Sovereign Group - Offshore News - Press Room - Sovereign in the Press

Sovereign Published Articles

Necessary Considerations

Howard Bilton

HK Golfer

Apr 2011

Thinking of leaving Hong Kong? You might find yourself in a taxing situation, writes Howard Bilton

Hong Kong has a very lenient system of taxation. The rates are low and tax is charged only on income which has a Hong Kong source. Capital gains are not subject to tax and there is no inheritance tax or estate duty. If you move away from Hong Kong, as many do upon retirement or after the end of their contracts, you are likely- to face a different system of taxation with much higher rates. Sometimes the increases in tax payable can come as a nasty shock - as can the vigour with which your new home country attempts to collect the tax.

The most popular destinations for those leaving Hong Kong are the United States, Canada, Australia and the United Kingdom. Al] of these places charge their residents tax on their worldwide income at rates of 30 per cent upwards and make it vow difficult to shield income and capital gains from tax by the use of offshore structures and their like. In fact, the income and capital gains tax rate is not the end of the story.

We recently conducted a study to work out how much of a typical high rate tax payer's income was returned to the government by a UK tax resident. The higher rate of tax in the UK is 50 per cent; national insurance normally adds another 10 per cent on income from employment, which leaves approximately 40 per cent. Then the government takes another slice on all expenditure. Alcohol, tobacco, fuel and other items carry government duty. Add in road tax on a car, congestion charges, Government rates on your house and other items - things that make up the expenditure of an average resident - and then add VAT at 20 per cent on top of that. The result is that somewhere between 75 and 80 per cent of income goes back to the UK Government.

It is possible to spend a reasonable amount of time in high tax countries without becoming tax resident but it's easy to overstay your welcome and get caught up in their tax system. For example, in the UK, you would not generally become tax resident unless you spent over half of any one year there, but you will become a tax resident if you spend and aggregate of 360 days in the country over any four-year period. Thus it would be possible to be there 180 days in year one and year two but then a single day spent in the UK in years three or four would trigger a retrospective tax residency from the day you arrived and four years of tax bills on your worldwide income. Other countries consider you tax resident if that country is your "primary place of residence" or "main centre of economic or social activity'. So unless it's possible to point to somewhere else where you actually live then you can be considered tax resident without spending the minimum required number of days there.

Many use offshore structures to shield their income and capital gains from tax once they become tax resident in a high tax country but anti-avoidance rules now look through most of these structures and treat the underlying income rolling up within an offshore trust or company as belonging to the taxpayer who set up the structure and tax accordingly. Previously many have set up these structures and assumed that the confidentiality afforded offshore will protect their identity, so they would not need to declare the income within these structures when the law says they must.

Now there are processes in place which allow the onshore countries to obtain information from anywhere in the world about who is behind a particular structure. Recently UK banks have been forced by HMRC to reveal details of all UK residents who hold accounts with them in their offshore branches. There are apparently 500,000 such accounts containing money which should have been tad but has illegally remained undeclared. The US has been very successful in forcing Swiss banks to reveal details of US account holders. Liechtenstein has recently been forced to sign tax cooperation agreements which will force it to reveal details of foreign account holders. One of the employees of a major Liechtenstein bank sold stolen information about foreign account holders to the tax authorities of both Germany and the UK. My legal studies suggest that it was quite illegal to receive stolen goods but clearly the normal rules of law don't apply when a government is involved.

All Offshore Financial Centres (OFCs), BVI included, have signed Tax Information Exchange Agreements (TIEAs) which allow onshore countries to obtain details about ownership of hitherto confidential structures. The EU has forced its member states and territories under their control to automatically pass details of any bank account held by a resident of another EU state back to the country of his residence. Although not in the EU, Switzerland has being forced to sign up to this initiative. So, for example, a resident of Germany who has a hank account in the Cayman Islands which generates income has details of that account and the income generated by it passed back by the Cayman Islands to the German tax authorities.

Many simply do not realise the additional tax cost of moving to another country. Many also do not realise that the days of hiding money in secret accounts or structures is now well and truly gone and attempts to do so are only likely to increase tax because details of the accounts will be revealed and the owner will be charged interest and penalties on top of the tax due and may even face criminal prosecution. Offshore structures can still he used to legitimately save tax but they must be specifically tailored to the country in question. Simple structures no longer work.

A commonly held misconception is that the remittance of capital to your new country has any effect on its taxation. If you have accumulated money while in Hong Kong and then move to a new country it matters not one bit whether or not you bring that money into the country or not. Capital sums earned before you become resident somewhere else are never taxable in your new county whether you take the capital into the new country or not. Income generated on that capital will almost certainly be taxable in your new country whether you leave it offshore or not.

Careful planning is everything. Before you move to your new country there are structures which you can set up which will be effective in mitigating or avoiding tax but they will rareIy be simple if they are to avoid being caught by the anti-avoidance laws in your new country.

Here is another trap for the unwary. Most countries consider that any offshore structure which is managed and controlled from within their jurisdiction is tax resident in their jurisdiction. For example, a BVI company which has directors based in the Australia is considered by the Australian Taxation Office to be tax resident there and therefore taxable on its worldwide income at the usual Australian rate. It's the company (or trust) which is taxable in Australia. Anyone who is going to become Australian tax resident and has offshore companies can no longer act as director and must appoint professionals to act in his place and actually manage and control that company - not just pretend to manage. It is not enough just to arrange the appointment of "nomincc" directors, who do as they are told. Control has to be given up.

So, if you are going to move countries then a careful examination of the relevant tax laws applicable in your new country is an absolute necessity. A review of existing structures is a must, as is consideration of what new structure should be put in place to avoid the worst aspects of the tax system of wherever you find yourself.

Download Clippings

Flying by the seat of your pants?

Press Room

Share this News Story