Category: Taxation

Recent developments on the non-domiciled regimes in the UK led many individuals who were benefiting from these schemes to reconsider their UK tax residency.

Chancellor of the Exchequer, Rachel Reeves, delivered the Autumn Budget on 30 October 2024, announcing several changes: from 6 April 2025, the existing non-Dom regime will end and the concept of domicile as a relevant connecting factor in the current tax system will be replaced by a system based on tax residence.

The change, which reduces the period under which a resident, non-domiciled individual will benefit from the remittance basis only for 4 years, provided that s/he has been non-tax resident for the last 10 years, will impact a significant number of UK Non-Doms, who are now looking for an alternative.

Relocating to a new country is a life-changing decision that cannot be taken lightly, and individuals and families need to take into consideration many aspects of their lives, before deciding (please read this Dixcart article for more information). Malta represents a strong option for several reasons.

Key Strengths of Malta

Malta is a politically stable country, with a well-developed legal framework that protects foreign investments and ensures security to those seeking long-term tax residency.

The remittance basis of taxation is available in Malta. In fact, residents are taxed only on income remitted to Malta, while foreign-sourced income that is not remitted to the country remains tax-free. This regime applies to individuals who are residents of Malta but are not domiciled there. Foreign-sourced capital gains (profits from selling assets like real estate, stocks, or other investments abroad) are not taxed, even if remitted, making it attractive to investors and those with significant capital gains abroad.

Furthermore, Malta has an extensive network of Double Taxation Treaties (DTAs) with over 70 countries, including major trading partners in the European Union, Asia, the Middle East, and Africa.

Malta also has no inheritance or wealth taxes, which is a major attraction for high-net-worth individuals looking to protect and transfer their assets and maintain their fortune through future generations.

In addition to advantageous fiscal conditions, Malta has many features that are highly appreciated by individuals and families who are considering relocating: English is one of the official languages, and its geographical location, with a good climate throughout the year and a Mediterranean lifestyle, make the country particularly attractive.

To complete this appealing scenario, the island boasts an excellent healthcare system, a wide choice of international schools and a constantly growing foreign community, which reinforce the positioning of Malta as a sought-after destination in the global mobility sector.

Residency Options Available in Malta for Non-EU Individuals

Malta offers several programmes for individuals considering moving to Malta: under the Global Residence Program (GRP), beneficiaries are subject to a 15% tax rate on remitted foreign income, with a minimum annual tax of only €15,000. The programme was designed to attract non-EU individuals seeking favourable tax residency. The Malta Permanent Residence Programme (MPRP) allows applicants to obtain residency through investments in property and government contributions. The programme allows successful applicants to travel VISA-free within the Schengen area. The Malta Citizenship by Naturalisation for Exceptional Services by Direct Investment can lead to Citizenship and grants free movement within the Schengen Zone (26 European countries).

Should you wish to discover the details of all residency programmes available in Malta, please click here.

How can Dixcart assist?

The Dixcart office in Malta has professionals that can assist in providing advice as to which programme would be most appropriate for each individual or family.

We can also assist with visits to Malta, applying for the relevant Maltese residence programme, assist with property searches for rentals and purchases, and provide a comprehensive range of individual and professional commercial services once relocation has taken place.

For further information, please contact Jonathan Vassallo at the Dixcart office in Malta: advice.malta@dixcart.com. Alternatively, please speak to your usual Dixcart contact.

On 30 October 2024, Chancellor of the Exchequer, Rachel Reeves, delivered the Autumn Budget, confirming a number of changes originally outlined in the Spring Budget.

As expected, from 6 April 2025, the existing non-dom regime will end and the concept of domicile will be replaced by a system based on tax residence.

Currently, individuals who are UK resident but not domiciled in the UK can benefit from the remittance basis for their first 15 years of UK residence. This means they do not pay UK tax on non-UK income and gains unless remitted to the UK. Under the new system, individuals who opt into the new regime will not pay UK tax on any foreign income and gains arising in their first 4 years of tax residence, provided they have been non-tax resident for the last 10 years.

Who is Eligible for New Regime?

Individuals will qualify for the new regime if they have been non-UK tax resident for at least 10 consecutive tax years, regardless of their domicile status. The new regime will apply for their first 4 tax years of UK residence, so this will apply to returning UK domiciliaries.

