Anilla Gondi

For many, the summer months bring to mind sunny beaches, mouth-watering Mediterranean cuisine, colourful buildings along Portuguese streets, and cities that offer memorable cultural experiences... Yet few are aware that, beyond drawing in tourists, because of their tax systems, popular holiday resorts are also attractive destinations for affluent, well-to-do foreigners - often for periods of time longer than that of a mere summer adventure.

Tax exemption as an attraction 

In the past, when speaking of tax systems offering favourable or even tax-free income opportunities, people generally thought of such classic tax havens as the Seychelles, the British Virgin Islands, or the Cayman Islands. However, the EU and the US, in collaboration with international organisations dedicated to preventing tax evasion (such as the OECD), are increasingly attempting to reduce the use of the tax breaks available in such places.

At the same time, some EU member states, along with certain developed Eastern countries (such as Israel) - none of which are thought of as impoverished countries - have also begun introducing extraordinary tax breaks for private individuals, an approach they hope will boost their economies and attract wealthy foreigners with lots of capital to spend. Their aim is to devise tax systems that keep such people in their sunny countries not as mere tourists, but as long-term guests who invest and spend their earnings there, and in doing so, help the local economy.

There's more to Spain, Portugal, and Israel than beaches...

Portugal and Israel have each introduced a tax category they call the 'non-habitual resident'. This preferential status can be obtained by individuals who move to the country and acquire local tax residence there without precedent within the previous ten years. Under this regime, persons who become non-habitual tax residents in either country are not required to pay taxes on income from foreign sources, such as dividends or capital gains from foreign companies, for a period of ten years after the status is conferred.

In essence, the system introduced in Spain, too, follows the Portuguese/Israeli model. There, the rule in question, known as the 'Beckham Law,' offers favourable taxation for former non-residents. According to the rule, those who move to Spain and become residents, whether on the basis of a contract of employment, or in order to hold a director's position, do not have to pay taxes on income from foreign sources. Thus, these persons become exempt, among other things, from paying Spanish taxes on dividends and capital gains received from companies outside of Spain. 

A few potential pitfalls

Nonetheless, tax-exempt status in the countries in question is subject to a few conditions. First, it's essential that the private individual acquire effective tax residence in one of the countries offering the benefit. While basically, it is a combination of the domestic regulations of the given country and the double taxation agreements it has with the country of the individual's nationality that determine when a person can be considered a tax resident there, neither a few months' stay, nor the simple act of changing one's official place of residence is enough to alter anyone's tax status.

Second, the rules of international law grant taxation rights not only to a private individual's country of tax residence, but also to what are known as source countries (i.e. the country from which income or dividends are transferred). For example, if a private individual of Hungarian nationality moves to Spain or Portugal, income from dividends from his/her Hungarian company will still be subject to the 15% Hungarian withholding tax. If, however, a Hungarian businessperson has savings accumulated in a Maltese or UK company, this income can be withdrawn tax-free after he/she has moved out.