic legislation
• Not have been taxed as a Portuguese resident during the previous five years

In order to qualify as a tax resident in Portugal, you must fulfil at least one of the following two conditions:-

• Remain in Portugal for more than 183 days during the relevant fiscal year
• Have a residence in Portugal on 31 December of the year of your application, to hold this as your habitual residency

To make the NHR scheme attractive, there need to be tax benefits. These are as follows:-

• You will be charged a flat rate of 20% on income from high-value jobs
• Where tax is paid at source, or there is a double taxation arrangement, there is no additional tax charge on global income

Those who follow the Portuguese tax system will be aware that in the past, the government has used what is known as the “Golden Visa” to attract wealthy individuals willing to invest in Portugal. This is a different scheme from the NHR.

Ireland

It is fair to say that the Irish government has been controversial regarding individual and company taxation in previous years. Indeed, there is an ongoing case brought by the EU against Apple and the Irish government regarding a favourable tax scheme. However, when it comes to non-domicile status in Ireland, there are numerous benefits for individuals:-

• Tax is only charged on Irish sources of income
• Only when remitted to Ireland will overseas income be taxed
• Overseas income earned while a non-resident of Ireland is not taxed if sent to Ireland at a later date
• Individuals with non-dom status living in Ireland can use overseas funds for everyday living expenses with no tax liability
• Those resident in Ireland, but holding non-dom status, will pay capital gains on Irish and UK disposals

Those domiciled in Ireland will be required to pay the €200,000 domicile levy if they meet the following conditions:-

• Global annual income of more than €1 million
• Income tax paid on global earnings
• Own Irish property worth in excess of €5 million
• Irish sourced income of less than €200,000 in a tax year

It is important to note that any Irish income tax charges in a fiscal year can be offset against the €200,000 domicile levy.

Cyprus

There is a general misconception that Cyprus is considered a tax haven. After increasing corporation tax to 12.5% in 2019, the Organisation for Economic Co-Operation and Development (OECD) afforded Cyprus the same status as many other European countries. However, there are still several issues to be aware of concerning domicile and non-domicile tax status.

If you’re domiciled in Cyprus, the tax regulations are very straightforward:-

• Cyprus income tax applies to worldwide income
• A Special Defence Contribution (SDC) will be imposed on worldwide dividends, interest and rental income

So, those who saw Cyprus as some form of tax haven may need to think again. Those who switch their tax residency to Cyprus will automatically receive non-dom status for a maximum of 17 years. As a non-dom, there are issues to consider, such as:-

• Income tax will only be charged on Cyprus income
• There is no SDC on worldwide income

The tax system in Cyprus, along with many other countries, is used to attract inward investment for the long-term benefit of the country.

Malta

While Cyprus is seen by many as a tax haven, although not officially recognised as such, Malta is officially recognised as a tax haven along with Luxembourg and Ireland. There are specific differences regarding tax liabilities for those with domicile and non-domicile status. Those with domicile status in Malta will be taxed on:-

• Worldwide income
• Certain capital gains crystallised in Malta

The situation regarding non-dom status is very different, and there are many issues to be aware of, such as:-

• Taxed on Malta income
• Taxed on certain capital gains in the country
• Taxed on foreign income remitted to Malta
• Overseas capital gains are not subject to tax in Malta, even if received in the country
• Optional flat 15% tax rate on all income remitted to Malta
• Minimum tax liability of €5000 per annum for non-domiciled individuals when remitting overseas funds to Malta

There are some anomalies to consider, such as “certain” capital gains. Therefore professional advice should be taken at all times.

Belgium

The tax situation for domiciled, non-domiciled and expats living in Belgium varies widely. It would be advisable to take professional advice before making any move. We will take a look at the various tax obligations starting with those domiciled in Belgium:-

• Belgium income tax is paid on worldwide income
• There is a wealth tax of 0.15% charged on securities accounts with an average annual balance exceeding €1 million

It is important to note that capital gains are not taxable to individuals in Belgium if carried out within the typical framework of an individual’s private estate. That will surprise many people!

Non-domicile status tax considerations:-

• Income tax is only charged on Belgium income
• If at least 75% of worldwide income is sourced in Belgium, individuals can make use of the personal tax allowance

The Belgian authorities also have a third tax status which relates to expats working in the country temporarily:-

• These rules only apply to overseas nationals earning more than €75,000 per annum
• Benefits are available, including tax-free reimbursement of living and housing expenses
• Expats working in Belgium will have 30% of their Belgium income shielded from tax, up to a maximum of €90,000
• These rules only apply to expats working in Belgium on a temporary basis, but resident in another country

It is fair to say that while very useful, the Belgium tax system for those domiciled, non-domicile and expats working temporarily is a little more complicated than usual.