Key Announcements

Individuals will not pay tax on foreign income and gains (FIG) arising in the first 4 years after becoming UK tax resident, where a claim is made. They will be able to bring these funds to the UK free from any additional charges and there will be no need to segregate or trace funds during this period. They will continue to pay tax on UK income and gains, as is the case for non-domiciled individuals now.

Individuals who on 6 April 2025 have been tax resident in the UK for less than 4 out of the previous 10 will be able to use the new regime for any tax year of UK residence in the remainder of those 4 years. For example, an individual who became resident in the UK in 2022/23, after a 10 year period of non-residence, will have been resident in the UK for up to 3 tax years on 6 April 2025. They will be able to claim under the new 4 year FIG regime for 2025/26 because this is their fourth year following a period of 10 years non-UK tax residence.

Transitional Provisions

As the new regime will represent a significant change for existing Resident Non-Domiciled individuals, there are a number of transitional arrangements that will be available as follows:

• Individuals who have previously claimed the remittance basis of taxation and are neither UK domiciled not deemed domiciled by 6 April 2025, will be able to elect to rebase assets held personally to their value at 5 April 2017, so they will only be taxed on capital gains since that date. This is in respect of disposals which take place on or after 6 April 2025.
• Individuals who have previously been taxed on the remittance basis will be able to elect to remit foreign income and gains that arose before 6 April 2025 to the UK at a reduced rate of 12%. This is a new Temporary Repatriation Facility that will only be available for the tax years 2025/26 and 2026/27, with the rate rising to 15% in the tax year 2027/28. This facility will not apply to foreign income and gains generated within trusts and trust structures.

Taxation of Assets Held in Trust

From 6 April 2025, the protection from taxation on future income and gains that arise within Trust structures (wherever established) will be removed for all current non-domiciled and deemed domiciled individuals who do not qualify for the new 4 year FIG regime.

Under the new regime, for as long as an individual qualifies for the new 4 year regime, they will not pay UK tax on the income and gains of the trust as they arise or on receipt of trust distributions.

Once the individual Is no longer eligible for the new 4 year FIG regime, they will be required to pay UK tax on all profits arising within a Trust structure which they have established.

Inheritance Tax (IHT)

The freeze on inheritance tax thresholds will be extended for a further two years, until 2030. This means that the first £325,000 of any estate can be inherited tax-free, rising to £500,000 if the estate includes a residence that has been passed to direct descendants, and £1 million when a tax-free allowance is passed to a surviving spouse or civil partner.

Individuals who have been resident in the UK for 10 of the previous 20 years will be subject to UK inheritance tax on their worldwide assets.

If an individual has been resident in the UK for at least 10 out of the 20 years and then becomes non-resident and does not return to the UK before the chargeable event, there will be provisions to shorten the length of time they are deemed to remain a long-term resident.

• For those who are resident between 10 and 13 years, they will remain in scope for 3 tax years.
• This will then increase by one tax year for each additional year of residence. So, if a person was resident for 15 out of 20 tax years on leaving, they would remain in scope for 5 years; if resident for 17 out of 20 tax years on leaving, they would remain in scope for 7 tax years.
• An individual will not be treated as long-term resident for IHT purposes in the year following 10 consecutive years of non-residence, even if they return to the UK, and the test is effectively reset.

HMRC has said there will be no changes to the IHT treaties or how these operate.

Conclusion

The announcements in the Autumn 2024 Budget represent the biggest change to the way in which non-UK domiciled individuals are taxed in the UK. This is an area which is likely to continue to develop and further details will emerge in the coming months which will hopefully allow individuals time to prepare for the new regime well in advance of its implementation date of 6 April 2025. If you would like to speak to our advisers regarding any of the changes, please contact: advice.uk@dixcart.com.

Portugal has established itself as a prime destination for businesses seeking a strategic base within Europe. One of the key factors contributing to its appeal is its extensive network of Double Taxation Treaties (DTTs). These treaties, which Portugal has signed with over 80 countries, play a crucial role in eliminating or minimising the risk of double taxation on income and profits, thereby fostering cross-border trade and investment.

In this note, we will give a general overview into some of the aspects of Portugal’s double tax treaties, exploring some of its benefits, and how they can be utilised by businesses and individuals.

