Citizens of the world: navigating the labyrinth of special tax regimes

A session report from the IBA’s 24th Annual US and Europe Tax Practice Trends Conference in Munich

Wednesday 10 April 2024

Co-Chairs

Thierry Boitelle, Boitelle Tax, Geneva

Sahel Ahyaie Assar, Buchanan Ingersoll & Rooney, New York

Speakers

Francesco Capitta, Facchini Rossi Michelutti, Milan

Victor A Jaramillo, Caplin & Drysdale, Washington, DC

Alex Jones, Macfarlanes, London

Gerd Kostrzewa, Heuking Kühn Lüer Wojtek, Munich

Tiago Cassiano Neves, Kore Partners, Lisbon

Sonia Velasco, Cuatrecasas, Barcelona

Reporter

Gilles Haudenschild, Fischer Ramp Buchmann, Zürich

Introduction

Sahel Ahyaie Assar introduced the panel, which embarked on a discussion of the special tax regimes in various jurisdictions. The speakers presented the latest news from their home jurisdictions and addressed the tax residency criteria, changes to the tax laws and the implications for taxpayers. They also touched on treaty issues and concluded with predictions on future trends in international tax policies.

Highlights and latest news per jurisdiction

Germany

Gerd Kostrzewa highlighted several positive developments in Germany, such as the reduction of the low taxation criteria from 25 per cent to 15 per cent for controlled foreign corporation (CFC) purposes and changes to the citizenship laws, facilitating the ability to obtain German citizenship.

Kostrzewa also pointed out that German tax residence is established by residing in Germany, with no specific day-count requirement, and tax residents are subject to worldwide income taxation, alongside gift and inheritance tax on global assets transferred or received. He continued with a note of caution regarding potential exit taxation upon leaving Germany.

He concluded by stating that to mitigate extended taxation on German source income or treatment as tax resident for gift/inheritance tax purposes after relocation, maintaining one’s foreign tax treaty residency by keeping a centre of vital interest abroad, is recommended, although structuring in such situations can be challenging.

The United Kingdom (UK)

Alex Jones provided an update on the significant changes to the UK’s resident non-domiciled (non-dom) regime, which is undergoing substantial reforms.

Under the amended regime, proposed for application from April 2025, the remittance basis will be abolished for future years, replaced by a new four year exemption on foreign income and gains for individuals residing outside the UK for ten consecutive years prior. Moreover, the domicile status will no longer influence tax liability in the UK after 2025. The existing ‘protected trust’ regime will be withdrawn, with the income and gains from foreign trusts attributed to UK resident settlors, unless the four year exemption period is applicable. Transitional measures aim to mitigate the impact of these changes, such as special tax rates for historic income and gains brought into the UK.

Inheritance tax proposals are also significant, with worldwide assets becoming subject to taxation after ten years of UK residence, and a further ten-year period of liability even after leaving the UK.

The changes are not yet final, however, not least because a general election was due to be held in the UK.

The United States 

Victor A Jaramillo reminded the audience of the complexity of the US tax regime and highlighted various challenges. He emphasised the far-reaching implications of US taxation for individuals, with worldwide taxation applying once an individual attains US person status.

Jaramillo elucidated the convoluted rules governing US tax residency, including intricate calculations based on presence and treaty tie-breaker rules. Moreover, he delved into the implications for green card holders, indicating potential exit tax liabilities and underscored the significance of compliance, particularly regarding US situs assets, which may trigger tax obligations for non-residents.

Spain

Sonia Velasco shared useful information about the Spanish impatriate regime, aimed at attracting talented individuals to Spain who intend to work in Spain and contribute to the country’s economy.

The regime offers significant benefits, such as a tax exemption on foreign wealth and foreign financial income for six years, with worldwide taxation only applicable to employment income and income from entrepreneurial economic activities. Spouses and children can also benefit from the regime’s provisions. To incentivise individuals to remain in Spain, the years spent under the impatriate regime are not counted for exit tax purposes.

Italy

Francesco Capitta highlighted Italy’s efforts to attract human and financial capital through various measures, including the flat tax regime, the impatriate regime and the new carried interest legislation with exemptions for investment managers.

The flat tax regime applies to individuals who have not been resident in Italy for nine of the previous ten years and is valid for 15 years. Italian-sourced income is taxed as ordinary income, while non-Italian source income is subject to an annual flat tax of €100,000 regardless of the actual income. Furthermore, there is an exemption from Italian inheritance and gift tax for non-Italian assets.