Holland

The Netherlands income tax system is one of the more complicated in Europe, with taxable income split into three different groups. These groups are:-

• Taxable income from profits, employment, homeownership, wages, pensions, social benefits and value of owner-occupied property
• Taxable income from substantial interests
• Taxable income from savings and investments

Now, if we look at the specific tax status of individuals and their liabilities, we find that those with a domicile status:-

• Pay tax on their entire worldwide income
• All three income groups apply

The situation for those with non-domicile status is very different:-

• Individuals are only taxed on Netherlands income
• On occasion, some types of overseas income can be taxed (take advice)

Then we have qualifying non-resident taxpayers who live outside of the country:-

• Those who live outside Holland but pay taxes in the country may be eligible for qualifying non-resident taxpayer status
• The one condition is that they pay Dutch tax on more than 90% of their worldwide income
• Those who qualify will enjoy the same tax deductions, tax credits and tax-free allowances as taxpayers resident in Holland

There is more! There’s also what is known as a 30% ruling with the following criteria:-

• Those who bring “specific and scarce skills” to Holland may be eligible for benefits associated with the 30% ruling
• The ruling will shield 30% of the individual’s income from taxation for five years (previously eight years)

While the system is complex and sometimes difficult to follow, there is better news on global double taxation arrangements. Those who may be eligible to pay Dutch tax on their overseas income will not need to do so if tax is already deducted at source.

Italy

When you consider the much covered Italian pension time-bomb, not to mention the enormous VAT gap, you might have expected a relatively harsh Italian income tax system. In what is a fairly straightforward system, those with domicile status:-

• Pay Italian tax on their worldwide income
• Will be charged a wealth tax covering overseas real estate and financial investments

Those with non-domicile status will abide by the following tax rules:-

• Only income produced in Italy will be susceptible to Italian income tax
• Worldwide income will not be included in any tax liability calculations

However, there is an Italian levy to consider for those looking at switching their tax residency. They can either:-

• Apply for non-Italian sourced income to be taxed at a flat €100,000 per annum
• Apply for overseas income/assets to be taxed in line with Italian residents

For those with significant assets, income and investments overseas, it may be worth considering the Italian levy. However, professional advice should be taken if you are considering changing your tax status.

Switzerland

Despite the perceived complexities of the Swiss taxation system, residency and non-residency, the system is relatively straightforward. There is the added input from federal, cantonal and municipal bodies, but the system is reasonably easy to understand. Those with a domicile status will be:-

• Taxed on worldwide income
• Taxed on worldwide wealth (only at cantonal and municipal levels)
• Taxed on income at three levels, federal, cantonal and municipal
• Able to opt for a lump sum taxation payment, based on seven times annual rent/deemed rentable value of an owned property

So a lot to think about there! However, for those with non-domicile status, the situation is much clearer:-

• Taxed on Swiss sources of income
• Taxed on Swiss sources of wealth

Many of the historic tax benefits associated with the likes of Switzerland have been eroded in the worldwide quest to clamp down on tax avoidance and tax evasion.

The complicated world of personal taxation

While many countries appear to “sing from the same tax hymn sheet”, the devil is in the detail when you delve a little deeper. It is essential to take professional financial advice if you are considering moving your residency and tax status. As individual country tax regulations tend to change regularly, it is also crucial to monitor any announcements which may impact your situation.

When the tax status of Chancellor of the Exchequer Rishi Sunak’s wife was leaked to the press, few could have predicted the political fallout. At the time, Akshata Murthy had a non-domicile tax status in the UK, paying tax on her UK earnings to the Treasury and tax on her overseas earnings to the Indian government. So, why is your domicile so essential, and what are the implications with regards to taxation?

What does the term domicile mean?

Before we look at this in more detail, it is important to remember the term domicile. It relates to:-

“The country that a person treats as their permanent home, lives in and has a substantial connection with”

In the case of Akshata Murthy, she cannot obtain British citizenship without renouncing her Indian citizenship. Consequently, she has a non-domicile tax status in the UK, which is perfectly legal and means she only pays UK tax on her UK income and gains. On the other hand, a person domiciled in the UK will pay tax (capital gains, income and inheritance tax) on their UK and worldwide income and gains.

There are four different types of domicile

Many people may be unaware, but there are three main types of domicile and one deemed status, which are:-

• Domicile of origin
• Domicile of dependence
• Domicile of choice
• Deemed domicile

Interestingly, there is no formal application process for any particular domicile status. However, if you are required to submit a tax return, you will need to complete a Self Assessment SA109 form. This will identify the terms on which you are claiming a particular domicile, although it can be challenged and reviewed by HMRC.

Domicile of origin

Upon birth, all of us will acquire a domicile of origin, usually that of our father, mother, or adopted parents. Consequently, your domicile could very well be different from your country of birth.

It is important to note that your domicile of origin is retained permanently unless replaced by a domicile of dependence or domicile of choice. If you acquire a domicile of choice, and this was to cease, you would automatically revert back to your domicile of origin.

Domicile of dependence

The term domicile of dependence relates to children under 16 (lower age limit in Scotland). This ensures that their domicile is reflective of their parents/legal guardians – the people they are legally dependent upon. Consequently, if the person a child was legally dependent on were to change their domicile status, the child’s status would automatically change as well.

