New Tax Heavens? Attracting Expats to a New Life Overseas

As globalization continues to shape the world, an increasing number of countries are recognizing the value of attracting expatriates to boost their economies. One way they are achieving this is by reforming their tax systems to make them more appealing to international professionals and entrepreneurs.

Today we explore how some countries are actively reviewing their tax structures to attract expats and the potential benefits that come with such initiatives – most recently the UK, Italy and Portugal are at the forefront of recent tax system changes.

Q1. Why and how are some countries reforming their tax systems?

Many countries have realized that offering tax incentives to expatriates can be a powerful tool to attract talent and investment. These incentives often include favourable tax rates, exemptions, or deductions specifically designed to entice foreigners to relocate. By reducing the tax burden on expats, countries hope to encourage them to contribute to their local economies, create jobs, and stimulate growth.

Q2. How strong is the impact of simplified tax procedures and competitive tax rates in attracting overseas residents to relocate?

To make their tax systems more attractive to expats, some countries are streamlining their procedures and simplifying the tax filing process. These reforms aim to make it easier for international individuals and businesses to navigate the tax system, reducing bureaucratic hurdles and minimizing administrative complexities. By providing a straightforward and efficient tax framework, countries can enhance their appeal as a destination for expats seeking a hassle-free tax environment.

Another approach taken by countries to lure expats is by offering competitive tax rates. Lower income tax rates and corporate tax rates can be immensely appealing to individuals and businesses looking to maximize their financial gains. By reducing tax rates, countries can position themselves as attractive destinations for expats seeking to optimize their income, retain more of their earnings, and enjoy a higher standard of living.

Q3. Are these countries also valuing entrepreneurs investing in the local economies?

In addition to tax benefits, some countries are offering various investment incentives to attract expats. These incentives can include grants, subsidies, or other favourable conditions for foreign investors. By creating an environment that supports investment and entrepreneurship, countries can entice expats to not only relocate but also contribute to the growth of local industries and the overall economy.

Q4. How much does quality of life impact the decision to relocate?

While tax incentives play a crucial role, countries are also focusing on improving the overall quality of life to attract expats. Access to quality healthcare, education, infrastructure, and a safe living environment are factors that greatly influence the decision of expats to move to a new country. Governments are investing in these areas to ensure a high standard of living, making their countries more appealing to expats seeking a better quality of life for themselves and their families.

For many Hong Kong residents moving to the UK is often a path closely related to education needs and cultural (as well as linguistic) familiarity with the country – surely the BNO route of migrating to the UK has made things easier for many families who have relocated there in recent years.

In the case of Italy or Portugal, the choice is often more based on lifestyle, weather, healthcare quality or lower living costs – both countries in fact have been able to attract a good number of Hong Kong residents with the allure of the beauty of Lake Como or bustling Milan as well as relatively affordable property in Lisbon or the Algarve region.

Q5. How does the UK’s Spring Budget 2024 reform “non dom” taxation?

In the Spring Budget of 2024, the British government announced sweeping changes to how it taxes individuals moving to the UK, which included the abolition of the current “non dom” regime with effect from 6 April 2025.  In its place will be a new four-year residence-based tax regime for income and gains for qualifying individuals.  In this period qualifying individuals will be able to bring foreign income and gains (“FIG”) into the UK free of tax.  Anyone will be able to access the new regime, including individuals born in the UK, provided they have not been UK resident in the previous ten tax years prior to their arrival.  The UK’s statutory residence test will be used to determine tax residence in each tax year.

For those individuals who wish to move to the UK before 6 April 2025, they will be subject to the existing “non dom” regime for their first year of UK tax residence (assuming they satisfy the statutory residence test) and will have the opportunity to take advantage of transitional provisions from 6 April 2025, including the ability to bring previously unremitted income and gains into the UK and only pay tax at a reduced rate of 12% if funds are brought in between 6 April 2025 and 5 April 2027.

Also under the new measures, from 6 April 2025, individuals will be subject to UK inheritance tax (IHT) on their assets owned outside the UK once they have been resident in the UK for ten tax years, and if they then leave the UK, they will remain within the scope of IHT for another ten years (the “Ten-Year IHT Tail”).  Domicile will no longer be a factor when determining a person’s exposure to IHT.   There may be scope to mitigate IHT by settling non-UK assets in excluded property trusts, particularly before 6 April 2025 because the government have expressly said that any such trusts created before this date will benefit from the same IHT protection given to existing trusts, whereas those created afterwards will not.  The proposals around changes to the IHT rules should be considered with caution at this stage though, and professional advice should be sought from the outset.

These reforms are politically charged; the current Conservative government, seemingly copying the opposition Labour party’s policy to abolish the non dom regime if they formed the next government but many commentators feel that the new provisions are far wider in their impact than anyone had anticipated.  The new four year rule is appealing for those who have never lived in the UK before or for returning expats who were previously subject to more onerous tax rules upon returning to the UK but four years is a limited window and the consequences of the Ten-Year IHT Tail is likely to mean individuals spend no more than nine tax years in the UK.

Q6. Can you please give us a few highlights about tax reforms in Italy?

To attract highly skilled professionals, Italy has introduced an exemption for foreign residents relocating to Italy who have not been Italian tax residents in the previous 3 years (6 years in case the employer remains the same) and owning specific skills that are in high demand. These professionals – both overseas and Italian passport holders –having high qualification or specialisation, may be eligible for a 50% reduction in their taxable income (up to the annual amount of €600,000) for a period of up to 5 years. The tax residence in Italy must be hold by the beneficiary at least for 4 years.

