Tax Matters for Relocating BRICS Investors and Business Owners

Citizens of the expanded BRICS group represent a significant proportion of applicants for investment migration programs around the world. Over the last six years, they have accounted for almost 40% of all applications received by Henley & Partners. While that is partly driven by sheer volume, it is nonetheless high on a per capita basis. Rising numbers of affluent individuals across the globe are on the move, and many are from BRICS countries, as the Henley Private Wealth Migration Dashboard reveals. The decision to move is rarely based solely on the tax landscape, but it can be the deciding factor between two countries that offer a similar for quality of life. Today, no major city seems complete without its share of BRICS investors or their student children taking advantage of global education opportunities.

One of the key drivers of demand for investment migration among BRICS nationals is global mobility. Many investors, particularly businesspeople, find it extremely useful to acquire citizenship of country with a strong passport that allows them to travel visa-free to many countries at short notice. Others are looking to set up a retirement plan with the option to live abroad for a myriad of reasons including access to healthcare, a more temperate climate, or a better standard of living.

For the foreseeable future, the member states of the enlarged BRICS group are likely to continue to be more of a source of outward migration than inbound destinations for the globally mobile. For a start, only a few offer investment migration programs — although the UAE’s membership of the group and residence by investment initiative give it the unique honor of being a recipient of investment from other BRICS nationals. The relatively new Egypt Citizenship by Investment Program could see the north African country becoming a two-way street within several years, however, especially if neighboring countries have challenges.

Tax residence and corporate tax are pivotal issues

From a tax perspective, BRICS outbound mobility tends to be focused in two pockets. Either the move is to a country with a complex tax system, such as the UK or the USA, or it is to one with a more versatile passport but a potentially small economy that may not even have tax. Whichever the case, the destination country’s taxation system is likely to be very different from what investors have experienced in their countries of origin.

As many outbound investors are often business owners, while all the regular issues around tax residence exist there are also additional challenges compared to a traditional relocation.

It is important to remember that the right to live in a country does not always make someone tax resident there, and even if it does, the country they are leaving must also accept that they have broken their tax residence. This can be challenging in countries that do not have a long history of outbound migration.

Other tax issues to consider include the following:

• Does the investment that was made to gain a residence permit generate income — for example, commercial property or government bonds?
• If so, often the income must be included in a tax return in the country of origin if tax residence has not been broken. If this is the case, this could create questions around confidentiality in the local tax office.
• Does the main part of the business continue trading in the country of origin? If so, how will the investor be remunerated while abroad, and does it create management and control issues for the company if the controlling shareholder is based in another country?

When moving to a country with a complex corporate structure, it is also important to remember that there may be an additional layer of taxation at the corporate level, once things like Controlled Foreign Company (CFC) status suddenly get interesting.

The focus should always remain on the basics: What is the top rate of tax? Is there a wealth tax or inheritance tax, or is the investor exempt? And are dividends and capital gains taxable or exempt? These matters could make a huge difference.

Countries with a longer history of taxation and tax compliance may expect higher standards of reporting accuracy. They may ask more detailed questions and have the experience to analyse the responses received. And their reporting deadlines will almost always be different.

Meanwhile, it is important to understand how to break tax residence in the country of origin, which may be challenging in cases where the investor is a key local figure. Ultimately, however, tax residence is a facts and circumstances test and is unlikely to be granted or withheld based on a whim.

None of these barriers is insurmountable, and regular relocation tax advice is always useful. Having a clear roadmap in advance of relocating, and being clear about sources of income and how are they contracted and documented, especially for business owner-managers, remains key.