The Structure of a Double Taxation Treaty (DTT)

A typical Double Taxation Treaty follows the Organisation for Economic Co-operation and Development (OECD) Model Convention, though countries may negotiate specific provisions based on their unique circumstances. Portugal’s DTTs generally adhere to this model, which outlines how income is taxed depending on its type (e.g., dividends, interest, royalties, business profits) and where it is earned.

Some of the key elements of Portugal’s DTTs include:

• Residence and Source Principles: Portugal’s treaties distinguish between individual tax residents (those who are subject to tax on their worldwide income) and individual non-tax residents (who are taxed only on some of the Portuguese-sourced income). The treaties help clarify which country has taxing rights over specific types of income.
• Permanent Establishment (PE): The concept of a permanent establishment is central to DTTs. In general, if a business has a significant and ongoing presence in Portugal, it may create a permanent establishment, giving Portugal the right to tax the business’s income attributable to that establishment. DTTs provide detailed guidelines on what constitutes a PE and how profits from the PE are taxed.
• Elimination of Double Taxation Methods: Portugal’s DTTs typically employ either the exemption method or the credit method to eliminate double taxation in a scenario of a corporation:
  • Exemption Method: Income taxed in the foreign country is exempt from Portuguese tax.
  • Credit Method: Taxes paid in the foreign country are credited against Portuguese tax liability.

Specific Provisions in Portugal’s Double Taxation Treaties

1. Dividends, Interest, and Royalties

One of the most significant benefits of DTTs for companies is the reduction in withholding tax rates on dividends, interest, and royalties paid to residents of the treaty partner country. Without a DTT, these payments might be subject to high withholding taxes in the source country.

• Dividends: Portugal generally imposes a 28% withholding tax on dividends paid to individuals who are non-resident in Portugal, but under many of its DTTs, this rate is reduced. For example, the withholding tax rate on dividends paid to individual shareholders in treaty countries can be as low as 5% to 15%, depending on the stake in the paying company. Under specific conditions, shareholders may be exempt from withholding tax.
• Interest: Portugal’s domestic withholding tax rate on interest paid to non-residents is also 28%. However, under a DTT, this rate can be significantly reduced, often to 10% or even 5% in some cases.
• Royalties: Royalties paid to foreign entities are typically subject to a 28% withholding tax, but this can be reduced to as low as 5% to 15% under certain treaties.

Each treaty will specify the applicable rates, and businesses and individuals should review the provisions of the relevant treaty to understand the exact reductions available.

2. Business Profits and Permanent Establishment

A crucial aspect of DTTs is determining how and where business profits are taxed. Under Portugal’s treaties, business profits are generally only taxable in the country where the business is based, unless the company operates through a permanent establishment in the other country.

A permanent establishment can take various forms, such as:

• A place of management,
• A branch,
• An office,
• A factory or workshop,
• A construction site lasting more than a specified period (typically 6-12 months, depending on the treaty).

Once a permanent establishment is deemed to exist, Portugal gains the right to tax the profits attributable to that establishment. However, the treaty ensures that only the profits directly related to the permanent establishment are taxed, while the rest of the company’s global income remains taxed in its home country.

3. Capital Gains

Capital gains are another area covered by Portugal’s Double Tax Treaties. Under most DTTs, capital gains derived from the sale of immovable property (such as real estate) are taxed in the country where the property is located. Gains from the sale of shares in real estate-rich companies may also be taxed in the country where the property is situated.

For gains on the sale of other types of assets, such as shares in non-real estate companies or movable assets, the treaties often assign taxation rights to the country where the seller is resident, though exceptions can exist depending on the specific treaty.

4. Income from Employment

Portugal’s treaties follow the OECD model in determining how employment income is taxed. Generally, the income of a resident of one country who is employed in another country is taxable only in the country of residence, provided:

• The individual is present in the other country for less than 183 days in a 12-month period.
• The employer is not a resident of the other country.
• The remuneration is not paid by a permanent establishment in the other country.

If these conditions are not met, the employment income may be taxed in the country where the company is based. This provision is particularly relevant for expatriates working in Portugal or Portuguese employees working abroad.

In these situations, the foreign company will have to request a Portuguese tax number to fulfil with its tax obligations in Portugal.

