EU non-habitual residence

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Euflag.jpg This page contains details specific to investors in the European Union (EU). However, it does not apply to residents of the EU who are also United States (US) citizens or US permanent residents.

EU non-habitual residence describes one particular tax regime available to EU residents (and others using more onerous requirements) in specific EU countries.[note 1]

EU citizens are taxed in their tax domicile and, therefore, as a result of the non-harmonisation of tax laws across the EU, certain anomalies in terms of tax rates arise between various EU countries. For pensioners and others, this can give rise to opportunities to relocate and establish an alternative tax domicile in a more favorable location.

In addition to the text on non-habitual residence, various tax advantaged locations are listed below, including a high level overview of their tax regimes. Some of these locations are within the EU, while some are typically well known tax advantaged locations.[1]

Non habitual residence

An example of the tax anomalies between EU nations is the Non Habitual Residence schemes that can, in certain circumstances, be availed of in countries such as Portugal and Malta.[2] These non habitual residence schemes are outlined below.

As tax law in EU differs according to the particular jurisdiction of the tax payer, specialist advice should be obtained both within the tax payer's original domicile and within Portugal or Malta. There are legal advisers and other advisers available who are willing to provide this advice and guidance through the process.

Italy

Italy has introduced new laws to allow a non resident to avail of favourable tax rates or to receive income generated from outside of Italy.

The "new" laws allowing foreigners advantageous tax treatments can be described in brief as follows:

  • Skilled worker "inpatriate" scheme
  • The New "Italian Resident Non-Domiciled" tax regime to draw high net worth individuals to Italy - "Flat Tax" annual €100,000 substitute tax
  • New Italian tax regime for retired people abroad - southern Italy "pensioner" tax regime for foreigners

The Italian government has issued guidelines on the new tax regimes for new residents and high net worth individuals and a checklist has also been released which individuals may file with the tax authorities in order to obtain a pre-assessment on eligibility for this beneficial regime.

Those seeking to take advantage of the new regimes should undertake detailed tax and legal planning before proceeding. While these tax regimes are not strictly non habitual residence schemes, they have some of the features of those schemes. The three different tax regimes are alternatives that cannot be applied all at once. It is up to the person to choose which one of the three is the most suitable for their situation.

Foreigners that take advantage of the southern Italy pensioner tax regime are exempted from:

  • wealth taxes levied on the value of financial assets (“IVAFE”) and real estate properties (“IVIE”) held abroad;
  • foreign assets reporting requirements within “Quadro RW” of the yearly Italian individual income tax return.

Portugal

Portugal introduced the Non Habitual Residency programme in 2009, aimed at attracting EU residents into the country. Qualification means satisfying a residency test, and in addition demonstrating that you have not been a tax resident of Portugal in the preceding five years. To be resident under the scheme you need to spend 183 days a year in Portugal and / or own or rent on a long term basis a residence there, with the intention of making it your habitual residence.

Tax matters

The scheme gives those who become resident in Portugal the opportunity to benefit from a tax exemption on certain types of income for a period of 10 years, provided residency requirements are met each year. In other words 0% Portuguese tax on income sourced outside of the country (with some exceptions).

Qualifying income includes:

  • pensions
  • interest
  • dividends
  • royalties sourced outside of Portugal

Foreign pension income, for example from UK pension funds, is exempt from Portuguese tax provided it is taxed in another country under the terms of the tax treaty, or is not regarded as Portuguese source income under domestic legislation.

However the UK/Portugal treaty states that pension income should be taxed in the country of residence and therefore no tax will be due - in other words a double exemption.

Similarly a pension transferred to a Malta QROPS will benefit from the fact that Maltese rules allow the QROPS to be taxed in the country of residence provided a double taxation agreement exists. Therefore under the NHR 0% tax will be levied.

Investment

Investment income including:

  • dividends
  • interest
  • rental income
  • royalties

If the above categories are earned outside Portugal, they are exempt from tax provided it may be taxed in the state of source under a tax treaty. Or, it may be taxed under the terms of the OECD Model Tax Convention and is not regarded as arising in Portugal.

Capital appreciation would appear not to be exempt from local Portuguese tax levels which are 30%.

UK dividends, for example, will be tax-free in Portugal under the NHR regime since the UK/Portugal treaty provides that they may be taxed in the UK (even though in practice they may not actually be under the disregarded income rules).

Note that this tax-free income option does not apply to income generated in a blacklisted tax haven such as the Channel Islands.

Malta

EU nationals may either take up residence in Malta under the Malta Ordinary Residence system or benefit from The Residence Programme Rules.[3]

Maltese tax law deems an individual non-domiciled resident in Malta on the basis of either spending more than 183 days in Malta or on circumstances demonstrated by the tax payer that support an intention to reside accordingly. (Buy or rent a home locally in accordance with certain limiting factors).

