06 April 2021
International Tax Planning,
Personal Tax Planning,
Wealth planning & Private client
If you're considering moving overseas as a company director, with business and personal interests in other countries, there are many implications to consider and planning is key.
Even in the post-Brexit landscape, there’s still plenty of scope to move to another European country, or further afield, and to conduct your business activities from your new home country.
However, it’s not entirely plain sailing when moving your country of residence and the location of your business empire. There are questions around residency, your tax position and your social security position and the company’s tax position, which all need to be taken into account.
Nicola Goldsmith talks through the key considerations when a director moves overseas, and underlines the importance of planning and the assistance of an experienced adviser.
Where is your business now resident?
If you’re a company director and decide to live abroad, there are certain key considerations to factor into your planning.
First of these is the question of where you, and your business, are now resident. In other words, do you now live permanently in your new home country?
If you spend a prolonged amount of time living in one country then – depending on their residency rules – you may become resident for tax purposes.
One of my clients is a husband and wife business who wanted to go and live permanently in their holiday home in Portugal. Under the Portuguese rules, if they are there for more than 183 days in the year, they are resident there for tax – and that raises some questions that have to be dealt with.
This couple run the business themselves and make all the decisions – so they are the business, to all intents and purposes. If they move, then so has the business, so this means the company itself has potentially moved to a new tax jurisdiction.
Every country will have different residency rules. For example, in the UK a company incorporated in the UK is considered to be UK resident, and also where ‘management and control’ of the company is located. For Portuguese tax purposes, the company in our example may now be considered to be resident in Portugal under Portuguese domestic law, in which case, Portugal may wish to tax the profits. Even if not resident in Portugal, the company may have created a permanent establishment in Portugal, and Portugal may wish to tax the profits attributed to that permanent establishment.
Double tax treaties
One danger of your company becoming resident in a new country is you may end up being taxed twice – once in your home country and once in your country of residence. To stop this happening, many countries set up ‘double tax treaties’ for use by companies and individuals.
A double tax treaty is a bilateral treaty between two countries which applies where an individual is resident in one state, and has income or gains arising in the other state. Some treaties also have similar treaties for taxes on death.
Without the treaty, both countries would seek to tax the income or gains, or, in some cases, may consider and individual or entity to be resident at the same time. The treaties give taxing rights over income or gains to one country or the other, or in some cases, both countries, but then explain how any double taxation is to be dealt with. Where and individual or an entity is resident on both countries for tax purposes, the treaty usually contains a ‘tie-breaker’ clause to determine tax residence.
You don’t want to be taxed in two different places on your profits. So, if you’re living between two countries, whether you have a business or not, we’d always advise you to take tax advice. If you have your own business, it is even more important to take advice. It’s very easy to miss these intricacies and create a real mess of your tax affairs, especially given the complexity.
Have you set up a permanent establishment?
Another important question is whether your movement as a company director to a new country has created a ‘permanent establishment’. A permanent establishment is created when a company has a presence in a country and is trading via that presence.
A permanent establishment is a fixed place of business through which the activities of the business are carried on. Again, the rules are quite complex, but if you have staff working for you outside the UK, you need to consider whether their presence there could create a permanent establishment.
Your permanent establishment could be a place of management where there’s an office, factory or workplace of some sort. Warehouses generally don’t count as permanent establishments, but all the other places where you work do count, even if you’re operating via a dependent agent.
I’m advising a firm that’s taken on a Portuguese resident scientist, living there and setting up a lab to work from. In effect, he will be setting up a permanent establishment in this new country, meaning that any profits made via that permanent establishment may have to be taxed in that country, depending on how Portugal see the position.
What this underlines is the importance of having a long run-in for any moves overseas. Unfortunately, people do move very swiftly without much warning. This can be due to a lack of awareness of the tax rules, or a lack of understanding of the implications, or even becoming trapped in one country because of unforeseen circumstances, such as Covid-19 lockdowns.
If you are thinking of moving, it’s vital to plan ahead and think through the potential impact, and take advice as to what the changes mean for you, and your company.
What will your personal income tax and social security position be?
Another big consideration of any move to a new country is the impact on your personal tax, and the way you contribute to and utilise social security in your new resident country.
Usually your country of residence will want to tax you on your personal income. So you’d need to know about the reliefs and rules, and how to comply with them.
How social security works will depend on how long you are going abroad for. If you’re leaving the UK for up to two years, you may continue to be able to contribute to the UK social security (National Insurance) system.
Otherwise, your social security liability may move to your country of residence. The rules are likely to be different there, and the rates will also be different for employees, and also employers. It’s worth noting that not all countries have pay-as-you-earn (PAYE) set up for income tax – so you may need to keep income back to pay your annual tax bill.
In addition, the employer liability usually follows the employee liability, so if your liability has moved to another country, so might that of the company. The company may have additional costs and may have to set up a payroll in the new country to deduct social security contributions at source.
The rules for UK taxpayers paying and claiming social security in other countries will change now that Brexit has happened and the UK is no longer part of the European Union (EU). It’s worth checking the implications of this before you move overseas to work.
The need for an experienced adviser
With each country having its own rules around residence, permanent establishments, income tax and social security, it’s easy to see the complexity involved in a move to a new country. There are also tax implications for you if you rent out your UK home, will have UK source income, and even if you want to continue saving into an ISA. Bearing this in mind, it is vital to seek professional advice before you move.
Take advice from a reputable adviser in each jurisdiction, and who is willing to work with the adviser in the other jurisdiction.
Work with someone who has full knowledge of the available double tax treaties.
Look for advisers who have an international network of specialists to call on.
Carry out plenty of planning, to make sure you mitigate any negative tax impact.
While moving yourself and your business overseas is something you shouldn't undertake lightly, it’s perfectly possible to get it right with the requisite planning.
Good planning allows you to sidestep any potential double-tax issues and mitigate the tax impact on your profits and income.
In a nutshell, preparing and planning is a great idea for anyone thinking of moving overseas. Doing it randomly – and without professional advice – gets you into trouble.
Talk to our specialist international tax team today about moving overseas as a company director.