How Double Tax Treaties Eliminate Double Taxation

As mentioned earlier, Portugal uses two primary methods to eliminate double taxation: the exemption method and the credit method.

• Exemption Method: Under this method, foreign-sourced income may be exempt from tax in Portugal. For instance, if a Portuguese resident earns income from a country with which Portugal has a DTT and under internal Portuguese tax rules the exemption method may be applied, and that income may not be taxed in Portugal at all.
• Credit Method: In this case, income earned abroad is taxed in Portugal, but the tax paid in the foreign country is credited against the Portuguese tax liability. For example, if a Portuguese resident earns income in the United States and pays tax there, they can deduct the amount of U.S. tax paid from their Portuguese tax liability on that income.

Key Countries with Double Tax Treaties with Portugal

Some of Portugal’s most significant Double Taxation Treaties include those with:

• United States: Reduced withholding taxes on dividends (15%), interest (10%), and royalties (10%). Employment income and business profits are taxed based on the presence of a permanent establishment.
• United Kingdom: Similar reductions in withholding taxes and clear guidelines for the taxation of pensions, employment income, and capital gains.
• Brazil: As a major trading partner, this treaty reduces tax barriers for cross-border investments, with special provisions for dividends and interest payments.
• China: Facilitates trade between the two countries by reducing withholding tax rates and providing clear rules for taxation of business profits and investment income.

How Can Dixcart Portugal Can Assist?

At Dixcart Portugal we have a wealth of experience in helping businesses and individuals optimise their tax structures using Portugal’s Double Tax Treaties. We offer specialised advice on how to minimise tax liabilities, ensure compliance with treaty provisions, and navigate complex international tax scenarios.

Our services include:

• Assessing the availability of reduced withholding taxes on cross-border payments.
• Advising on the establishment of permanent establishments and the related tax implications.
• Structuring business activities to take full advantage of treaty benefits.
• Providing support with tax filings and documentation to claim treaty benefits.

Conclusion

Portugal’s network of Double Taxation Treaties offer significant opportunities for businesses and individuals engaged in cross-border operations. By understanding the technical details of these treaties and how they apply to specific situations, companies can greatly reduce their tax liabilities and enhance their overall profitability.

At Dixcart Portugal, we are experts in leveraging these treaties to benefit our clients. If you are looking to start a business in Portugal or need expert advice on international tax strategies, we provide the support you need to simplify the process and position your business for success.  Please contact Dixcart Portugal for more information advice.portugal@dixcart.com.

Portugal has announced a series of measures aimed at attracting foreign investment and stimulating economic growth. These include a reduction in corporate tax rates and plans to expand the list of eligible professionals that may benefit from the new Non-Habitual Resident (NHR) personal tax program.

Corporate Tax Reduction

The headline news is a decrease in Portugal’s corporate tax rate. The current rate of 21% will be gradually reduced by 2% a year to target a 15% rate by 2027. A reduction of 12.5% will apply for the first €50,000 of taxable income for small, medium-sized, and mid-capped companies. This positions Portugal as a more competitive destination for businesses, particularly multinational corporations looking to establish a European base. Additionally, these tax reductions are expected to ease the burden on local businesses, fostering entrepreneurship and innovation within the country.

NHR for Individuals

The new NHR program, which was previously narrowed to specific individuals in certain activities, is expected to be expanded to cater for a broader number of eligible professional activities. Individuals who have not been tax resident in Portugal in the last 5 years will be able to benefit, provided they fall into the list of activities or professions that will qualify. Over the coming weeks, further information will be provided. The NHR program offers significant tax benefits, such as a flat 20% tax rate on Portuguese-source income derived from specific professions and the possibility of tax exemptions on foreign-source income, making it an attractive option for expatriates.

Portugal Seeks to Capitalise on Advantages

The Portuguese government believes these measures will make the country a more attractive proposition for foreign investors and residents. Portugal boasts a number of advantages, including a skilled workforce, strategic location within Europe, and a relatively low cost of living. The country’s rich cultural heritage, high quality of life, and excellent healthcare system further enhance its appeal. Moreover, Portugal’s robust infrastructure, including modern transportation networks and advanced telecommunications, supports business operations and connectivity.