Tax matters

Non-domiciled residents of Malta are taxable on a remittance basis only on foreign-source income (not foreign-source capital) remitted to Malta and only to the extent remitted. Income and capital gains arising in Malta are subject to tax in Malta at the applicable personal income tax rates. [4]

Capital gains arising outside Malta fall outside the scope of Maltese tax, whether remitted to Malta or otherwise. Capital and savings remitted to Malta also fall outside the scope of Malta tax.

Malta has agreed over 60 double tax treaties. An individual who take up residence in Malta can receive their pensions in Malta free of tax at source, and subject to a mere 15% under the Global Residence Programme or the Retirement Programme.

Overseas capital funds invested locally are only taxed on interest or dividends generated at a 15% flat rate.

Permanent residents also benefit from double taxation agreements existing between Malta, most European countries, Canada, Australia and the USA, ensuring that tax is never paid twice upon the same income.

In addition Malta applies the following:

  • No inheritance tax
  • No estate duty
  • No wealth tax
  • No municipal taxes
  • No rates

Tax advantaged locations

Below is a list of countries which offer alternative tax regimes that may be beneficial to non-citizens.

Optimal Tax Locations
Country Features
Antigua & Barbuda
  • Individuals are taxed on income derived or sourced from the country only
  • Capital gains are not subject to tax
  • No capital duty, capital acquisitions tax, inheritance tax, net wealth/net worth tax
  • Treaties are in force with CARICOM and the United Kingdom
Bulgaria
  • Non-residents are taxed only on Bulgaria-source income
  • Individuals who have a permanent address in Bulgaria but whose centre of vital interests is not in the country are not considered a Bulgarian tax resident
  • No stamp duty, capital duty, wealth/net worth tax
Cyprus
  • Property tax ranging from 0,6% to 1,9%
  • Transfer tax on properties ranging from 3%-8%
  • A non-resident individual is taxed on Cyprus-source income only
  • Progressive tax rates imposed up to 35% on incomes above EUR 19,500
  • No capital duty, capital acquisitions tax, inheritance/estate tax, wealth/net worth tax
Dominica
  • No capital gains, no property tax, stamp duty, capital acquisitions tax, inheritance tax, net wealth/net worth
  • Non-resident individuals are taxed on income derived or sourced in Dominica
  • Tax treaty is in force with CARICOM
Greece
  • Non-residents are taxed on Greece-source profits only
  • No capital duty, no net wealth/ net worth tax
  • Stamp duty for individuals is 3,6%
  • Property taxation includes a main tax depending on the characteristics of the property and an additional tax calculated for properties value exceeding EUR 300,000
  • Inheritance tax ranging from 1-10% for close relatives
Grenada
  • Non-residents are taxed on Grenada-source profits only
  • No capital gains, stamp duty, capital acquisitions tax, no inheritance tax, net wealth/net worth tax
  • Real property tax is ranging 0-0,5% depending on the property’s use
Hungary
  • Foreign resident individuals are taxed on Hungarian-source income only
  • The general personal income tax rate is 16%
  • No capital duty
  • The tax for residential real estate property purchases is 9%
  • Inheritance is fully exempt in case of close relatives, otherwise is 18%
Italy
  • Three "new" laws allowing foreigners advantageous tax treatments
  • Skilled worker "inpatriate" scheme
  • Annual €100,000 substitute tax for foreigners
  • Southern Italy "pensioner" tax regime for foreigners
Malta
  • Persons who are resident or domiciled in Malta are taxable on their income
  • No capital duty, real property tax, no inheritance, net wealth/net worth tax
  • Tax is generally due on any gain on the transfer of property
Portugal
  • Non-residents are taxed on their Portuguese-source income only
  • Real estate income is taxed at a flat rate of 28%
  • A municipal tax is levied on property sales and transfers
  • 10% stamp duty on inheritance/estate tax with exceptions on a few cases
  • No net wealth/net worth tax
Spain
  • Non-residents are taxed on Spanish-source income
  • For capital gains progressive rates apply
  • Stamp duty is applicable at 0,5-1%
  • Capital acquisitions tax is 7%
  • As real property tax the municipal authorities levy a real estate tax, with a temporary surcharge of up to 10%
  • Inheritance estate tax ranges from 7-34%
St. Kitts
  • No personal income tax, capital duty, capital acquisitions tax, inheritance/estate tax, net wealth/net worth tax
  • Property tax ranges 0,2-0,3% depending on the property’s use and location
  • Stamp duty on the transfer of real estate property ranges from 2% to 18,5% and payable by the seller
  • Tax treaties are in force with CARICOM, Monaco, Switzerland and the United Kingdom

Notes

  1. The term “special tax regime” with respect to an item of income or profit means any legislation, regulation or administrative practice that provides a preferential effective rate of taxation to such income or profit, including through reductions in the tax rate or the tax base. Source: Special Tax Regimes, US Treasury, May 20, 2015.

References

Further reading

External links