The IBSA Podcasts

Explore the EU & UK New Tax Laws Affecting Incoming Residents

• Lucie • Season 2 • Episode 3

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Discover the latest shifts in global tax policies as José Aguila Shea joins us to dissect the financial landscapes that the world's affluent must navigate. As countries like the UK, Portugal, and Italy adjust their tax regimes, we're here to arm you with the essential knowledge you need. José  brings his wealth of experience to the table, providing deep insights into how changes in tax laws could influence your decision to seek new horizons. From the sun-kissed shores offering tax breaks to the complexities of exit taxes, we’ve got you covered with a discussion that's as enlightening as it is critical for high-net-worth individuals plotting their next move.

José will be examining this in greater detail at our upcoming conference in May.  Click here for full details of the conference and to book your ticket. 

Speaker 1:

Hello and welcome to this IBSA podcast about where our UK non-DOMs can go if they want to escape the wet and windy weather we seem to have had since last October and, of course, to escape the UK taxman now that their privileges will end in April 2025. My name is Roy Saunders, founder and chairman of the IBSA, the International Business Structuring Association, which is a multidisciplinary global association of entrepreneurs and their professional advisors, dedicated to sharing their expertise with each other and within a great networking platform. Today I am joined by a good friend, josé Aguila of Squire Patent Bolks in Madrid, who works on international tax issues from his base in Madrid and who will be participating in our 10th anniversary IBSA conference on 9th of May, which I'll tell you about a little bit later. So, josé, good morning. Can you give me a general overview on the tax developments for incoming residents in various countries? I know you're in Madrid, but I think perhaps Portugal we can start with, because I know they've changed their law a little bit, italy and some other countries.

Speaker 2:

We can then compare those with what's been announced so far as tax incentives for new UK residents after April 2025?. Good morning, Roy. Thanks a lot for the opportunity and also for these friendly discussions about the regimes and special opportunities for tax reasons. So I think a good way to start before going in detail of each one of the jurisdictions, I think it's the recent approach that I've seen or noticed both in the European Union and also in the OECD, where they found these special tax regimes a way where the high net worth individuals could actually be exempt from tax or at least reduce substantial their tax liability. So, and I'd seen that development within the European Union, I mean we've, I think the UK non-dom non-dom was probably one of the oldest which you want. I mean that's the purpose of every jurisdiction. Right, to attract high net worth individuals. We're not paying a bunch of income tax. They buy houses, they create a good environment, they spend BAT Right, they have a lot of expenses and that was the, I guess, the historical purposes of attracting these high net worth individuals. Right, and, of course, over the past years, I think, the tax authorities lot of criticism internally in the Portuguese market, where they haven't seen those developments of attracting these high-networth individuals into the real economy because they're just kicking out the locals from buying properties in these specific economic areas they're using. So at the end of the day they found, like in Cascais, the Lisbon area, it was outrageous the amount of increase of prices that they had because of those high net worth individuals. So they ended up.

Speaker 2:

I think that there was a general understanding that that tax rate for individuals, for retired people that came to Lisbon, was really not adding any benefit to the market.

Speaker 2:

So I think they decided to repeal it from last year, From this year I think they have a few years going on the people who actually applied it, but from next year it'll end up not being applied for anyone new coming into Portugal.

Speaker 2:

There are some exceptions depending on the areas that you are applying for, but in the Lisbon area, Cascais, Estoril, which is where the main high net worth individuals went, that would no longer be a bill. And I mean I've heard I have some good friends there that what they've done is they've tried to allow the specific tax benefits when you actually set up a company and become an employee of a company that actually accesses certain tax benefits, and I know there's a range of tax benefits that the companies could have played. And, for example, I've heard the scenario of well, if you're in a developing company and you actually request investment in computers and hardware, you would actually get tax benefits and therefore if you're hired by that company that got a tax benefit, you can actually become in a special tax redeem. So that's kind of the ways that right now I understand the local lawyers are looking into opportunities to still fit in some high net worth individuals where they actually carry out a business activity.

Speaker 1:

Is that a cross-party consensus that they don't want this anymore? Unlike in the UK, which was primarily Labour-led? The non-dom attack.

Speaker 2:

Yes, I mean, have you heard the changes in the Portuguese government? They had a socialist party, now they have a more centre-right wing. And you might have heard recently, last week, there was an agreement where the center-right party does not have to agree with the far-right party, which came into place with a substantial amount of votes. So I think now both the center-left and center-right both agree to set up a common government where they would actually switch positions. So I think that's a common understanding. As far as I understand, there is no turning back on the changes introduced by the repealing of that special regime. And now we'll have to see how that goes with the opportunity with this new developments on the special tax regime.

