Where are Europe’s tax havens – and how are they luring in the rich?

The top rates of statutory personal income tax in the EU have stopped declining since the 2008 financial crisis, according to the EU Tax Observatory.

Instead, the group notes that governments have introduced “a growing number of preferential tax regimes targeting foreign individuals”, hoping to lure rich expats to their territories.

When thinking about Europe’s top tax havens, there isn’t – however – a “one-size-fits-all” approach.

In other words, a low-tax jurisdiction for one person may not be a tax haven for another.

“It depends an awful lot on where that wealth is coming from,” said Jason Piper, head of Tax and Business Law at the Association of Chartered Certified Accountants.

“For example, if you’ve got a lot of capital tied up somewhere, then you’re going to be far more interested in a regime that has 0% tax on remittance capital gains than if you’ve still got a lot of more active income coming through.”

Hoping to lower their tax burden, a number of wealthy individuals may choose to up sticks and emigrate.

Euronews Business explores what different countries have on offer, and what considerations go into tax planning.

Italy

Italy is a popular destination with expats not only for its culture and climate, but also because of its tax perks.

On the face of it, the country has relatively high levies on personal and corporate income, although there are tax incentives available to foreigners.

One of the most well-known is its flat tax regime, which allows wealthy individuals to pay a fixed sum on all foreign-sourced income. This is regardless of the amount earned.

The annual fixed fee has recently been increased to €200,000, from the previous €100,000.

The advantage is available for up to 15 years, and it’s also only open to those who have not been tax residents in Italy for at least 9 out of the last 10 years.

Given the cost of the flat tax, it’s only interesting for very high-net-worth individuals.

“Italy is very popular,” tax and immigration advisor David Lesperance told Euronews Business.

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“When the flat tax was €100,000, one of my clients told me that’s what he paid his accountant every year. You’ve got to remember that, with the lump sum tax, there are no compliance costs for tax planning.”

Switzerland

Switzerland also has a type of lump-sum scheme (forfait fiscal), although the Swiss state claims that fewer than 0.1% of its taxpayers are charged using this method.

The way it works is that, instead of collecting fees based on income or wealth, some Swiss regions calculate a rate based on an individual’s expenses.

While the lump-sum scheme can be interesting for the super rich, the state has put in place a minimum levy.

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This is the higher of two figures: either seven times your annual rent or the rental value of your primary property, or higher than CHF 429,100 (around €455,000).

These thresholds apply at a federal level, although specific regions can increase the minimum sum.

You’re eligible for the forfait fiscal if you have no Swiss citizenship, and if you are coming to live in the country for the first time – or after an absence of 10 or more years.

Beneficiaries are also forbidden from holding employment or running a business in Switzerland.

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This means the scheme is intended to lure a small number of rich expats who have passive income.

Portugal

Tax perks have become a polemic topic in Portugal due to soaring house prices, which have been stoked by the arrival of wealthy foreigners.

Even so, after scaling back benefits last year, the Portuguese government is now reintroducing tax breaks for expats.

“Portugal had the NHR regime which allowed you to live in Portugal for up to 10 years and not pay much tax on foreign income,” explained Gregory Goossens, a tax lawyer at Taxpatria.

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In particular, this attracted a large number of retirees, who decided to relocate to Portugal and pay no income tax on their foreign pension income.

For those who were generating income in Portugal, specific activities were taxed at a favourable rate of 20%.

As well as upsetting locals, the NHR system prompted criticism from Nordic states, who were observing an exodus of their older citizens.

Finland and Sweden notably made formal requests to change their double tax treaty rules with Portugal.

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This would allow them to impose levies on the pensions of their migrating expats.

In response to pressure, Portugal has now altered its tax breaks to “focus on people with an education who can really contribute something to the Portuguese economy”, explained Goossens.

Earlier this year, Portugal’s Finance Minister Joaquim Miranda Sarmento told the Financial Times that salaries and professional income would be eligible for tax breaks under the new rules.

It appears that pensions, dividends and capital gains will be excluded.

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Holding companies

Another way that rich individuals can enjoy low effective tax rates is through the use of holding companies, according to the EU Tax Observatory.

The body notes that these firms are “in a grey zone between avoidance and evasion” in the sense that they are designed to avoid income tax.

Individuals sheltering assets in this way decide to place their wealth in the name of a company they control, instead of classing it as personal revenue.

Withdrawals from the company are taxed at normal rates, although the taxpayer can harbour the excess in the holding firm.

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Setting up such a structure is particularly profitable in countries where the rate of corporation tax is low.

Interesting countries are therefore Ireland (12.5%), Hungary (9%), Bulgaria (10%) and Cyprus (12.5%).

While the OECD has been working with member states to introduce a global minimum corporate tax rate of 15%, this only applies to firms earning more than €750m.

More than 140 countries have signed up to the deal, but implementation is still a work in progress.

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A tax haven for one isn’t paradise for all

Tax planning cannot simply revolve around one or two types of rate, but rather a whole host of factors must be considered, experts told Euronews.

Fees to keep in mind include taxes on personal and corporate income, capital gains, inheritance, and wealth – as well as social security charges.

In addition to the locations listed above, countries such as Malta, the UK, and Monaco can all be considered fiscally advantageous, but it all depends on the nature of someone’s income.

In some cases, this means even famously high-tax areas such as Belgium can be called havens.

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As the OECD continues efforts to raise corporation tax, it is yet to be seen whether this will encourage conversations around other rates and diminish tax perks.

“Nations would not provide tax breaks or specialist visas to the wealthy unless they resulted in a greater overall benefit to the state than the cost,” argued Jason Porter, business development director at Blevins Franks Financial Management.

“You could say whatever tax they collect will be greater than they would have without the encouragement, as the individuals concerned are unlikely to have moved there otherwise.”

“It is also important to realise what the total benefit might entail, including the property market, spending in local businesses and the potential for entrepreneurial investment locally.”

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The trade-offs of wooing wealthy foreigners is a question that continues to dominate political debates, with the push and pull set to continue.