The government is also investing in education and training programs to ensure the workforce remains competitive and well-equipped for the demands of the global market. These initiatives, coupled with a business-friendly environment, are expected to drive economic growth and create new job opportunities.

Conclusion

By cutting corporate taxes and expanding the NHR scheme, Portugal is positioning itself as a prime destination for businesses and professionals alike. These strategic measures are designed to boost foreign investment, stimulate economic growth, and enhance the country’s competitive edge on the global stage. Investors and individuals looking for opportunities in Europe should consider Portugal’s evolving landscape as it becomes increasingly conducive to business and quality living.

Reach out to Dixcart Portugal for more information (advice.portugal@dixcart.com).

Welcome to our UK non-dom Update History Page. As the landscape of UK tax policies evolves, we are committed to providing you with the most current and factual information to aid your decision-making process regarding relocation abroad. This page archives all our past updates on the UK Spring Budget proposals and related developments. Stay informed and explore our update history to track the progression of changes that could affect you.

To explore key considerations for UK non-dom individuals considering moving abroad, visit our dedicated page.

Portugal’s allure extends far beyond its stunning landscapes and vibrant culture. In recent years, the country has emerged as a favourite destination for international citizens seeking a tax-advantageous and fulfilling lifestyle. This article explores the key tax benefits and lifestyle factors that make Portugal so attractive.

Portugal’s Tax Advantages

• Favourable Inheritance and Gift Tax: Portugal boasts one of the lowest inheritance and gift tax rates in Europe with no taxes applying to spouses, children, and parents, and 10% applying in other scenarios. Further, if you are a national of another country, you may be able to opt Portugal to govern your succession as a whole. Read here for more information.

• Capital Gains Exemption on Primary Residence: No capital gains tax applies when selling your primary or main residence in Portugal – provided you reinvest in a primary home within 36 months after the sale or 24 months before in another home in Portugal, within the European Union or European Economic Area that has a tax treaty with Portugal.

• Non-Habitual Resident (NHR) Regime: Introduced to attract foreign talent and investment, Portugal’s NHR program offers significant tax benefits for a ten-year period. As of January 2024, the program has been revised.  Currently, specific professions, like those in scientific research, qualify for reduced tax rates. The Portuguese Island of Madeira may extend the revised NHR program to a broader number of professions in the future, so staying informed about potential changes is recommended for those wishing to embark on an island lifestyle. Read here for more information.

• Trust Income: Although trusts are not recognized in Portuguese law, taxation still applies. Distributions from trusts are taxed as investment income at a rate of 28% (unless from a blacklisted tax jurisdiction where the rate is 35%). The benefit in taxation of trusts may lie upon liquidating, revocation or extinction, where the following may apply:
  • Liquidation/revocation/extinction for a settlor-beneficiary: When the trust ends and the person who created the trust (settlor) also receives the assets (beneficiary), the proceeds are treated as a capital gain and taxed at a rate of 28% in Portugal (the tax rate increases to 35% when received from a Portuguese blacklisted jurisdiction).
  • Liquidation/revocation/extinction for a non-settlor beneficiary: If someone other than the person who created the trust receives the assets upon termination, it’s not taxed as income. Instead, a 10% stamp duty applies in Portugal, but only to assets physically located in Portugal (real estate incurs an additional 0.8% surtax).

• Life Insurance Bond Benefits: Life insurance bonds in Portugal offer significant tax advantages. Tax rates in Portugal vary between 11.2% and 28% when redeemed – depending on factors such as the holding period. Unpaid gains as well as gains paid upon death may be exempt from personal taxation in Portugal.

• Crypto gains: Holding crypto gains for more than a year may be exempt from personal taxation – with shorter holding periods taxed at 28% (with exception to professional trading activities). Read here for more information.

• Investment Income: Typically, dividends and interest income are subject to a fixed tax rate of 28% (unless the scale rates are less which may then be applied). Note that depending on where these investments are located, and depending on whether Portugal has a double taxation agreement in place with the respective jurisdiction, a reduced rate may apply.

• Double Taxation: Portugal boasts a network of close to 80 double taxation agreements with other countries allowing for efficient tax structuring to avoid double taxation on income.