Domicile of choice

As the term suggests, a domicile of choice relates to the individual’s preference. There are certain conditions when looking to apply a domicile of choice, which include:-

• Permanent settlement in the country which you now recognise as your domicile
• You intend to stay there for the rest of your life
• Ties have been broken with your domicile of origin

While strictly speaking, there is no requirement to become a UK citizen or acquire a UK passport; this would be looked on favourably with a domicile of choice application. In essence, a domicile of choice application reflects a commitment to a particular country.

Other factors to be taken into consideration when applying a domicile of choice include:-

• Retirement plans
• Business activities
• Social commitments
• Family ties

While looking to apply a domicile of choice is relatively straightforward, for many people, it can be a big decision to cut ties with their “home” country.

One of the most famous cases of a domicile of choice was that of John Lennon and his bid to become a permanent resident of the US, living in New York. Despite his historical connection with the UK, his decision to cut ties with his former homeland allowed him to apply this domicile of choice.

Deemed domicile

In April 2017, the UK government brought in a raft of regulations concerning the domicile status of individuals living in the UK. While the three main options remain relatively unchanged, an additional category was introduced in the shape of “deemed domicile”. This allows HMRC to treat those not officially domiciled in the UK, as if they were, for income and capital gains tax purposes.

There are two specific scenarios where the deemed domicile status can be used, which include:-

• Individuals domiciled outside of the UK but born in the UK, with a UK domicile of origin
• Those who have been resident in the UK for tax purposes for at least 15 of the last 20 tax years

If you have significant assets and receive substantial income from overseas, the deemed domicile status could prove expensive. It is vital to take advice from your accountant!

What is non-domicile status?

Often referred to as non-dom, this relates to the status of an individual and their obligations to pay UK taxes. It implies that the UK is not their permanent place of residence and infers that they will return to their country of origin at some point in the future. Therefore, those with non-domicile status will only pay UK tax on their UK earnings.

To say that non-dom status is controversial is something of an understatement. Many see it as a means of switching tax obligations on overseas income to countries with a lower tax rate than the UK. While this reading is not necessarily correct, this is an angle that has been the subject of much media coverage.

How does non-domicile status work?

Those with a UK non-domicile status will not pay tax on foreign income of less than £2000 a year brought into the UK. This is often referred to as unremitted foreign income. However, if you decide to bring more than £2000 a year of foreign income into the UK, you have two stark choices:-

Opt to pay tax on worldwide income

If you decided to pay tax on income and gains from non-UK sources, this would be added to your UK income and taxed accordingly. However, you would be eligible for the various tax allowances and offsets in this scenario.

Remittance basis

Alternatively, if you have significant wealth overseas but wish to transfer more than £2000 a year to the UK, you can opt for a remittance basis. This means that only the income/gains transferred to the UK will be added to your income and taxed accordingly. The element of your income and gains which remain overseas is untaxed. However, you may be required to pay an annual charge, dependent upon how long you have been living in the UK.

The scale for the annual charge is as follows:-

• £30,000 if you have lived in the UK at least seven out of the previous nine tax years
• £60,000 if you have lived in the UK for at least 12 of the last 14 tax years

If you have lived in the UK for 15 of the last 20 tax years, you will not be eligible to claim non-dom status. Consequently, you must pay UK tax on all of your international income and gains.

Why is there a non-domicile status?

There is no doubt that the non-dom status used by many wealthy individuals is controversial, although perhaps not fully understood. Whether paying VAT or other taxes on goods, products and services or employing people in their private or business lives, non-doms can directly and indirectly provide additional income for HMRC.

Whether the potential benefits of allowing non-doms to operating businesses in the UK are sufficient to offset the tax breaks, has been, and continues to be, a subject of controversy.

Summary

While 2015 and 2017 saw a tightening of the non-domicile rules and regulations, it is still a potentially lucrative means of reducing tax for wealthy individuals living in the UK. It is also important to note that many of those caught up in the non-dom scenario may have inherited or created businesses in their domicile of origin. Consequently, it could be argued that converting to a full UK resident taxpayer could see HMRC benefit from actions carried out previously in a different country. This is not a straightforward subject!

Sources:-

https://www.cityam.com/sunak-considered-resigning-over-his-wifes-non-domicile-tax-status/
https://www.ft.com/content/fb958a86-9564-4149-a423-8f2570d8566a
https://www.google.com/search?client=firefox-b-d&q=domicle
https://www.litrg.org.uk/tax-guides/migrants/residence-and-domicile/where-am-i-domiciled
https://www.gov.uk/government/publications/self-assessment-residence-remittance-basis-etc-sa109
https://www.theguardian.com/politics/2022/apr/07/what-is-non-domicile-status-and-who-qualifies-hmrc
https://www.city.ac.uk/news-and-events/news/2022/04/what-is-a-non-dom-an-expert-answers-questions-about-the-tax-status-claimed-by-rishi-sunaks-wife-and-other-wealthy-people
https://inews.co.uk/inews-lifestyle/money/non-dom-status-what-rules-how-long-domicile-stay-uk-who-apply-akshata-murty-1564081
https://www.gov.uk/guidance/remittance-basis-changes
https://www.youtube.com/watch?v=c9hgQXPgYJQ