Capitta also touched on the impatriate regime, which offers a 50 per cent tax exemption on Italian-sourced employment income and self-employment income.

Portugal

Tiago Cassiano Neves outlined the end of the non-habitual residence (NHR) regime in Portugal, which was a victim of its own success, and the introduction of a new tax regime.

The new alternative regime focuses on attracting talent and high-net-worth individuals, offering a 20 per cent flat tax rate on eligible income sourced in Portugal and provides a full exemption for several categories of foreign income, including capital gains. Eligible activities include highly qualified professions in Portuguese companies or being involved with certified startups. He further emphasised Portugal’s appeal due to the absence of inheritance and exit taxes.

Special regimes and double tax treaties

Portugal

Cassiano Neves explained that in the beginning of the NHR regime, Portugal issued a tax residence certificate without reference to the special tax regime. This led to challenges from other countries, such as Finland and Sweden, who terminated the tax treaties, and from Spain and France, who raised concerns about individuals’ vital interests and the potential for abuse of the tax treaties.

Despite these challenges, Cassiano Neves noted Portugal’s advantage in terms of treaty eligibility due to the individuals being subject to tax and the NHR exemption only being applied to certain categories of income. He concluded that under the new regime, the applicability of the treaty is less clear, but it is questionable whether it is necessary to apply the treaty concerning the special regime at all.

Italy

Capitta explained that individuals opting for the flat tax regime are not excluded from treaty benefits unless the tax treaty specifically addresses such cases, including the treaty between Italy and Switzerland. Tax residency certificates issued by Italian authorities for treaty purposes generally do not mention the individual’s special tax regime status.

Furthermore, Capitta noted that countries with which there is a treaty that is incompatible with Italy’s flat tax regime can be excluded from its application, resulting in the individual being subject to standard Italian income and inheritance taxes on income and assets from that country.

Spain

Velasco continued by discussing the variability in inheritance and gift tax rates across different regions in Spain, with some regions offering significant reductions. Regarding tax treaty issues in respect of Spain’s impatriate regime, Velasco explained that the tax administration issues residency certificates indicating the individual’s tax residency in Spain without specifying a particular tax treaty. Velasco also mentioned rulings by Spanish courts in favour of treaty applicability in terms of the UK non-dom regime and the Swiss forfait tax regime.

The US

Jaramillo highlighted the complexities of claiming treaty benefits and the importance of carefully analysing each treaty’s provisions. Using examples like the McManus case, he stressed the need to consider the specific tax treatment provided by each country and how it aligns with treaty provisions. Jaramillo emphasised the dynamic nature of tax law and advised against making assumptions about tax obligations.

The UK

Jones explained that remittance basis taxpayers are considered residents from a UK perspective because they are liable for tax on worldwide income, albeit deferred until remitted to the UK. However, he noted varying international interpretations in this regard, citing French and Italian Supreme Court decisions. With the expected abolition of the remittance basis after April 2025, Jones wonders how the new four year regime will work with the treaties. He also raised concerns about the impact of the changes on estate tax treaties, particularly in relation to the removal of domicile as a tax criterion in the UK.

Germany

Kostrzewa discussed German unilateral treaty-override/switch-over rules and the limitations to treaty benefits, in particular for dual-resident individuals benefitting from a special tax regime. Additionally, he noted the potential shift towards a credit method in more recent treaty clauses and anticipated a review of the general limitation on benefits approach by German tax authorities.

Nostradamus predicts

Thierry Boitelle initiated the ‘crystal ball session’ for each jurisdiction, explaining that in Switzerland, the number of individuals under the forfait regime is negligible and does not exert any pressure in terms of the demographics or the real estate market.

Jones expressed the view that the vast majority of non-dom individuals will probably remain in the UK, but that further changes to tax policy may be implemented given the political uncertainty.

Jaramillo concluded that litigation surrounding tax residency and citizenship status may intensify in the US.

Velasco predicted that the Spanish impatriate regime will play an important role in attracting talent and boosting the economy and, therefore, that the tax incentives will remain.

Capitta drew a parallel between Portugal’s experience and the potential challenges in Italy in the case of successful tax regimes, which therefore may face scrutiny and adjustments to balance the economic benefits with fiscal equity.

Cassiano Neves forecasted potential adjustments in light of the changing political landscape and global trends with a focus on the taxation of wealthy individuals.