Lifestyle benefits in Portugal

Portugal offers a wealth of lifestyle benefits that complement its many tax advantages. The country enjoys a warm, sunny climate with mild winters, especially in the southern regions, making it an ideal destination for those who appreciate pleasant weather year-round. The stunning natural beauty of Portugal, from its pristine beaches and impressive mountains to charming countryside towns, provides endless opportunities for outdoor activities and exploration. Whether you enjoy hiking, surfing, or simply relaxing by the sea, Portugal’s diverse landscapes have something for everyone.

In addition to its natural beauty, Portugal is known for its lower cost of living, which can be a significant advantage for retirees or individuals on a fixed income. Housing, groceries, and dining out are generally more affordable compared to many other European countries. This economic benefit is complemented by Portugal’s relaxed and laid-back culture, offering a slower pace of life that many find appealing. The rich history and vibrant culture of Portugal, with its charming towns, historical sites, and lively traditions, provide a deep well of experiences for those interested in immersing themselves in a new culture.

Furthermore, Portugal has a growing English-speaking community, particularly in popular areas for expats. This can make the transition to living in Portugal smoother for those not fluent in Portuguese, fostering a sense of community and belonging. All these factors combined make Portugal an attractive destination for those seeking a high quality of life with the added benefit of favourable tax conditions.

Sun, Sand & Tax Savings: Why Portugal Should Be Your Next Move

Portugal’s combination of tax breaks and a desirable lifestyle makes it a compelling choice for those seeking a fresh start. However, careful planning and professional guidance are crucial for navigating the legalities of moving and maximising the tax benefits available. Consulting a qualified tax advisor and immigration lawyer can ensure a smooth transition and help you leverage Portugal’s offerings to the fullest. Portugal presents a unique opportunity to enjoy a high-quality life while minimising your tax burden. With its favourable tax regime, beautiful scenery, and rich culture, Portugal is a gem waiting to be explored. Reach out to Dixcart Portugal for more information advice.portugal@dixcart.com.

The above is not considered tax advice but rather general information around taxation consequences that may arise in Portugal.

On 6^th March 2024 the UK Chancellor of the Exchequer, Jeremy Hunt, delivered his second Spring Budget for the current Conservatve Government.

Contained within the Budget were proposals for a change to the current system of taxation of non-domiciled individuals with effect from 6^th April 2025, from the existing regime where UK resident non-domiciled individuals are only taxed on income or capital gains remitted to or originating in the UK, to a regime based on residence whereby all UK residents will pay UK tax on foreign income and gains following four years of residency.

In addition, from 6^th April 2025 the protected trust regime will also effectively cease to apply, with the result that income and gains in affected trust structures could become taxable on the settlor(s) from that date.

Mention is also made of the intention to change the inheritance tax laws so that exposure is determined by reference to residence rather than domicile. However, these plans have yet to be detailed and will be subject to consultation.

“Hope for the best and prepare for the worst” T. Norton & T Sackville

Whilst the above is a departure from the Conservative’s previous stance on the status of non-doms it is very much in line with proposals mooted by Labour over the years.

At present, these are only proposals and the legislation (whatever form it may take) is yet to be drafted let alone come into effect. It remains to be seen what form any Conservative legislation would eventually take or whether, should the matter still be in abeyance at the time of the next General Election and Labour come to power. It is likely they would want to put their own stamp on the matter and one would assume that any amendments that Labour introduce would be unlikely to dilute the Conservative proposals.

Therefore it is recommended that existing Non-doms and those considering re-locating to the UK to consider how they may wish to (re-)structure their affairs prior to 6^th April 2025 and discuss their options with a qualified tax advisor. As a starting point there are numerous articles freely available discussing the terminology used in the Budget and the effect that the proposed changes may (or may not) have, depending on how they are implemented.

Options that individuals may wish to consider include (but are not limited to):

• Use of an insurance wrapper or other insurance-based products
• Use of a Family Investment Company
• Formation of an excluded property trust now whilst delaying the funding of the trust until clarification on the future inheritance tax regime
• Accelerating the receipt and realisation of foreign income and gains where possible to crystalise Foreign Income and Gains (FIG) as detailed in the Budget
• Requesting trust distributions prior to 5 April 2025 to generate foreign income and gains for the same purpose (assuming this is not blocked by the new rules)
• Where possible amending the terms of existing trusts in order to minimise the impact of the loss of the trust protections (such as the exclusion of the settlor and certain other family members so as to prevent the attribution of income and gains to the settlor)

“If not now, when?” Hillel the Elder

While it is true that “Only death and taxes are certain” there does appear to be some leeway with the second as to the form it may take provided action is taken in a timely manner.

