Tax Matters When Investing in Another Country: Considerations for Centi-Millionaires

As interest rates have risen, the returns on the investments made to obtain residence become more significant, and global management of the tax process becomes more important for centi-millionaires, as local country considerations form a key part of their overall tax position.

Investing in an additional residence or citizenship

Increased interest in residence and citizenship by investment programs means that many more centi-millionaires are spreading their economic footprint across the globe. Many countries have used these programs to bring investment into their economies to finance new industries, and that investment has given significant input into their growth.

Residence programs give the right but not the obligation to live in a host country, and so in many cases, investors retain their tax residence in their country of origin. Tax residence is always a different thing from the legal right to reside, and it is driven by a variety of factors including where someone physically spends their time, where their center of vital interests is (main home, family, employment, or business), or where they habitually reside.

To be or not to be tax resident

Being tax resident means that your country of residence has the ability to tax you on your worldwide income, whereas if you are non-resident, this means that only your income arising in that country can be taxed. If two countries both think you are resident, that is usually resolved by review of the relevant double tax treaty. And, if you have a portfolio of different residence rights, then these need to be looked at across the whole range of countries. As tax agreements are bilateral, each pair of countries will need to be considered separately as well as in relation to the big picture overall.

The investment aspect does mean that there would be a return on that investment, which will result in tax consequences in the country of investment. Unless you have have relocated though, that tax liability will often be calculated by treating you as tax non-resident, which can appear confusing initially if you have legal residence rights.

The staying power of real estate investment

For many countries, and for many centi-millionaires, residential real estate has been the simplest and hence the preferred investment. When that real estate is retained as a family holiday home, there is no income to speak of, and therefore no significant tax issues year by year.

However, as more residence and citizenship by investment host countries widen their list of eligible investment categories, this becomes an opportunity to diversify country risk in family wealth investment portfolios. The recent rises in interest rates also mean that bank deposits and government bonds are offering significant returns for the first time in over a decade.

Commercial real estate and, particularly, tourist accommodation are popular categories for investment. International tax principles tend to tax income from real estate in the countries where that real estate is located though; not only in the country where the investor is tax resident. In those cases, it is important for investors to have local support to meet the relevant accounting requirements and be aware of what the deadlines are for filing accounts and tax returns to ensure that compliance requirements are met. Also, it is important that all deductions are claimed.

Dotting the ‘i’s and crossing the ‘t’s

Once the income and tax is calculated in the country of source, it is highly likely that the country of residence may want to include that when taxing worldwide income. So having the proof of the local in-country tax payment would be important for the double tax relief claim in the country of residence. Deadlines will differ as well, so the tax provider in the country of investment may need to accelerate their normal work schedule if the country of residence has an earlier filing deadline or if the taxes need to be paid to claim the foreign tax credit.

Financial investments such as bank deposits and government bonds will generate interest, and the rules on whether it is taxable or not, and whether that tax is withheld at source or not, will vary. In addition, exchanges of information clauses in double tax agreements may mean that the tax authorities in one country will inform the country of residence of all income earned there by its residents.

Several countries do not tax interest income, but the country of residence may still want to do so. It is important that the information flows correctly so that the ultimate tax return that reports worldwide income is correct. It is in nobody’s interest for a tax return to be investigated because of a routine exchange of information that was overlooked because the overall amount is insignificant.

Securing returns on your investments

Some countries such as Italy, Portugal, and Spain permit the investment to be made into listed securities, and have a stock market with a range of high-quality international companies listed on them. In those cases, returns will mainly come in the form of dividends and capital gains.

Dividends paid to non-residents will often be subject to a flat rate withholding tax, which may be as low as 5% or 10% depending on the double tax treaty, but it will be taxable in the country of residence with a foreign tax credit for the withholding. Capital gains on listed investments are less likely to be taxed other than in the country of residence, but every double tax agreement needs reviewing to be sure of that. For example, shares in a company that predominantly owns real estate are more likely to be taxed where the real estate is held.

The key when building a portfolio of residences and citizenships is to ensure that the administrative requirements of managing the investments, reporting the types of income, then paying the tax don’t create a complex paperwork industry. Choosing the right type of investment to make within the chosen country will become an increasingly important part of managing centi-millionaire family wealth.

Strategic issues of where to locate holding companies and similar are one aspect of the family wealth tax planning, but the operational details of individual countries are equally important. The fact that residence by investment often requires the investment to be made in a personal capacity means that centi-millionaires who may have had their private office file their tax returns will have new filing requirements to consider in future years, which mustn’t be overlooked.