Speaker 1:

Okay. So what's happened in Spain? Because I know the laws have changed. Yes.

Speaker 2:

And again going back to just before going into Spain, Italy has also introduced, as you know, italy is one of the most recent I think it's been in place not more than four or five, six years where they have this flat tax, which I think it's really interesting because it allowed for a little more high net worth individuals paying 100,000 flat. That would allow them to become tax resident and retire and not have to pay for their foreign income. Italy has become also very attractive for employees moving and working in Italy because they had a. It was a tax rate about 70 or up to 90% of the employment income would be exempt. That's what has been recently changed, that for employees. That has changed from this year that it would reduce the exemption from 70% to 50%. So I'm just this is. I like to use this as an example of how again the threat of the understanding or the fairness of taxation that comes into place more recently, where we have an understanding that well that it's not that clear that tax authorities want to benefit high net worth individual other than qualified employees, right. So I think this is something to consider because that has led again we've seen Spain and the changes, as you said, we have last year and going now into detail, in Spain we had had already said the difference between the non-dom, the Portuguese, the Italian and Spanish is that Spain did not accept high net worth individuals just moving to Spain to live in Spain, to retire. That did not work. We always had to link it to an employment contract or a directorship in a non-related company. So that was a big difference.

Speaker 2:

Obviously, you've heard that a nice way to you can always plan around finding an employment relationship, a director relationship, and I've always said well, the truth is the growing development in the tech system generally, where there's a lot of focus on wealth, tax, disclosure of foreign assets. You have to inform even if sometimes it was exempt, you always have to inform your wealth, your sources of income, your foreign assets. That did not apply to individuals under the special regime, so it really had very low scrutiny on these individuals. Where, let's say, a high net worth individual is hired by a company, it's paid $50,000 a year, that's it, like they already had. The tax authorities didn't even have a reason to explore whether this was a high net worth individual or whether it's really just an employee making $50,000. So that's where I've seen in practice a lot more difficulties and a lot more scrutiny by the tax authorities. Even with informal conversations with tax officers, they said that the tax authorities have created some specific attributions to local teams to kind of look into each specific case. So that's something that we have to take into account, that now we have to plan and look at precisely the purpose of the actually transfer of domicile to Spain, and that's kind of like the part that we have to put more focus on thinking about tax planning for high net worth individuals. The good side of it is that we've raised new scenarios to apply the special regime right, and again I always like to say that everyone has all the jurisdictions have the tax benefits to high net worth individuals on the spot right, because now it's hard to justify against the general public. But this is curious that the last changes, or let's say improvements of this vessel what everyone knows is the Beckham Law. It's included in the startup law. So we have a year and a half to be able to approve what we call the new entrepreneurs law, which has a lot of other measures, including setting up a companies for entrepreneurs. One of the point carried interest for venture capital and equity funds, and one of the issues that was approved in this is the improvement of the special regime for impatuates Right For the Beckham.

Speaker 2:

So, as I mentioned before, you could only apply employment relationship and directorship relationship with non-related entities and, as you know, with high net worth individuals. This is very important because a lot of times you can set up, let's say, ad hoc structures for high net worth individuals which have the ability to set up companies and set up their own directorship or employment relationship. So that's something that where, as I said before, you can only become an employment relationship where you have non-control and director. We have non-control right. So now it allows high net worth individuals because it's first you can set up a, become a remote worker in any type of company. You don't even have to be, have a link to spain. You're working for a remote basis.

Speaker 2:

Or, for example, uk tax resident decides to move to spain, continue into a uk relationship.

Speaker 2:

That works perfectly.

Speaker 2:

The only requirement is that you don't set up in a basis in spain.

Speaker 2:

So that means that you have to be working exclusively a remote basis right now we have the discussion. So that means that you have to be working exclusively a remote basis right Now we have the discussion whether that means that some people have to commute to the employer jurisdictions. We've seen cases in Switzerland, in the UK, where people say, well, my employer allows me to work remotely but is asking to come to work where the employee in UK and London or in Geneva I've seen a recent case for, let's say, one or two days a week. So apparently that it's seen with some flexibility but it has to be like really on a common basis that it's you're based in Spain and just randomly going to Spain. I would try to avoid the cases where you're working on a fixed basis on your employer jurisdiction for one, two or three days a week, right, I know that in the past the high net worth entrepreneurs couldn't set up their own company and own the company and also come within the law.

Speaker 1:

Are you saying now that they can do, that they can own a?