Additional Information

For further information on private wealth structures and their management, please contact John Nelson, Managing Director, Dixcart Trust Corporation Limited, Guernsey: john.nelson@dixcart.com

Dixcart Trust Corporation Limited, Guernsey: Full Fiduciary Licence granted by the Guernsey Financial Services Commission. Guernsey registered company number: 6512.

Malta, a sunny island nation in the Mediterranean, has been steadily growing its economy and establishing itself as an attractive destination for businesses, as well as being a wonderful place to live. One of the key incentives offered by the local government to promote investment and economic growth is the Notional Interest Rate Deduction (NIRD). This deduction, introduced in 2017, aims to encourage equity financing and stimulate entrepreneurship. In this article, we will explore the intricacies of Malta’s NIRD, its benefits, eligibility criteria, and how it impacts businesses operating in Malta.

Understanding Notional Interest Rate Deduction

The Notional Interest Rate Deduction, often abbreviated as NIRD, allows companies registered in Malta to deduct a notional interest expense from their taxable income. This deduction effectively reduces the company’s tax liability, providing a significant incentive for businesses to invest and expand their operations in Malta.

The concept behind The Notional Interest Rate Deduction is to provide an incentive for companies to finance their operations through equity rather than debt. By doing so, companies can strengthen their balance sheets, reduce financial risk, and promote long-term sustainability.

Unlike traditional interest expenses, which represent actual borrowing costs, the notional interest expense is a theoretical amount calculated based on the company’s equity investment.

Example:

	No Notional Interest Election	Notional Interest Election	Notional Interest Election
Chargeable Income	100,000	100,000	100,000
Notional Interest	Nil	20,000	60,000
Chargeable Income	100,000	80,000	40,000
Tax thereon at 35%	35,000	28,000	14,000
FTA Allocation	Nil	22,000 (20,000 x 110%)	66,000 (60,000 x 110%)
MTA Allocation	65,000	50,000 (80-28-2)	20,000 (40-14-6)
6/7th Refund	30,000	23,0777	9,231
Tax Leakage	5,000	4,923	4,769

What are the Benefits of Notional Interest Rate Deduction?

The implementation of the NIRD has several benefits for businesses operating in Malta:

Tax Savings: The primary benefit of the NIRD is the reduction of corporate tax liabilities. By deducting a notional interest expense from taxable income, companies can lower their effective tax rate, resulting in significant tax savings.

Encourages Equity Financing: The NIRD encourages businesses to finance their operations through equity rather than debt. This promotes a healthier capital structure, reduces financial risk, and enhances the company’s ability to weather economic downturns.

Stimulates Investment: The availability of the NIRD incentivizes both local and foreign companies to invest in Malta. This influx of investment capital contributes to economic growth, job creation, and the development of key industries.

Supports Entrepreneurship: The NIRD provides a valuable tax incentive for startups and small businesses, making it easier for entrepreneurs to access capital and fuel innovation. This, in turn, fosters a vibrant entrepreneurial ecosystem and drives economic diversification.

What’s the Eligibility Criteria for Notional Interest Rate Deduction?

While the NIRD offers attractive tax benefits, not all companies operating in Malta are eligible to claim this deduction.

To qualify for the NIRD, companies must meet certain criteria:

• Registered in Malta: The company must be registered and resident in Malta for tax purposes.
• Equity Financing: The NIRD is available only for companies that finance their operations through equity rather than debt. Companies must maintain a minimum level of equity capital to be eligible for the deduction.
• Compliance with Substance Requirements: Companies claiming the NIRD must demonstrate substance in Malta, meaning they must have a physical presence, employees, and conduct genuine business activities in the country.
• Compliance with Transfer Pricing Rules: Companies taking advantage of NIRD must comply with Malta’s transfer pricing rules and maintain proper documentation to support their transactions.

Conclusion:

Malta’s Notional Interest Rate Deduction is a valuable tax incentive that promotes equity financing, stimulates investment, and supports entrepreneurship. By allowing companies to deduct a notional interest expense from their taxable income, the NIRD reduces tax liabilities, enhances competitiveness, and fosters economic growth.

