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Manager, Tax & Law, People Advisory Services, EY Ukraine
Business Immigration: Pitfalls and Tips
Why Does Business Immigration Occur?
We receive more and more requests from international business and businessmen that need to deploy their people around the world or move personally. There are various reasons. International groups may require a particular employee in a particular location for a certain period of time. A family business may require a trusted member to be present at a location where capital is concentrated. A beneficial owner may want to emigrate for personal or economic reasons.
Moreover, Base Erosion and Profit Shifting (BEPS) Project initiatives, which Ukraine is implementing on a step-by-step basis, would potentially accelerate the people relocation trend. In particular, so as to satisfy the Principal Purpose Test (PPT) international enterprises will, possibly, need to move their management to intermediary companies to strengthen business presence in those countries and ensure economic substance of transactions between entities of their group. The Controlled Foreign Company (CFC) rules may compel beneficial owners the shift their tax residence status from Ukraine to jurisdictions with more preferential tax rules and, therefore, emigrate.
What is this Article About?
Globalization makes the relocation of people simpler and faster. However, individuals and their employers should carefully consider regulatory environment of the home and host country to make relocation compliant, efficient and quick. Besides, different locations may offer lucrative conditions for business immigrants, which one should be aware of. Some common pitfalls and worthwhile opportunities are discussed below.
How do International Companies Structure Relocation of their People?
In general, immigration of personnel inside a group of companies can be structured as: (i) secondment — relocation of personnel on the basis of an inter-company agreement, or (ii) direct employment — a host company offers local employment. Both options work pretty well for relocation to Ukraine; out of Ukraine — secondment appears practically unfeasible due to the absence of a legal framework, double taxation and labor law risks. In particular, Ukrainian employment assumes payment of salary in Ukraine, which will most likely be taxed twice: (i) in Ukraine under the pay as you earn (PAYE) system and (ii) in host country as in location of income source with priority to tax such income. Thus, multinational companies often terminate employment in Ukraine prior to relocation. This results in a gap in the individual’s Ukrainian social security record for pension purposes, which can be covered by (i) voluntary contributions to the state pension system, or (ii) use of international social security agreement, if available.
Are there Special Requirements for Hiring a Foreigner?
It usually takes 2-6 months to gather/submit paperwork and get authorization to work and to reside in the host country. The employee’s profile should qualify for work in a particular country at a particular position (education, expertise), minimum salary requirements must be satisfied. Some countries may offer a fast-track procedure and special immigration regimes. For instance, Cyprus, a popular jurisdiction to incorporate international business structures for tax planning purposes, offers a simplified procedure for the employment of third country nationals in companies of foreign interest. Namely, qualified companies do not need to prove they could not find a local alternative and, therefore, they skip this step and get authorization much faster.
Is it Possible to Make Relocation of Personnel Tax-efficient?
A delegate’s family can get a residence permit alongside the main applicant, though one should take into account that the location of family members can influence his/her tax residence status. In particular, many countries give residence for tax purposes to the country of family location and, therefore, the right to tax worldwide income in that country. Foreign tax credit or tax exemption methods exist in the country of residence to eliminate double taxation. However, in the case of Ukraine the country does not grant credit against the military duty liability (1.5% of taxable income). Moreover, the foreign tax credit procedure is itself burdensome in Ukraine (specific supporting documentation, legalization), while the law does not provide for split residence in a year. Thus, one may consider relocation out of Ukraine at the beginning of the year together with one’s family, so that will potentially break the status in Ukraine. For similar reasons, from the Ukrainian taxation perspective, it may be convenient to either come to Ukraine at the very beginning of the year or closer to the 4th quarter.
Why May Business Owners Think of Leaving Ukraine?
Immigration to tax-efficient countries has been on the agenda of high net worth individuals (HNWI) for many years. With the implementation of CFC rules in Ukraine, we expect the attention of business owners to this question to rise, as change of tax residence status would be a possible solution to avoid taxation of undistributed business profit in Ukraine. To become a tax resident of a particular country one does not necessarily need to acquire citizenship of that country. Thus, there are more immigration options.
Is there a List of Popular Destinations for HNWI?
Currently, tax-efficient reputable jurisdictions include:
– Monaco. Individuals should prove sufficient means to afford the lifestyle in order to receive the residence permit. Residents in the Principality are not liable for income tax.
– Italy. Apart from the investor visa, which requires a minimum investment of EUR 500k, the country offers an elective residence visa. New Italian tax residents may apply for a flat annual tax of EUR 100k on foreign-source income.
– Switzerland. Individuals who conclude an agreement with Swiss authorities to pay a lump-sum tax get a residence permit. The tax is calculated on the basis of the total annual cost of living expenses incurred by the taxpayer and his/her family in Switzerland and abroad, subject to a minimum taxable amount.
Is there a Formula to Change Tax Residence Status?
In many cases, to become a tax resident of a particular country and break one’s status in the home country, one should actually move to the host country and establish the center of vital interests there. Otherwise, the host country may refuse to grant preferential tax conditions, whereas the home country may claim taxation of worldwide income.
Although it is difficult to suggest an irrefutable solution, to break tax residence in Ukraine, an individual should, at least, follow recommendations as described in the previous sections: move together with his/her family and spend less than half of a year in Ukraine, establish a place of permanent residence and economic ties in the host location. To strengthen one’s position, the beneficiary and his/her family may complete the procedure of leaving Ukraine for permanent residence abroad. Supporting documentation of residence abroad would also be required in case an individual needs to defend the non-resident position. Importantly, certain transactions like alienation of Ukrainian property and division of assets between family members may be more beneficial in the status of a tax resident of Ukraine and, thus, prior to relocation.
Is it Possible to Be a Tax Resident Nowhere?
To be a tax resident nowhere may be difficult to achieve. Moreover, international banks must identify beneficial owners of each account. Subsequently, banks question the beneficiary’s country of tax residence and request proof of compliance in the tax residence country. Otherwise, international banks refuse to cooperate.
Whether people immigrate inside the group of companies or the owner considers relocation, a proper immigration and tax strategy should be developed. This will ensure stakeholders utilize various opportunities provided by laws, achieve time and cost efficiency of the project as well as compliance in both the home and host countries.