Where in the world would you pay the least tax?
Few families emigrate for tax reasons, but tax regimes differ greatly by country - and it's factor that needs consideration
As families become more globally dispersed and business interests become ever more international, growing numbers of wealthy individuals and families are in a position to choose where to make their home.
While there are many considerations in that choice, one important factor is tax.
“In our experience tax is often an issue, but it is rarely the primary driver of choice of location,” says Jo Bateson, Partner at KPMG’s London office. “More often people want to live somewhere because of family connections or lifestyle – tax is secondary.
"We had recent clients for example who simply wanted to relocate to Tuscany. That was where they were going to go, and our role as advisers was to help them understand the tax consequences of that decision.”
Top marginal rates of income tax are only part of the picture
Different nations’ tax systems vary considerably, in part because they stem from local cultures and traditions. This makes it tricky to compare one regime with another.
The table below shows the highest marginal income tax rates applying in a number of countries. The band is fairly narrow, with higher outliers being Sweden (with a top rate of over 57%) and a prominent lower outlier Hong Kong (where a flat standard rate of 15% applies).
Income tax: Top marginal rates around the world
What those figures don’t reveal is the effect of other key elements of the income tax system: at what level of income does tax start to apply, and how quickly do the subsequent higher rates – where they exist – kick in?
Some countries have central and local income tax, with the latter differing by region. In addition, family-friendly or agerelated measures, typically in the form of extra tax allowances, complicate the overall tax take.
The OECD’s Global Revenue Statistics Database gives a clear picture of the countries in which those individuals and two-children families on average incomes pay more or less tax. For instance, a single worker on an average wage will pay the highest overall rates of income tax in Belgium, Germany and Denmark – in part because the tax systems in those countries make generous allowances for families with children.
In Belgium, a single earner on the average wage will pay 40% of their income in tax and other state contributions: a family of four in which one parent earns the same average wage will pay approximately 20%.
But what about higher earners? Here the comparisons are largely skewed by the levels at which the top rates apply. In the US, the top rate applies when an individual’s earnings reach $500,000. In the UK, it’s a far lower £150,000 ($198,000). In Austria, it is €1 million ($1.18 million) and in Sweden 662,000 kronor ($75,300). Exchange rates are correct as of 21 September - source, Reuters.
For most countries, two forms of tax make up the bulk of revenues – corporation tax and personal income tax. One means of getting a snapshot of which countries tax income more highly is to look at the proportion of their total revenues which comprise personal income tax.
This shows a wide spread between nations. It is again only a snapshot: the comparatively high position of the US, for example, relative to France and Germany, arises from the fact that the latter two countries apply among the highest social security contributions to individuals, on top of income tax requirements.
Wealth taxes and taxes on capital gains
Many families have different forms and sources of income. “Before a move overseas we need to look at the origin of a client’s income,” says Jo. “Are you going to live on investment income or earned income? The differences in terms of tax can be significant.
Some countries apply an annual tax on capital; others have regimes which are likely to be costly to families who expect to generate future capital gains.”
The other issue she raises is that of business ownership. “It’s not uncommon for families to move to a new location and take their business with them, and many countries are actively adjusting their tax systems in order to attract this type of expatriate.” In these scenarios, inheritance tax is likely to be a major consideration (scroll down for more on inheritance tax).
The stability of countries’ tax regimes
There is a history of countries adjusting their tax regimes to make themselves more or less attractive to wealthy individuals, families and business owners – and this trend has picked up in the decade since the financial crisis.
“Switzerland, Ireland and Luxembourg are potentially attractive for those wanting to bring their businesses with them,” Jo says, “and in recent years we’ve seen other regimes offer tax concessions which apply to the first period of residency for wealthy individuals and families.” This may take the form, for example, of applying taxes only to domestic and not worldwide income and assets.
But it’s not just the attractiveness of the regime: another issue is whether these regimes will remain in place. Political instability and a history of previous changes to the tax system are a cause of concern.
