Investment Migration Programs: An Attractive Option in the Age of Fiscal Transparency

By Dominic Volek, Head Southeast Asia, Henley & Partners (03/09/2017)

Tax planning has always been a major part of financial planning/sustainability and legacy building. With the introduction of the Common Reporting Standard (CRS), alternative residence or citizenship (and the fiscal and security benefits associated with it) is being taken far more seriously by ultra-high net worth individuals (UHNWIs) wanting to operate globally, reduce their exposure to external threats, increase their international flexibility and open up new opportunities for growth.

The CRS, introduced by the Organisation for Economic Co-operation and Development (OECD), requires financial institutions to report account holder information to local tax authorities who, in turn, automatically exchange that information with the tax authorities where those account holders are tax resident on an annual basis. The first phase of the CRS was initiated in 2017 and is in the process of coming into force in almost every significant economy except for the US.

The CRS has been widely welcomed as a positive, globally coordinated move towards greater financial transparency and accountability. However, with the second wave of CRS adopters expected in 2018, there is a growing fear among wealthy individuals and their families that their information will be made available to the wrong sources and threaten their safety and security, especially in developing countries where the necessary regulations and safeguards are lacking.

Various residence- and citizenship-by-investment programs can provide a bridge for those who wish to physically relocate and become tax resident in a country where the vital controls and regulations around cross-border sharing of information are in place. Alternative residence and citizenship additionally provide access to a country where the overall situation is more favorable, in terms of their security, lifestyle, and the quality of education available to their children.

Malta: Safety and Security in an EU Member State

Driven by its reputation for stability, predictability and security, Malta has become one of Europe’s leading investment locations. The island nation also provides numerous financial incentives for residence and maintains a tax regime that encourages economic growth. For international entrepreneurs and businesspeople, Malta boasts an advanced telecommunications network, as well as the support of many highly skilled professionals. A member of the European Union (EU), the country provides residence in a state that is neutral, stable and highly respected, and freedom of movement within the entire Schengen area.

The Malta Individual Investor Program (MIIP) is the most exclusive and sought-after citizenship-by-investment program in the world, with applications capped at just 1,800. The application process is efficient and applies the world’s strictest due diligence standards and applicant vetting. When it comes to travel freedom and global mobility, Maltese citizens enjoy the benefits of the world’s 10th most powerful passport, with visa-free access to 167 countries, including all EU member states, the US, Australia, and Switzerland.

As a former British colony, Malta inherited a remittance-based tax system which provides foreign individuals who become tax residents with beneficial tax treatment. Those who are resident and permanently reside in Malta pay income tax on their worldwide income at progressive rates of up to 35 per cent. On the other hand, individuals who are resident, but not domiciled in Malta, and who acquire their residence status through Malta’s residence- or citizenship-by-investment programs, will be taxed according to the remittance system only.

Non-domiciled residents in Malta are only taxed on two types of income. Firstly, foreign individuals with residence status who work to earn an income are subject to Maltese personal income tax. The second form of taxable income for non-domiciled residents applies to foreign-sourced income, but only if it is remitted to Malta. In other words, no taxes are imposed on foreign-sourced income unless the income is paid into a Maltese bank account.

In addition, Malta does not levy inheritance tax, gift tax or wealth tax, which are serious additional advantages. Stamp duty is only paid on transfers of Maltese real estate (5 per cent) and on transfers of certain shares in Maltese companies (2 per cent). The acquisition of Maltese citizenship does not trigger tax residence and, even if you decide to move and take up permanent residence in Malta, you would normally still retain the status of a non-domiciled person insofar as taxation is concerned.

Cyprus: One of the World’s Lowest Corporate Tax Rates

In just a few years, Cyprus succeeded in turning around its economy from near bankruptcy to continued sustained growth. This is evident in the country’s recent credit rating upgrade to just a notch below investment grade by international ratings agency Standard & Poor’s, along with predicted steady growth over the next three years. As Cyprus’ economy continues on the road to recovery, foreign investors are increasingly flocking to the island’s shores to take advantage of the improved economic climate, privatizations and its robust corporate culture.

Cyprus’ strategic position at the crossroads of Europe, the Middle East, and Africa, has seen the island thrive as an international business center. Along with an affordable business environment, an abundance of support services, and state-of-the-art telecommunications infrastructure, the island offers a corporate tax rate of just 12.5 per cent — one of the 20 lowest corporate tax rates in the world. Cyprus’ investor-friendly tax regime is also underpinned by double taxation agreements with 60 countries.

Individuals are considered tax resident in Cyprus if they spend more than 183 days per annum in the country. Tax residents are taxed on all chargeable income that is accrued or derived from any source in Cyprus and abroad. Non-tax residents are only taxed on certain income accrued or derived from sources in Cyprus. Any foreign taxes that are paid can be credited against personal income tax liability. Personal tax on income generated in Cyprus is taxed at progressive rates up to 35 per cent and tax varies according to the individual’s tax status.

The Attractive Tax Residence Alternative in Southeast Asia

One of the tax residence options that has gained considerable attention from international investors and mobile entrepreneurs is the Southeast Asian hub of Thailand. Renowned for its natural beauty, temperate climate, and outstanding leisure facilities, more and more foreign nationals are considering making Thailand their second home and taking advantage of the attractive tax benefits associated with being a Thai tax resident. Thailand has shown significant social and economic growth, moving from a low- to a middle-income society in less than a generation, with the hopes of further growth to come as part of the Royal Thai Government’s development projections.

Earlier this year, Henley & Partners was awarded the global concession to promote Thailand’s unique residence program. It’s the first of its kind worldwide as it allows successful applicants to live in the country for up to 20 years and experience exclusive VIP privileges and benefits. The program was initiated by the Royal Thai Government to attract wealthy global citizens, families, investors and entrepreneurs who want to spend extended periods of time in the country and take advantage of its beneficial tax regime and affordable but exceptionally high standard of living.

In Thailand, taxpayers are classified as either ‘resident’ or ‘non-resident.’ Resident means any person residing in Thailand for a period (or periods) aggregating to more than 180 days in any tax year. A Thai resident is liable to pay tax on income from sources in Thailand as well as on the portion of income from foreign sources that is remitted to Thailand in the same year of earning. Delaying remittance of earned income to Thailand to the following year is, therefore, an attractive tax benefit to a resident. A non-resident, on the other hand, is only subject to tax on income from sources within Thailand and may transfer foreign-sourced income to Thailand without restriction. Personal income tax rates are progressive up to a maximum of 35 per cent.

Planning for a Secure Future

While investment migration programs are an attractive option for wealthy individuals concerned over the security of their financial information, it is vitally important that the unique financial and lifestyle requirements of each individual are taken into account before making a decision regarding alternative residence. Consulting with professionals experienced in both tax planning and citizenship planning can help wealthy individuals and their families make informed decisions regarding the future of their financial security and growth.