Ultra-High Net Worth Individuals (UHNWI’s) often have business interests and own property in several countries of the world. Many of them use various tax planning instruments that include acquiring tax residence in a foreign country. If you are looking to become a legal and a tax resident in the European Union in particular, you have to approach the matter with care.
When you learn what tax benefits a foreign state offers, you have to find out about the obligations that you will have to meet before you apply for tax residence in a foreign country. When you change your tax residence, you will have to abide by the laws that are different from the laws in your home country.
Below we discuss the opportunity to acquire legal and tax residence in Europe as this service that we provide is becoming increasingly popular with investors from countries outside the EU. In particular, we focus on the requirements that you have to meet to be considered a law-abiding taxpayer in Europe. We also describe the measures that the European authorities are taking against tax evasion.
Permanent Legal residence in the EU: basic principles
Non-EU citizens have the right to apply for permanent residence in one of the European countries, as a special Directive has been passed by the EU authorities. This Directive gives foreign nationals the right to safely reside in Europe and gain access to the social security system, and use the job and educational opportunities available to the locals. In other worlds, foreign nationals have a chance to fully integrate with the European communities after some time. You have to legally reside in one of the EU member states for five years as a temporary resident and then you can file an application for a permanent legal residence permit. The main conditions that you have to meet if you want to qualify for the status are as follows:
- You have to have a stable source of income;
- You have to have a medical insurance policy;
- You have to take effort to integrate with the local community;
- You have to meet all the legal obligations including the obligation to pay taxes.
In addition to that, your behavior should not pose any threats to the public peace or national security of the state where you are living. Even though the requirements look reasonable enough, there have been cases when foreign nationals used the opportunity to acquire legal residence in a European state with the purpose of evading taxes. The scandal that broke out in Italy some time ago will serve as an example. The Italian police arrested a wealthy person who pretended to be a tax resident of Monaco while actually living in the Italian province of Pavia. The Monegasque legislation offers considerable tax benefits to the residents of the dukedom but as the person de facto resided in Italy, he had to pay the taxes in accordance with the Italian tax-related legislation. He wanted to save on taxes but he ended up losing assets worth around 30 million euros as eleven of his real estate pieces, classic cars, as well as large company stocks were confiscated by the tax authorities in Italy. As you can see, an attempt to violate the laws can have serious legal consequences if you live in Europe.
Please note that many of the EU states are also in the Schengen zone so you can travel around Europe with ease when you have a legal residence permit in one of the countries. At the same time, you have to enquire about the ’90-day-stay’ regulations in each particular case. International Wealth experts will be happy to consult you in this matter.
Our detailed consultations will allow you to optimize your taxes and avoid violating any tax-related rules due to lack of knowledge. Taxpayers are monitored closely in Europe and as you know, ignorantia juris non excusat (ignorance of the law is no excuse). Please also note that when an agreement on avoiding double taxation is applied, citizenship of the taxpayer has a priority over his/ her legal resident status.
Measures taken in the EU to combat tax fraud
One of the top priorities that the European Parliament has is providing for fair taxation regulations that would satisfy the residents of all EU member states. The European Commission found in 2019 that the above mentioned Directive allowing foreigners to legally reside in Europe was not free of drawbacks. The growing number of attempts to use tax residence in Europe with the intention to avoid paying taxes is one of the biggest concerns for the EU authorities at the moment.
Tax evasion and tax fraud are two important tasks that the European Parliament is currently trying to solve.
The fight against tax-related crimes and the new tax policies have become hot topics over the last few years. Such journalist investigations as LuxLeaks, Paradise Papers, Panama Papers, and – quite recently – Pandora Papers have triggered the growth of interest to the topics on the part of European fiscal authorities. The investigations revealed that some publicly exposed personas, movie stars, and even national leaders have used the so-called ‘tax havens’ in their financial operations. The interest of the European fiscal authorities to such instances should not be surprising at all: if a European resident pays taxes in a foreign country at a lower rate, this means that he or she is not paying taxes to his/ her home country’s national budget! Thus, the Government of the country has less funds to finance various social projects.
The European Parliament has taken the following measures, among others, to prevent tax fraud:
- A subcommittee for tax-related issues has been established (September 2020);
- Bills increasing financial transparency for taxation purposes have been passed;
- A financial crimes subcommittee and a maladministration committee have been established;
- Discrepancies between national tax legislations and other weaknesses of the tax-related legal documents have been inspected;
- Automatic exchange of fiscal information between countries has been introduced.
The European Union was the first international organization to start promoting the principles of fiscal transparency and many other large economies soon followed suit. In addition to automatic exchange of fiscal information, the European Commission has introduced the following measures:
- Exchange of tax-related legal acts passed in each EU state;
- Regulation of the activities of large transnational corporations that can be engaged in aggressive tax planning and using the fiscal instruments that are unavailable to national corporations in a certain European country;
- Exchange of information about money laundering and terrorism financing instances between the EU member states.
- A consolidated corporate tax database that serves to prevent corporate tax avoidance and to eliminate the tax berries that emerge due to the differences between national legislations governing the payment of the corporate tax;
- Corporate taxes on digital services – the new instrument allows taxing digital service providers that are not physically present in the country but that sell their services there anyway;
- Profit tax on digital services – companies that make earnings by data transfers, user information gathering, digital interface application, etc. now have to pay a profit tax.
The European Union is not a low-tax jurisdiction of course, but it provides some tax-planning opportunities anyway. Before acquiring tax residence in Europe, however, you have to become acquainted with the tax legislation of the country where you are planning to move.
International Wealth experts will gladly help you decide what European country will suit your personal and business purposes best of all, if you apply for legal and tax residence there.
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On choosing a jurisdiction
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On choosing a jurisdiction and terms for changing Your tax residency.
Other measures taken in the EU to combat tax fraud
In addition to the steps described above, the European Parliament is seriously considering reforming the VAT system in the EU. Besides, it is designing the legislation for taxing digital companies. These measures are especially important with the view of the need to revive the European economy after the COVID-19 pandemic.
One more innovation introduced in 2020 was the Fiscalis program. The program allows national tax departments to exchange information, control, and regulate trans-European fiscal systems with the help of IT solutions.
Fiscalis is aimed at improving the functionality of the European taxation systems, which will help the national tax authorities combat tax evasion and tax fraud on the part of both private individuals and corporate entities in a more efficient manner. Besides, the program will also protect law-abiding taxpayers who meet all the fiscal requirements.
Intensive cooperation and coordination between the EU member states is the main instrument of combating tax evasion and tax fraud in the region. The countries go beyond their national borders and establish closer ties with their neighbors as far as tax policies are concerned.
In conclusion, we would like to emphasize that fiscal transparency is today’s slogan. Fraudulent business activities are becoming a thing of the past. We suggest that you should look deep into your own tax-paying policies and apply for our consultation. If you would like to acquire tax residence in the EU without knowing all the tax-related regulations in the particular country that you are moving to, you may find yourself in an unexpected and probably unpleasant situation.
The cooperation between EU member states in tax issues contributes greatly to combating fiscal crimes, tax evasion, and aggressive tax planning. You have to use the available opportunities to reduce your tax burden today. Please contact us in any way you like (click on the Contact us icon above) and apply for our consultation on tax-related matters. We will get back to you in no time at all!
