Residence in tax havens

  • Posted By : Admin
  • Tax havens
  • 10-12-2017

One of the basic aspects of tax havens is the concept of residence; a concept that is clear to most people, but that has a complex legal consideration and important consequences from a fiscal and international tax planning points of view. 

The change of residence must be properly planned taking into account all aspects that may affect it in the future. Being non-resident has important consequences when it comes to not only paying taxes but also choosing where and what is taxed and in what concept. In many countries the residence entails the taxation for all the returns that are obtained in any part of the world. In some jurisdictions this is not the case and some advantages can be derived from it.

A physical person is considered a resident of any country when at least one of the following circumstances takes place: 

  1. Permanence in the country for more than 183 days during one calendar year;
  2. This country is the main nucleus or the base of its activities or economic interests;
  3. When the spouse or underage children reside in this country (unless there is proof against it).

When an individual leaves his country of residence and the place of destination is a tax haven, residence is maintained during the first year of transfer for tax purposes and the following four years the effective residence in that territory must be proven. This situation can be seen in almost all European countries. There are also countries in which a tax is paid when leaving the country of residence and others in which one pays for the equity that he or she possessed upon arrival. In both cases, proper planning and legal advice can help to save on personal or corporate taxes. The criterion of having the second residence or the base of the economic interests in one of the European countries is based on a debatable concept and subject to interpretations. The courts have used it in a restrictive sense, also demanding the payment of taxes when these interests are not direct, but are channeled through offshore companies based in other countries. 

In other countries it is the center of vital interests, based on economic criteria and others of a personal, family and social nature. In Switzerland or France, important factors to consider are where the fundamental source of income or family residence is. In the United Kingdom courts have used different arguments to establish the residence of an individual, for example if the person "tries to establish his home in the new country until the end of his days unless and until something happens that will change his mind”. The OFC Report 2004 describes the factors that have been taken into account in the decision process of a British court, in the case of a US citizen who moved to London, and that were used to estimate that he did not reside in the United Kingdom:

  • He did not wear British clothes or eat English food.
  • He was seen as an American living a nomadic life.
  • He was an illegal immigrant in the United Kingdom.
  • He lived in London because of the health care he was receiving.
  • He did not interrupt his contacts with New York.
  • He had his investments managed from New York.
  • His lawyer in New York prepared his will.

As can be seen, these are discretional, debatable criteria that can be resolved with some preparation.

A company is considered a resident of a country when: 

  1. The company is incorporated in accordance with the laws of this country
  2. It has its registered office one the territory of this country.
  3. The headquarters of the effective address and control of the set of activities takes place in this country.

These points may present interpretation problems. If the person residing in one of the countries receives income from work done in another country, such income is subject to tax in the country of his new residence, by the aforementioned principle of taxation by world income. There are exemptions, if taxed outside the country of residence for a similar tax and if the amount is equal to or less than 60,000 euros (Law 6/2000 of December 13). To qualify for the exemption, these jobs must have been provided to a company or a permanent establishment located abroad. The exemption does not apply when the work has been done in a tax haven.

As of today, there are many tax havens that offer the option of a second residence. According to the criteria, a citizen of the European Union may choose the country of residence that offers the most advantages when it comes to protecting his assets, working, traveling or retiring.