For High-Net-Woth-Individuals one of the crucial reforms introduced by Italy is the implementation of a flat tax regime for new residents. Under this scheme, individuals who have not been Italian tax residents for at least 9 out of the previous 10 years can opt for a fixed tax rate on their foreign-source income. The flat tax rate is set at €100,000 per year, regardless of the individual’s actual income and regardless if the tax subject is working or retired.

Italy is also keen to attract entrepreneurs and startups, recognizing their potential to stimulate economic growth and create jobs. The country has implemented several tax incentives to encourage investment in innovative businesses. These incentives include tax deductions for the investors, tax exemptions related to stock option assigned to employees, and tax credits for research and development activities.

Italy has also introduced specific measures to attract retirees from around the world. The country offers a special tax regime called the “Foreign Retirees Regime” for retirees who transfer their tax residence to one of the municipalities belonging to the Central and Southern regions of Italy with population not exceeding 20,000 inhabitants. Under this regime, retirees are subject to a flat tax rate of 7% on their foreign income, regardless of the amount.

Italy has signed double taxation agreements with numerous countries worldwide, including major economies. These agreements aim to eliminate or reduce the double taxation of income for foreign professionals working in Italy.

Q7. What about the Golden Visa Program and tax incentives in Portugal?

Portugal’s Golden Visa program has long been a popular choice of investment for foreign citizens and family members seeking residency in Europe. This program offers a pathway for non-European Union citizens to obtain and hold a residence permit in Portugal, with a requirement of permanency of 7 days per year in the country, as well as entitling the applicants to apply for the Portuguese citizenship after 5 years, provided they fulfil all legal requirements.

In recent years, there have been significant changes to the Golden Visa program, aimed at enhancing transparency, diversifying investment options, and promoting regional development. The program supressed investments that are intended (directly or indirectly) for real estate. Nonetheless, the program still provides other investment options that enhance new companies set-up, job creation, R&D, tech-related industries or artistic and cultural heritage.

In order to promote regional development and encourage investment in areas outside of major cities, the investments in job creation, research activities carried out by public or private scientific research institutions and artistic production, refurbishment or maintenance of the national cultural heritage carried out in low-density areas include a 20% reduction have the minimum required amount.

By obtaining a residence permit through the program, individuals get the right to live, work and study in Portugal, as well as the right to circulate in the Schengen Area without the need of a visa. The program also entitles the main investor and his/her family members to be part of the application for permanent residency and/or Portuguese citizenship, provided that they have sufficient knowledge of the Portuguese language and no conviction under a final court decision of any offense punishable by imprisonment equal to or greater than 3 years.

The New Tax Incentive Regime for Scientific Research and Innovation (replacing the Non-Habitual Tax Residents regime) is a tax incentive program that aims to attract professionals with special skills. Eligible individuals can benefit from a flat tax rate of 20% on income derived from high value-added activities (both under third-parties employment and self-employment contracts) and an exemption on foreign income from any type of employment, dividends and interest, real estate income, capital income or capital gains.

The regime applies to individuals who carry out, specific activities – e.g. teaching, scientific research and R&D or development in autonomous regions like Azores and Madeira.

This individual favourable taxation benefit is applicable for a period of 10 years, providing significant tax savings compared to many other jurisdictions.

Portugal has also attracted many High-Net-Worth-Individuals as there is no wealth tax. Additionally, beneficiaries who are spouses, descendants or ascendants on inheritance and gifts are not liable to tax (except for a rate of 0.8% applicable to donations of real estate assets). Moreover, capital reporting is not mandatory in Portugal.

By combining these tax benefits with a high standard and secure way of living, a favourable business environment, and a competitive cost of living, Portugal has successfully positioned itself as one of the most attractive destinations for foreigners looking to relocate and invest.

Q8. What specific advice would you give to Hong Kong residents who are planning to relocate to one of these countries?

First of all, relocation is a big decision. It takes time to set up a new home and get used to the new environment.  Therefore, we advise clients to take their assets relocation one step at a time: settle in first, open new bank account in the new country, understand how the tax system works and seek advice on potential tax implication before moving their assets to the new country. This process could take a few months to a few years!

With the new wealth management system in the new country set up, proper update on the wealth and estate planning would be the next step to protect your assets and ensuring your wishes are fulfilled. By seeking legal advice and planning ahead, Hong Kong residents can confidently embark on their journey to a new jurisdiction knowing that their wealth and estate matters are in order.

Find a lawyer who has experience in international estate planning to work with your foreign lawyers to set up the new estate plan for you.

Q9. What final conclusions are important to highlight?

As countries recognize the economic advantages of attracting expats, many are proactively reviewing and revising their tax systems to make them more attractive. By offering tax incentives, simplifying procedures, and providing competitive tax rates, these countries are positioning themselves as desirable destinations for international professionals and entrepreneurs. The efforts to attract expats not only boost the local economy but also foster cultural exchange and diversity. As the global workforce becomes more mobile, countries that adapt and cater to the needs of expats are likely to reap the benefits of a thriving and cosmopolitan society.

Given the intricacies involved in wealth and estate planning for international relocation, it is highly recommended to consult with experienced legal professionals specializing in cross-border matters. They can provide tailored advice based on your specific circumstances and help you navigate the complexities of the legal systems involved.

We closely work with several law firms located in the UK, Italy and Portugal which focus on Private Client in order for us to guarantee our clients with the right option and advise – both in Hong Kong before moving and overseas while in the process to relocate and start a new chapter of their lives.