Discreet and low

Saturday, 01 October 2011
Comparing the Belgian tax regime with the Swiss and UK schemes

Many affluent individuals seek ways to minimise the tax burden on their wealth and income, and on gains realised through this wealth. Within the framework of a unified Europe, the abolition of banking secrecy principles, a tightening of the anti-money laundering legislation and closer collaboration of different national tax authorities, sound legal, tax and estate planning is gaining ground. More and more practitioners (lawyers, notaries, bankers, etc) and their clients are becoming aware that tax can only be minimised through proper and sound planning.

When minimising the tax burden of a high-net-worth individual, depending on the jurisdictions involved, many routes can be followed. Assets can be reallocated to another jurisdiction to avoid double taxation (for example, withholding tax), and wealth can be reorganised so that a larger portion is invested in asset classes that do not suffer as much tax. As long as no controlled foreign company (CFC) regulations exist in the country of residence, wealth can be transferred to low-tax trusts, private foundations or (offshore) companies. 

At first, it appears that the most efficient and easiest way to avoid domestic taxes is simply to leave the jurisdiction for another that is more clement from a tax perspective. It is often believed this would not require sophisticated planning to be implemented.

In practice, this assumption is wrong. Experience tells us that this kind of planning is the most burdensome of all, especially because of the enormous emotional impact on the client, who has to abandon their home for mere tax purposes. Furthermore, many practical arrangements have to be made (utilities, social security, doctors, dentist, etc). Finally, what is often forgotten by clients is that changing residence, domicile, etc can have an important impact on the applicable international private law, marital property law, inheritance law, alimony obligations in situations of divorce, the legal capacity of children and laws governing the right of access to children. All these implications have to be investigated and discussed within the framework of pre-emigration planning.

It seems clear that the UK non-domiciled resident regime will be phased out

Moving is one of the most drastic and radical ‘tax’ planning alternatives to consider, which explains why there are so many fictitious moves. In many jurisdictions, a sham move is regarded as tax fraud, triggering criminal investigation and penalties, and many countries seem to have a ‘personality’ that is caught in this regard. Consequently, the individual’s real, authentic relocation must be evidenced and documented.

You cannot be naive. Simply showing a lease agreement and some utility bills will not be enough to prove actual residence abroad. This has to be done with mobile phone invoices (providing roaming details), credit card summaries, bank statements, travel documents, etc. Furthermore, the high-net-worth individual has to strengthen their ties with the country they migrate to and, concomitantly, has to weaken ties with the country they emigrate from. In practice, this means selling immovable property (and buying it in the new home country), giving up employment and corporate offices (and taking them up in the new home country), rerouting financial interests, reorganising their social security situation and so on.

If the individual is ready to leave, and understands all legal and emotional consequences of their decision, they have to determine a country of destination. In this regard, a vast number of European countries are promoting themselves as being tax-efficient jurisdictions for affluent individuals. Recently, for example, Malta, Portugal, Luxembourg, Spain and even France have altered their domestic tax rules to attract affluent individuals, triggering a real race to the bottom with regard to personal income tax. Given the difficult budgetary environment, this is an astonishing evolution. Aside from distant jurisdictions – for example Dubai, Abu Dhabi, Singapore, etc – and the city states – such as Monaco, Andorra, etc – the usual suspects are always Switzerland and the UK.

Switzerland

At first, concluding that Switzerland is a tax-effective jurisdiction is difficult to understand. With one country, 26 cantons and more than 2,800 communes having taxation powers, it is virtually impossible to determine the tax burden up front. Furthermore, this burden cannot be considered as low. Finally, there is even a yearly net-wealth tax. These circumstances are far from ideal for affluent individuals, so why are so many keen to reside in Switzerland? The only (tax) reason seems to be that a lump-sum taxation system is available to certain individuals (taxation forfaitaire/Pauschalbesteuerung). This regime, to a large extent, mitigates these income tax and net-wealth tax drawbacks. It is only available to foreign nationals (not Swiss nationals) when they first take up Swiss residence (or after an absence of ten years) and who do not undertake a profit-making activity in Switzerland. Hence, the Swiss themselves cannot benefit from this favourable regime.

But, although clearly discriminatory, the Swiss seem to like it – they supported it in a recent referendum. The lump-sum taxation regime is an income tax regime that simply replaces the ordinary tax base (aggregate amount of worldwide income) with an alternative tax base, which is based on the standard of living of the taxpayer who applies for the lump-sum taxation regime. The taxpayer is only taxable on what they ‘eat’, not what they ‘kill’, so the bigger an individual’s wealth, the more interesting the lump-sum taxation regime becomes. Despite all actual expenses having to be taken into consideration, for example housing, food, clothing, etc, the lump sum is mostly negotiated.

Because certain cantons are keen on attracting affluent individuals, the tax base thus negotiated can be very low. A minimum has been determined by federal legislation, and it will increase in the future. Once an individual has an agreement, they are immune from the ordinary Swiss taxes on income, gains and wealth. Gift and inheritance taxes are independently determined by the cantons, and, if applicable, must be paid upon donation or death. Most cantons have (fairly) low rates for direct descendants and between spouses. Some cantons even provide exemptions for direct descendants and between spouses, for example, Zug, Zurich, Vaud and Valais.

