Alternative Residence Can Ease Financial Exposure Fears

By Dominic Volek, Head Southeast Asia, Henley & Partners

Wealthy people place a premium on privacy, and for good reason. If their personal information becomes available to the wrong sources, it can threaten their own safety and security as well as that of their families. This is especially true in developing countries where the regulations and safeguards may be lacking.

 

Take the Common Reporting Standard (CRS) for example, which has been widely welcomed as a positive, globally coordinated move towards greater financial transparency and accountability. But, with a second wave of CRS adopters expected to implement the standards in 2018, there is a growing fear that critical data could potentially fall into the wrong hands.

 

Introduced by the Organisation for Economic Co-operation and Development (OECD), the CRS

requires financial institutions to report account holder information to local tax authorities. These authorities automatically exchange that information with the other tax authorities in locations where those account holders are considered residents for tax purposes. The first phase of the CRS was initiated in 2017 and it is now coming into force in virtually every significant economy, apart from the US.

 

However, growing security concerns over this automatic exchange of information is prompting wealthy people to explore investment migration programs as a hedge against potential financial exposure, data theft and extortion.

 

An increasing number of people are seeking alternative residence or citizenship in an unsettled world climate which has prompted an increased emphasis on physical safety and financial security. With the implementation of the CRS, high net worth individuals have been motivated to explore investment migration programs to reduce their risk profile and provide alternative options — for themselves and their families — in jurisdictions with a more secure and better regulated environment.

 

Establishing tax residence

 

The CRS is based on tax residence and not citizenship, which offers high net worth individuals room to maneuver.

 

While most countries consider residence as the key criterion for personal income taxation, the definition of who is and who isn’t resident varies considerably, from physical presence and availability of accommodation to where one’s assets are located.

 

A change of residence to a suitable country is an increasingly important aspect of international planning for private clients. Various residence- and citizenship-by-investment programs can act as 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. In addition, alternative residence and/or citizenship can provide access to a country where the overall situation is more favorable in terms of security, lifestyle, and the quality of education available to children.

 

Secure tax jurisdictions — Cyprus, Malta, Thailand

 

The investment migration programs in Cyprus and Malta offer the highest amount of flexibility to high net worth individuals. Both Cyprus and Malta are members of the European Union (EU), therefore they provide their citizens with the same rights as any EU national, including legal, protection and settlement privileges throughout all 28 EU countries and Switzerland. These programs effectively provide 29 EU-based tax residence options and, therefore, much greater comfort in terms of the security and confidentiality of the information that will be shared as part of the Automatic Exchange of Information.

 

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.

 

The application process for the Malta Individual Investor Program (MIIP) is efficient and applies the world’s strictest due diligence standards and applicant vetting. As a former British colony, Malta inherited a remittance-based tax system that provides foreign individuals who become tax resident with beneficial tax treatment. To be considered tax resident in Malta, individuals must spend more than 183 days per annum in the country.

 

Cyprus has been a full member of the EU since 2004. The island is located in the southeastern Mediterranean Sea, at the crossroads of Europe, Asia and Africa. The strategic location of the island has played an important role in its development as a financial center. Cyprus offers a corporate tax rate of just 12.5% — one of the 20 lowest corporate tax rates in the world. And its residence- and citizenship-by-investment programs offer individuals access to an investor-friendly tax regime that is underpinned by double taxation protection agreements with 60 countries. Generally, individuals are considered tax resident in Cyprus if they spend more than 183 days per year in the country. In July 2017, however, the Cyprus parliament voted for a Cyprus tax law amendment adding a second test — the ‘60-day rule’ — for the purposes of determining Cyprus tax residence for individuals. As from tax year 2017, an individual will be considered a tax resident of Cyprus if the individual satisfies either the current ‘183-day rule’ or the new ‘60-day rule’ for the tax year.

 

One tax residence option that has captured the imagination of international investors and mobile entrepreneurs is the Southeast Asian hub of Thailand. An individual is deemed to be tax resident in Thailand only if he stays there for an aggregate period of not less than 180 days within a calendar year. A resident of Thailand is liable to personal income tax on assessable income derived in Thailand and only from sources outside Thailand that are remitted into Thailand in the same year in which such income is derived (remittance in the following year is not subject to tax). The Thailand Residence 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.

 

Strategy for a secure future

 

There has been a sharp increase worldwide in the number of individuals wanting to acquire a beneficial alternative residence and/or citizenship to globalize their family’s opportunities and expand their business interests in a changing and uncertain world.

 

The concern of who will ultimately have access to the information exchanged under the CRS and what will be done with that information if it falls into the wrong hands — potential extortion and kidnapping — are very real concerns for high net worth individuals around the world. In many respects, alternative residence and citizenship has become a valuable and strategic asset for talented and wealthy individuals and their families who want to operate globally, reduce their financial exposure and safeguard against external threats.

 

It is essential that an individual’s international residence and citizenship planning aligns with their business and personal situation and goals. 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.

 

 

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