As life slowly returns to the pre-COVID-19 normal, more and more high net worth (HNW) individuals are starting to seriously consider relocation. In deciding where to relocate, some HNW individuals may be predominantly concerned with economic factors and may, therefore, wish to relocate to a country with a favourable tax regime. Others, however, may be troubled by the likelihood of a slow economic recovery, their government’s intentions to increase taxes on the rich or have serious concerns about their safety or lack of an adequate healthcare system in their home country.
There is no “one size fits all” solution when it comes to the decision to relocate. Though economic factors often become the determining factor, reasons other than economics may influence the final decision. In this article, we focus solely on alternative personal taxation systems by describing the so-called “res non-dom” and “lump-sum tax” regimes in three specific jurisdictions, namely the UK, Italy and Switzerland. However, the jurisdictions mentioned in this article are not the only ones that may offer advantageous tax regimes and are provided as examples only.
Lump-sum taxation, also referred to as an expenditure-based taxation, is a simplified assessment procedure for foreign nationals. Each of the jurisdictions described below offers foreign nationals the advantage of beneficial taxation through lump-sum taxation or RND regimes.
HNW individuals who consider relocating to the UK may be able to take advantage of the substantial tax benefits of the UK’s RND regime. The regime is available to UK tax resident individuals who are not domiciled (or deemed domiciled) in the UK, in other words residents non-domiciled (RNDs). Whilst there has been a curtailing of the RND regime, it remains a very well-established and attractive regime for foreign HNW individuals. The RND regime is set to continue for the foreseeable future, with no further radical reform expected under the current UK government, which continues to seek to attract business, innovation and wealth to the UK, particularly after Brexit.
The UK RND regime has historically been subject to a number of reviews and consultations and is now restricted to non-UK domiciliaries. As a starting point, UK tax resident individuals1 are generally taxable on their worldwide income and gains. However, RNDs may be able to claim the remittance basis of taxation pursuant to the RND regime (outlined below).
The remittance basis allows RNDs to pay UK tax on UK source income and capital gains on an arising basis and on certain foreign source income and capital gains to the extent that these are “remitted” to the UK. In addition, whilst an individual is not UK domiciled or deemed domiciled, they will be subject to UK inheritance tax on their UK,2 and not their worldwide, estates.
The remittance basis does not apply automatically and RNDs must claim the benefit in their self-assessment tax return if their unremitted foreign income and gains in a tax year exceed GBP 2,000. Such claims are required for each year in which the individual wishes to use the remittance basis and is generally time barred once four years have passed from the year to which the claim relates.
Additionally, with effect from 6 April 2017, a UK tax resident individual is considered “deemed domiciled” for all UK tax purposes once they have been a UK tax resident for 15 out of the 20 previous tax years. Once deemed domiciled, they will be taxable on the arising basis on their worldwide income and gains and estates, although their trusts established before they become deemed domiciled may continue to offer significant benefits of the RND regime, in many cases putting RNDs into a better position than under previous rules, provided they avoid certain traps and pitfalls.
The RND regime offers very significant tax benefits for non-UK domiciliaries wishing to reside in the UK, particularly those who undertake the key pre-arrival planning steps during the UK tax year prior to their arrival in the UK (or the non-resident part of a split year, if they qualify).
From 2017, the lump-sum tax regime became available to HNW individuals who relocate to Italy and acquire Italian tax residence, provided that they have not qualified as Italian tax residents for at least nine of the previous 10 years. According to the law regulating the lump-sum tax regime, qualifying individuals who successfully adhere to the regime (“New Italian Residents”) will be subject, for up to 15 years starting from the first fiscal year of residence, to the following Italian tax treatment.
In the first instance, a New Italian Resident who elects for lump-sum tax regime treatment will be required to pay an annual EUR 100,000 lump-sum tax, which will replace the following:
- Italian income taxation on any non-Italian-sourced income, irrespective of the actual amount of such foreign income and irrespective of its remittance to Italy.
The sole exception to the above principle is that capital gains arising from the sale of the so-called “qualified shareholdings”3 during the first five years of validity of the beneficial tax regime are reportable on the Italian tax return and are taxable at a 26% flat tax rate.
- The 0.2% annual tax on the value of foreign financial assets (IVAFE).
- The 0.76% tax on the value of foreign real estate (IVIE).
Additional favorable consequences of election for the application of the flat tax regime are as follows:
- New Italian Residents are exempt from gift and inheritance tax on the transfer of assets and rights located outside of Italy.