As Malta continues to position itself as a leading business destination, the NIRD plays a crucial role in attracting investment, driving innovation, and building a sustainable economy for the future.

Additional Benefits Enjoyed by Maltese Companies

Malta does not levy withholding taxes on outbound dividends, interest, royalties and liquidation proceeds.

Maltese holding companies also benefit from the application of all EU directives as well as Malta’s extensive network of double taxation agreements.

Dixcart in Malta

The Dixcart office in Malta has a wealth of experience across financial services and offers legal and regulatory compliance insight. Our team of qualified Accountants and Lawyers are available to set up structures and help to manage them efficiently.

Additional Information

For further information about Maltese companies matters please contact Jonathan Vassallo, at the Dixcart office in Malta: advice.malta@dixcart.com. Alternatively, please speak to your usual Dixcart contact.

Introduction

In this scenario, an international private client, let’s call him John, a UK resident in his early 70s and a widower, found himself confronted with a substantial Inheritance Tax (IHT) bill. With a UK property worth £1,500,000 and investments totalling £750,000, John pondered strategies to mitigate the impact on his wealth without seeking professional advice.

The Risky Plan

In an attempt to navigate inheritance tax, John contemplated selling his house to his son, a resident of Guernsey, a jurisdiction with no inheritance tax. The plan involved his son, who recently liquidated a multimillion-pound business, purchasing the property, and John gifting the proceeds back while continuing to reside in the house. The goal was for John to live for another seven years, aiming to avoid hefty inheritance tax charges.

Professional Analysis

However, our team of experts swiftly identified the flaws in this plan. The proposed scheme of “selling” the house to the son, followed by gifting the proceeds, would not align with HM Revenue and Customs. The Gift with Reservation of Benefit (GWR) rules, coupled with the potential application of Pre-Owned Assets Tax (POAT), made the plan ineffective. The value of the property would still be considered part of John’s estate for inheritance tax purposes. Moreover, the son’s residence in Guernsey did not exempt the UK-sited property from UK-based IHT, potentially leading to complexities in the future.

Professional Advice

What if John had sought professional advice from Dixcart UK before embarking on this risky endeavour? Let’s explore.

• Scenario Planning

Dixcart UK, could have guided John through a comprehensive scenario analysis. Understanding John’s international financial situation, Dixcart professionals could have illustrated potential outcomes, considering international wealth preservation goals and the nuances of various jurisdictions.

• Strategic International Gifting

Instead of pursuing a convoluted plan, Dixcart could have advised John on straightforward and globally compliant methods of mitigating inheritance tax. This might involve strategic gifting within allowable limits set by relevant jurisdictions or exploring Potentially Exempt Transfers (PETs) for financial assets. A carefully structured gifting plan, considering the time period, could have mitigated the IHT impact effectively.

• Utilising International Tax Allowances

Dixcart UK could have helped John leverage international tax allowances, considering his global assets. Exploring options like gifting a portion of his investments within these allowances could have been a more tax-efficient and transparent strategy. The utilisation of nil-rate bands, residence nil-rate bands, and other available allowances could have been optimised for international wealth preservation.

• Long-Term Generational Wealth Planning

Moreover, Dixcart UK could have assisted John in developing a long-term inheritance tax mitigation plan with an international perspective. Understanding John’s financial goals and family situation on an international scale, the professionals could have provided guidance on structuring his estate, ensuring the seamless transfer of assets to the next generation.

Conclusion

John’s case serves as a compelling illustration of the importance of professional advice in navigating complex global financial decisions. Seeking guidance from Dixcart, could have potentially saved John from the complications and financial pitfalls he faced. This case study underscores the significance of consulting professionals in international private client services, ensuring individuals make informed decisions and preserve their wealth across borders.

By exploring the hypothetical scenario where John had come to Dixcart UK first, we emphasise the proactive role professionals can play in securing a sound financial future and mitigating risks associated with international wealth preservation and generational wealth planning. This case study aims to reinforce the value of expert consultation and strategic planning in safeguarding individuals from unforeseen financial consequences.

Get in Touch

If you have any questions regarding the tax implications and international inheritance planning, please get in touch at: advice.uk@dixcart.com