Speaker 2:

company and live in Spain. Yes, apart from the remote working, the opportunities that they have is that now anyone could move to Spain and become their own employer. Let's put it that way you set up your company at 100%. The law states is that they cannot be what we call an asset holding company, which this means it needs to carry out an active business activity I understand that, and and and how long is that for?

Speaker 1:

is that for five years their foreign income would be exempt?

Speaker 2:

yeah, so the special regime applies to actually six years because the law states the year you become resident in and five more. So in the actually the draft of the law, it was provided in the initial stages that it would go up to 10, 11 years, 10 plus one, but then they put it back again to five plus one. Okay, and important to notice that this is because I've had some confusion around this it doesn't require to be a non-Spanish individual, it just requires to be a Spanish non-resident over the past five years. Before it required 10 years. So now, since it only requires five years, we've seen a lot of Spanish citizens that have been abroad for a number of years that actually return to Spain under a local contract and local entrepreneur and they still be able to benefit from the special tax regime.

Speaker 1:

That's very interesting because the new laws, when they're eventually documented in the UK as from April 25, says that if you haven't been a resident of the UK for the past 10 years, then you can benefit for the first four years not six years in your case for the first four years from freedom from foreign income. So again it means that UK domiciled individuals who haven't been resident in the UK for the past 10 years can benefit from coming back to the UK and the first four years after April 25, they don't pay tax on their foreign income gains, which is very beneficial. It's interesting because there is sort of some amnesty type approach. I know Italy had a really successful amnesty some many years ago now perhaps 10, 15 years ago and a lot of money was brought back to Italy under a very, very minimal tax we have in the UK. We're going to have from April 25, we're going to have people who have been on the remittance spaces non-doms who've been on the remittance spaces of taxation for the past many years and haven't been able to remit their income will be able to remit their income from April 25 with a 12% tax rate. So it's a sort of an amnesty in a way, and bringing money back into the country is, as you say, a very key thing.

Speaker 1:

I mean, one of the things that I'd like to touch on, because you've touched on it, is the approach of the EU. I know, with beneficial IP regimes, for example, it used to be that we could have patent box regimes and IP regimes for all sorts of software and other intellectual property. Now the EU started. First of all, they said we don't want the non-patent patent box type regimes, but equally, they're now coming back and saying you know they don't really like the patent box regime. So I'm interested to know what they're thinking about these temporary residence rules and what you've said about them.

Speaker 2:

Yes, I mean, as you said, and that links to your point on the new regime in the UK, which that is a limit right, I think the European Union and OECD, I think it's somehow accepting that a country establishes a special regime to attract capital, to attract investors, but it has to be limited in time. So I think that makes sense with the proposal and counterproposal that we had in Spain to extend it to 10, 11. And they said, no, we stay in five. In your case, where I remember UK had up to 20 years, they started limitation and now you only have four years that you propose. And I've recently seen a case also in Brazil with the established new CFC rules. And they've also said, as you mentioned, that kind of tax amnesty, where you can bring back the money that wasn't taxed before for a limited 8% tax rate that they had. So this is, I think, the approach both in the European Union and the OECD, which is to limit these tax benefits to a certain amount of years.

Speaker 1:

Yeah, now there are some countries where it's quite extended. I mean, I know Israel has a 10-year period for people coming back to Israel and having their foreign income exempt. What other countries I know Cyprus has got some beneficial regime there, malta as well have you experienced? I suppose your experience is mainly that people will be going to the warmer climes like Spain and Portugal and Italy, and perhaps those are the ones that have been giving the tax breaks as well.

Speaker 2:

Yes, I've seen that. I mean, as you said, spain has a big focus also on Latin America and a lot of attraction with Latin American high net worth individuals, so that's always been a place and one of the points that I think it's good noticing. And looking at the environment, and you probably heard of, in Belgium they have exempt capital gains, so it's a perfect environment for entrepreneurs which are looking to exit right. As you know, a lot of everyone has a capital income taxation, so a lot of times you try to benefit from the special regime because, therefore, the foreign income is not exempt. I mean, it's exempt so it's not taxable. And Belgium I think it's the only country where it actually has a full exemption on capital income. They don't have a special regime, but they do have that tax break.

Speaker 2:

And then I mean, I've heard across Europe that sometimes they do have special regimes, just like a tax break for employment income for a certain amount of years. I've seen those in Belgium. I think Netherlands has something like that, but it's only limited to employment income and it's a way of attracting. But again, you said for high net worth individuals, the fact that you get exemption and capital income I think is the key to be able to benefit from the exemption.