- New Italian Residents are exempt from Italian reporting obligations with respect to their non-Italian assets, which would have been required otherwise. Pursuant to Italian tax law, individuals residing in Italy who do not qualify as New Italian Residents are required to report on their annual tax returns “any foreign asset of financial nature” or “investments abroad” that they held during the fiscal year and that may generate income taxable in Italy. The sole exception to the above exemption from reporting duties concerns qualified shareholdings.
Election for the special regime can be extended to one or more relatives of New Italian Residents, to the extent that such relatives also acquire tax residence in Italy. However, in such circumstances, the annual substitute tax will be increased by EUR 25,000 for each relative.
It should be noted that New Italian Residents can choose to withdraw from the lump-sum tax regime at any time.
The Swiss lump-sum taxation regime is a special tax regime available to i) non-Swiss nationals (“New Swiss Resident”) who ii) relocate to Switzerland for the first time on or after an absence of at least ten years and iii) do not pursue any professional or commercial activity in Switzerland. The pursuance of a gainful activity abroad or of a non-gainful activity in Switzerland (including personal wealth management or charitable activities) is allowed under the regime. The lump-sum tax regime is available at the federal and cantonal levels in most of the cantons.
Determination of taxable income under the lump-sum tax regime:
Under the lump-sum tax regime, the income tax basis will be equivalent to the highest of the following:
- the annual worldwide living expenses of the New Swiss Resident and their dependents, such as rental costs, costs of education, leisure, health care, food, clothing or other related costs
- a minimum of CHF 400,000 at the federal level; the minimum on a cantonal level depends on the specific cantonal tax legislation
- the equivalent of seven times the annual rental cost or a property’s deemed rental value if the New Swiss Resident has acquired residential property in Switzerland, or three times the annual price for boarding and lodging
- the total gross income coming from Swiss sources; for this purpose, a control calculation must be prepared annually and will include income from Swiss real estate, Swiss shareholdings and foreign income for which benefits are claimed under a double tax treaty
The taxable income (determined pursuant to the above) will then be taxable subject to ordinary income tax rates. The New Swiss Resident may withdraw from the lump-sum tax regime. However, under normal circumstances, once an individual decides to withdraw from the regime, the regime will no longer be available to that individual.
In addition to the lump-sum regime, a New Swiss Resident will also be eligible to benefit from double taxation treaties (DTTs). However, certain foreign jurisdictions may disallow the application of a DTT if income derived from certain sources becomes subject to taxation other than regular income taxation for such income. If income is subject to only the ordinary taxation inSwitzerland. The emphasis here is to ordinary income only, but not other time of income.4 In such circumstances, Switzerland may apply a modified lump-sum taxation regime under which the income from the respective state will be included in the control calculation, i.e., treated as a Swiss-source income enabling a New Swiss Resident to claim benefits under a DTT.
Net wealth tax
HNW individuals considering relocating to Switzerland should be aware of an additional tax liability, namely Swiss net wealth tax. The net wealth tax is due at the cantonal level. Under the lump-sum tax regime, taxable wealth is calculated as a multiple of the aforementioned income tax basis. The multiple varies from canton to canton. The taxable wealth then becomes subject to ordinary wealth tax rates at the cantonal level.
One of the benefits of the lump-sum tax regime in Switzerland is a significantly lower tax burden when compared to ordinary taxation. In addition, the lump-sum tax regime is attractive from an immigration perspective, especially to non-EU nationals, as it allows them to obtain a Swiss residence permit under simplified conditions. However, it is important to be aware of the tax rate differences, which will vary greatly on the cantonal and municipal level, with the highest rates of 40% to 45% in Geneva and Vaud and considerably lower rates of 22% to 27% in cantons such as Zug and Schwyz.
Finally, it is important to note that income and net wealth tax bases are typically agreed between New Swiss Residents and the respective cantonal tax authorities by means of tax rulings prior to relocation. Once agreed upon, and as long as the New Swiss Resident’s situation does not change considerably, the tax basis remains the same every consecutive year, which considerably reduces tax administration and compliance costs.
To summarize, each of the above regimes requires careful navigation and deep knowledge and understanding of the subject matter. However, with careful planning, these regimes may offer substantial tax benefits to HNW individuals interested in relocating. While the ultimate decision will belong to the individual, they should seriously consider contacting their attorneys for assistance in selecting the most appropriate and beneficial regime based on their personal circumstances.