“You don’t want to go through the process of moving somewhere, only for the tax regime to change significantly to your disadvantage a few years down the road,” she says. “The current Italian regime is two years old, for example, and it is pretty attractive.
But what certainty is there that it will remain if there is political change? In some cases, we have clients who are prepared to take less favourable tax rates for a more stable environment.
“And despite the uncertainty that we might feel attaches to the UK at the moment, in particular because of Brexit, we still have many wealthy individuals from around the world who want to come and live here.
It’s an attractive place to live and by and large it’s fairly stable. There is uncertainty hanging over a great many countries.”
Death duties: one of the biggest considerations
If income tax and wealth taxes are difficult to compare across nations, death duties are even more complex in their overall structure and degree.
KPMG has for several years produced a family business tax monitor which models scenarios based on the current tax law of many countries. Some of the results appear in the table below.
One striking outcome is that while death duties are apparently severe in many countries, they can be significantly reduced by the application of a wide range of reliefs.
KPMG’s model assumes a family business worth €10 million is passed on to a child on the second parent’s death. In the UK, for example, this would attract headline death duty of €4 million. Existing reliefs could reduce this to zero.
In France, an initial liability of €4.2 million could be cut to €843,000. Other countries – notably Austria, Norway and Malta – have lower initial rates of inheritance tax, but fewer concessions and reliefs with which to limit its impact.
Overall, the tax regimes least favourable to a family in this situation include those of South Africa, Canada, Greece, France and – for certain types of taxpayer – the US.
Inheritance tax around the world
How much tax would be payable if you bequeathed on death a business worth €10m?
Switzerland, Cayman Islands, Hungary, Isle of Man, Gibraltar, New Zealand, Hong Kong, China, Israel, Sweden, Singapore and Italy apply no taxes on a family business inheritance.
Odd one out: how the US tax system differs from the rest
While much of the world is metric, Americans still measure in inches, feet and yards.
The US has another peculiarity which sets it apart from almost every other nation on earth – the way it taxes its citizens who live overseas.
Like most countries, the US taxes its residents – but it also taxes individuals on the basis of their US citizenship, irrespective of where they happen to live. The only other country which takes this approach is the east African state of Eritrea.
As a result, anyone who has ever been an American citizen (as defined by the US government – and therein lies another problem) has tax obligations as a result of their citizenship until the day they die. The only other escape is to renounce their citizenship.
The fact that an American might also be a citizen of another country, and even have spent their entire lives in this other country, is not considered a mitigating factor.
Civil War origins
Tax experts note that America’s use of citizenship-based taxation dates back to the 1880s, when the US government was in the throes of funding the American Civil War. The then-new US income tax was expanded in 1864 to include offshore income.
Surprisingly, the implications of the US’s near-unique tax system has only come into widespread public consciousness recently. And it has only done so largely as a result of the difficulties it has created for many of the estimated nine million Americans who live outside of the US’s borders.
The problems intensified in the wake of the introduction of the Foreign Account Tax Compliance Act (FATCA) in 2010, which required overseas banks and investment firms to register with the IRS and agree to report to it information about any US citizen’s accounts.
Almost overnight, life became harder for American expatriates, a growing number of whom renounced their citizenship.
Global renunciations grew from 231 in 2008 to 742 by 2009 and 5,411 in 2016 – the most ever recorded in a year. President Donald Trump’s Tax Cuts & Jobs Act, signed into law on 22nd December 2017, was a further piece of legislation which made things worse for many expats.
It hits those who own overseas businesses, and, unless changed, is likely to result in further citizenship renunciations. However, moves are afoot in Congress that could give US expats some reprieve.
Schroders Wealth Management (US) Limited is one of very few global wealth managers to be regulated by the US watchdog, the SEC, and to offer both discretionary and advisory investment services to Americans living outside of the US. For more information, please contact Martin Heale on 020 7658 3602, or Janette Saxer on 020 7658 1245.