There are many benefits to investing in a residency or citizenship by investment programme – lifestyle, financial, investment, more business opportunities and freedom of travel with fewer if any visa requirements etc – but a change in tax domicile is not always a benefit. This is according to James Bowling, CEO of Monarch&Co, a company that specialises in residency and citizenship by investment programmes in a number of territories around the world.
So just how does a residency or citizenship programme benefit the investor in terms of them being within a new tax jurisdiction? According to Bowling, it only benefits an investor if they have moved their tax residence to the new country of residency or citizenship, provided that the new tax jurisdiction is more beneficial by offering a lower rate of taxation than their current jurisdiction.
Bowling cautions that it’s not always beneficial to move tax jurisdictions. He cites the US as an example: “In the US, the Internal Revenue Service (IRS) has an extremely aggressive and thorough tax collection programme, which has caused many Americans to give up their citizenship on an annual basis. Therefore, by gaining US citizenship and falling under their tax jurisdiction, investors may well be worse off when it comes to tax affairs.”
Investors should also bear in mind that not all residents and citizens who qualify for their status through a residency or citizenship by investment programme qualify for tax benefits in their new country. “Different countries have different rules,” explains Bowling. “In some countries, investors will only benefit on tax earned in that country, while other countries offer tax benefits on global un-taxed income, remitted into the country.”
Bowling says that those looking to gain from living in a new tax domicile need to ensure that the country they are moving to has lower income tax, that a double taxation agreement is in place, and that no estate duty or inheritance tax is payable. Some countries also offer lower corporate tax structures.
Investors should be warned that some countries don’t have double taxation agreements in place and that higher tax brackets may apply.
Double taxation is a factor that investors should take into consideration when deciding on which residency or citizenship by investment programme to choose. “It depends on what the investor is looking to do in that country,” says Bowling. “If they are not going to accrue income in that country, then a double taxation agreement or lack thereof won’t be an influencing factor on their decision. However, if they are accruing income in the country and there is no double taxation agreement with their current country of residence, then they will be taxed twice.”
Bowling says that South Africa offers double taxation agreements with a number of other countries. “Most of the countries where Monarch&Co offers residency and citizenship programmes have these agreements in place. This means that the tax charged in the foreign country is offset against the amount that the investor would be liable to pay in South Africa. For example, if the foreign country's tax is 7%, the investor would still be liable to pay the additional 7% to total South Africa’s 14% tax rate.
“Malta offers the best improvement on personal and corporate tax exposure for South Africans as expats or non-Maltese citizens only pay tax on their income derived in Malta, and are not liable for tax on their worldwide income, while they are not a tax resident. If they choose to become a tax resident in Malta they could structure their affairs to effectively only pay a corporate tax rate of approximately 3% of their worldwide earnings,” says Bowling. He points to Mauritius, St Kitts and Nevis as other low tax jurisdictions where residency and citizenship by investment programmes are available.