Speaker 1:

Yeah, One of the things that you mentioned entrepreneurs exiting their companies and the capital gains tax that might be levered on those. I can understand them going to places like Spain, Portugal and Italy, but there are a lot of countries I think Denmark, Austria, well, several countries in Europe where they have what's called a step up in basis for their assets. So when people go to those countries, the value of their assets are stepped up to the current value and then if they were to sell soon after that, then there should be no capital gains tax because the value won't have increased since they arrived.

Speaker 2:

That's definitely a great approach that they have, because I have a lot of times situations where they say, well, okay, I'm willing to pay taxes, but if I come in 2024 and I've grown a business for 20 years, I mean I'm willing to pay in Spain, just the extra right. Sometimes it's hard even to explain say no, no, the tax basis stays from the time you set up the company, but you have to pay for the full amount, which sometimes is even difficult to acknowledge, right? But that's interesting that you pointed out and I remember discussing about that that some of the northern countries, which generally are the ones who are sending people to the south of Europe, that also the way to attract is well, you're still going to be paying taxes, but the step-up in basis is a great tax benefit, right?

Speaker 1:

A lot of what you've been. You've just mentioned that. Why should you be paying tax in a country that you've just arrived in, on, where you've been able to accumulate your value beforehand? But then, of course, that's why you have an exit tax in several countries. The the US, of course, has a an exit tax for individuals, so the value of their assets if they leave the US are stepped up to what they are on departure and they pay capital gains tax on that. So you know there are a lot of countries that do have the exit tax. The UK, incidentally, doesn't have an exit tax. I don't know about the southern European countries. I don't think they do either.

Speaker 2:

I was just going to bring that up. I know Portugal does and Spain has an exit tax for any individual that has been tax resident in Spain at least 15 years out of the last 20. So that still gives you a lot of benefits around the Beckham law and even people that can become fully taxed residents. Because the concern is OK, I'm growing a business, I'm willing to pay taxes until that happens, but that exit. I want to be business, I'm willing to pay taxes until that happens, but that exit I want to be able to not be taxable. So, again, that's an attraction for entrepreneurs that you can come to Spain, benefit for some years for the special regime and eventually, when you're going to set up a big capital gain, you can decide to move to a country which doesn't tax or tax and reduce rates that capital gain. Because, again, one of the benefits that Spain's had and now it's really negative is that we have a capital income tax which initially was 15 flat, and I'm talking about 15 years ago when I started, 20 years when I started working we had a 15% for capital gains. Now they've raised to the different crisis that we had in 2008,. Now they've raised to the different crisis that we had in 2008, 2011, 2015. Lately, our maximum capital gains tax now is 28%. So for capital income both dividends and capital gains now it goes up to 28% for an annual capital income up to over 300,000 euros. And that's something that I've seen, especially the left parties, and something that the European Union is looking to.

Speaker 2:

I've always heard this idea of trying to lower the gap between general income, employment income and capital income. Right, because they always say that the hardworking people are being taxed at higher rates than the people who generally make their income as capital income. Right, which is the case of the high net worth individuals. So, as you said before, we've had taxes up to 50, 55%. So they've tried. Now, employment income, we can have cases where it's 45%, and then capital income, we've gone up from 15%.

Speaker 1:

Then we had 18, 18, then 21, then 26 and this this year the higher tax rate was increased to 28, which, as you can understand, is a substantial tax rate yeah, no, that's interesting because there's been a lot of talk in the uk about increasing the capital gains tax rate to income tax rates, um, so there we're talking about very high rates of 45% or whatever, but funnily enough, the spring budget actually reduced the rate of capital gains tax from 28% to 24%. So I'm not quite sure which way we're going there. And, of course, now we're facing a Labour government which will be coming in, I'm sure, this year, and we'll see what happens there. But I think it's been very interesting. I think one of the things that seems to be emanating from this, and perhaps from the EU, is that they want fairness between taxpayers general taxpayers, if you like. So, although they're prepared to, as you say, acknowledge a short term for incoming residents, that's it. They don't want this to be abused and longer term. So I think that's very interesting. I think we've covered what I wanted to cover.

Speaker 1:

Thank you very much, jose, it was really good. Thanks for joining me today. I'm sure our IBSA members will listen carefully to some of your comments and some of the practical recommendations that we've made as well, and I'm sure there may be more questions, because I know you're coming along to the conference, the IBSA conference, which is our 10th year anniversary conference on the 9th of May, and we're all looking forward to that. We're concluding it with a champagne reception and an evening barbecue, so I think it's going to be really interesting for our listeners. Details are on our website at the IBSAorg. It remains for me to thank José again and thank you to all our listeners for engaging with this podcast. Thank you.