Report on a session at the annual IBA ‘The New Era of Taxation Conference’ in Rio de Janeiro

Friday 22 September 2023

Session Chairs
Jennifer Migliori, Duane Morris, Miami
Gurbachan Singh, GSM Law, Singapore

Panellists
Tiago Cassiano Neves, Kore Partners, Lisbon
Chloé Delion, CMS Francis Lefebvre Avocats, Neuilly-sur-Seine
Carlos Eduardo Orsolon, Demarest Advogados, São Paulo
Gabriele Tancioni, AndPartners Tax and Law Firm, Milan

Reporter
Lis Aguileira, Brigagão, Duque Estrada Advogados, Rio de Janeiro

Introduction

Multiple factors compel high-net-worth individuals (HNWIs) to consider relocation, such as entrepreneurial ventures, educational opportunities or tax considerations. Numerous jurisdictions actively compete to draw in both skilled individuals and capital, offering enticements such as ‘golden visas’ and fiscal incentives. Transitioning from one’s domicile or tax residence can lead to potential repercussions, affecting extant trust arrangements and the applicable legal framework. Moreover, migration introduces considerations beyond taxation, including inheritance laws, premarital contracts and durable powers of attorney. Ultimately, the primary factors that guide relocation decisions hinge on assurances of safety, security and legal stability. The discussion by the panel delved into these complex migration considerations and their subsequent ramifications for affluent individuals.

Panel discussion

The panel focused on several key topics: (1) migration and the underlying motivations; (2) a case study comparing business owners to passive income recipients; (3) exit strategies; (4) favourable regulatory environments; (5) jurisdiction-specific taxation; and concluded with (6) the optimal destinations for Brazilian nationals as highlighted in the case study.

When asked about the factors that are driving migration, the speakers provided a unique perspective based on their experience in their own country.

Carlos Eduardo Orsolon emphasised that factors such as employment, security and politics, and not just taxation, influence migration in Brazil. He highlighted Brazil’s intricate tax system and the potential impact of the new rules applicable to foreign corporations.

Gabriele Tancioni noted Italy’s popularity with HNWIs due to the quality of life in the country, the stable political landscape and the expansive tax treaties. Italy’s efforts to streamline the applicable administrative tasks and its over 100 tax treaties stood out.

Chloé Delion indicated that while France’s personal income tax might not be the most competitive, the country’s appeal lies in the lifestyle amenities on offer and its economic dominance in the European Union, especially in regard to foreign investments. France’s focus on research and industry was also underscored.

Following the initial discussions, the panellists turned their attention to a case study contrasting a business owner’s exit strategy with the goal of a passive income recipient.

Orsolon detailed the tax nuances in Brazil. For business owners, capital gains tax varies from 15 per cent for gains up to $5m to 22.5 per cent for gains above $30m, plus a 0.38 per cent tax on financial operations (IOF) applicable to foreign funds. Brazil doesn’t have an exit tax. For passive income, local dividends aren't taxed, but foreign dividends face a 27.5 per cent tax rate. Interest taxation is between 15 per cent and 27.5 per cent. He also discussed the process to end tax residence in the country and highlighted the migration conditions for ‘blacklisted’ countries.

Delion described France’s exit tax system. Applicable to residents with significant shareholdings, the tax base includes unrealised and deferred gains, which are taxed at 30 per cent. Payments can be deferred with possible relief after a certain period. Planning often entails setting up a holding company for imminent sales.

Regarding the fiscal consequences of exiting, Tiago Cassiano Neves discussed the fiscal consequences of exiting in Portugal. Portugal doesn't have a formal exit tax, but certain transactions may have tax implications, including stock options treated as deemed sales and cryptocurrency sales held for less than a year. There’s also a potential trailing tax for those moving to blacklisted areas. For inflows, Portugal maintains the original asset valuation. While an exit tax exists, exemptions might be available for non-habitual residents (NHRs) based on tax treaty qualifications. Some of Portugal’s tax treaties, such as those with Canada, Ireland and the Netherlands, have a trailing tax provision.

When discussing the fiscal implications of both exiting and entering Italy, several key points were highlighted by Tancioni. For outflows, Italy lacks an individual exit tax, but taxes entrepreneurs on contingent capital gains from business assets. Recapture can occur if tax incentives, such as the two-year residency requirement for HNWIs, aren't met. For inflows, Italy doesn't impose an entry tax. However, entrepreneurs from the EU or cooperative jurisdictions, including Brazil, must recognise the fair market value of business assets for tax purposes in Italy.

After concluding the analysis on the ‘fiscal consequences of exiting’, the discussion shifted to ‘attractive regimes’.

Delion discussed the French tax incentives, noting that the ‘inpatriate’ regime favours ‘business owners’. Those relocating to France can access income tax exemptions up to their eighth year, including a 100 per cent exemption on specific remunerations and 50 per cent on foreign passive income. Newcomers get a 100 per cent inheritance and gift tax exemption on non-French assets for their initial six out of ten years in the country, and a wealth tax exemption on non-French real estate for five years.

Cassiano Neves outlined Portugal’s benefits in this regard. The NHR tax regime offers tax advantages for ten years, taxing active income at a flat 20 per cent. Foreign income may be subject to exemptions. Portugal’s immigration routes, such its ‘golden visa’, plus no wealth or inheritance taxes, make it an attractive jurisdiction.

Tancioni highlighted Italy’s incentives. Italy has immigration benefits such as investor visas and promotes employment. The authorities favour ‘quality migrants’, including skilled workers and HNWIs. Tax breaks include a €100k flat tax on foreign income for new HNWI residents for 15 years and varied exemptions for workers and athletes. Pensioners also enjoy a seven per cent tax rate on foreign income for ten years, and there are inheritance or gift tax exemptions for generational transfers.

On completion of this analysis, the panellists were invited to discuss the jurisdiction-specific taxation in each country.

Delion provided details on France’s tax system, noting a potential 45 per cent income tax on worldwide earnings and certain special provisions, such as the 12.8 per cent flat tax on specific income types. Social contributions can go up to 17.2 per cent for all income types. High earners may have an added surtax. France levies a wealth tax on property, and inheritance and gift taxes with rates up to 45 per cent or 60 per cent. The country also has controlled foreign company (CFC) rules, and the inpatriate regime offers a 6.4 per cent flat tax rate on foreign passive income.

Cassiano Neves described Portugal's NHR tax regime. Eligible individuals are subject to a 20 per cent tax rate on specific income types, tax exemptions are applicable to some foreign incomes and there's a 10 per cent tax rate on foreign pension income. Notably, Portugal doesn't tax crypto-assets held for over a year or certain pieces of art, unless they are linked to a business. The country also lacks several other taxes, which makes it appealing for relocation.

Tancioni discussed Italy's beneficial tax regime for HNWIs, including a €100k flat tax on foreign income and varied tax rates on Italian income. Italy has certain exceptions and conditions, such as a five-year lockup for certain capital gains. Migrants also receive employment income tax exemptions, which differ based on residency location. Italy’s individual residency criteria and anti-avoidance rules necessitate careful consideration.

Orsolon explained that Brazil underwent significant tax changes in 2023, including alignment with the Organisation for Economic Co-operation and Development (OECD) model rules. There are also ongoing discussions in the country on several tax reforms and prospective changes.

Conclusion

In essence, HNWIs should diligently assess the tax implications in each jurisdiction before deciding on relocation, considering potential exit taxes or special tax regimes.