United Kingdom

The other usual suspect that attracts many affluent individuals is the UK. At first, this is also difficult to understand, given the tax burden that the ordinary UK taxpayer faces. The UK tax system makes an important distinction between residents, who can be either domiciled or non-domiciled. If a resident individual is regarded as non-domiciled in the UK, they will only pay income tax (and capital gains tax) on the income/gains from a UK source or from a non-UK source, but remitted (or considered as being remitted) to the UK.

Consequently, the individual can, to a large extent, determine the size of their tax base in the UK. They can organise their wealth so their UK source and non-UK source but remitted income/gains just suffice to cover their standard of living in the UK, for example, out-of-pocket expenses. They could even live off their capital and pay no tax at all.

This distinction is clearly discriminatory as UK-domiciled residents pay high inheritance, income and capital gains taxes and their non-domiciled neighbour decides how much they are willing to contribute. So how long will this system remain in force?

Criticised since the 1950s, it has recently been subjected to adjustments that make the system less favourable and more transparent – the Finance Act 2008 introduced some major changes. It seems clear to many practitioners that the regime will be phased out over a long period, so you could describe it as a melting iceberg. But how slowly or quickly will it go?

Although no gift tax exists, the UK levies an inheritance tax at a flat rate of 40 per cent. There are some reliefs, for example the nil rate band, and tax planning schemes available. This tax does not, however, affect non-domiciled resident individuals. Only the estates of UK-domiciled decedents are struck by this tax. For non-domiciled decedents, only the UK assets fall within the scope of the UK inheritance tax. However, a non-domiciled individual can become a deemed domiciled individual.

In doing what any Belgian does, affluent individuals can live in anonymity

This occurs when the individual resides in the UK for no fewer than 17 out of the past 20 years of assessment, ending with the year in question. This is a landmark date for high-net-worth individuals benefiting from the non-domiciled resident regime.

Belgium

Although not recognised by many practitioners, Belgium is a discreet tax haven for affluent individuals as it is at the heart of Europe and close to the major decisions centre. This low profile constitutes a major advantage. The local tax inspector will not, in principle, regard a move to Belgium as being tax-driven. Undoubtedly, this has much to do with Belgium being commonly known as a high-tax jurisdiction. Belgium, in fact, flirts with the top place on the Organisation for Economic Cooperation and Development’s (OECD) hit list of jurisdictions with the highest tax burden. Nonetheless, the tax system is very interesting for affluent individuals who do not live off employment income.

As for investment income, a zero-tax situation can be obtained by structuring wealth, which can be, but need not be, complicated. On the contrary, relatively commonly used structures suffice. If tax is payable on investment income, this tax is levied (at comparably low flat rates) as a final withholding tax by the paying agent. This means that the income no longer has to be reported in the annual tax return. Together with the fact that a private dwelling is tax free, the final withholding tax means that many high-net-worth individuals actually have nothing to declare. Hence, they stay virtually out of sight of the tax authorities.

In doing what any Belgian does, affluent individuals can live in complete anonymity. This is contrary to Switzerland and the UK, where taxpayers have to use exceptional regimes not available to proper residents. ‘Vivons heureux, vivons cachés’ (‘let’s live happy, let’s live hidden away’) is the motto. As for capital gains realised on privately held assets, broad exemptions exist, for example, gains realised within the frame of a privately held stock portfolio are tax free.

Likewise, capital reductions are tax free, so if an affluent individual owns a highly capitalised investment company, they can live off the capital repayments while the income is ‘taxed’ in their investment company. This is already fairly high-tech. Attaining a tax-free yield on investments in Belgium does not need to be so complex (investment company) or so risky (stock market). If an individual taxpayer invests in a capitalising UCITS (Undertakings for Collective Investment in Transferable Securities Directives) with legal personality (not a mere fund), the yield upon redemption is often tax free. Should the investor opt for ‘investment’ insurance products, a tax-free yield can be realised in both type 21 (capital and yield guaranteed) and type 23 products (no guarantee as to capital or yield).

As for capital taxes, the Belgian situation is relatively optimal: there is no wealth tax. From a rate perspective, progressive inheritance taxes and gift taxes do exist. As long as there is proper planning, however, such taxes can be avoided without surrendering too many ownership rights. This is mostly organised by means of a tax-free lifetime gift whereby the donor reserves an (important) interest in possession, for example, usufruct, management, or voting rights. Such a reservation does not affect the effectiveness of the gift. It goes without saying that other planning techniques also exist.

Where do you go?

Belgium can be considered a low-profile jurisdiction, which, from a tax perspective, can compete with both Switzerland and the UK. It is not associated with disproportionate tax savings. Furthermore it is not too strange for captains of industry or other influential individuals to come and reside close to decision centres. Hence, such a move should arguably not trigger negative reactions with foreign tax authorities. Undoubtedly, this is because Belgium has one of the highest burdens of tax within the OECD. Surprisingly, this conclusion is incorrect with regard to affluent individuals.

Compared to this benchmark, only Switzerland (lump-sum taxation available for foreigners) and the UK (taxation on a remittance basis for non-domiciled residents) can compete from a tax perspective. However, as those regimes are exceptional and, more importantly, discriminatory in relation to the relevant countries’ own taxpayers, it is anticipated that they will be slowly phased out.

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Anton van Zantbeek

Anton van Zantbeek TEP is a Partner in Belgium and Switzerland.

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