Expatriate Tax Update

This newsletter brings together individual country updates over recent months. As you will appreciate, the wealth of changes across multiple jurisdictions is significant, so to provide easily digestible information we have kept it to the key developments that are likely to affect your business and international assignees.

Australia                                  

Audit of Expatriates to Australia Announced By the Australian Commissioner of Taxation

The Australian Commissioner of Taxation has recently announced that the Australian Tax Office (ATO) will request and collect names, addresses and other details from the Department of Immigration and Citizenship (DIAC) of those who have applied for specified temporary visa subclasses (detailed below) in the period from 1 July 2008 to 31 March 2011, inclusive.

These records will be electronically matched and analyzed by the ATO’s data matching department to identify potential refund fraud and other non compliance with tax lodgement and payment obligations.

The data matching will be carried out in the second quarter of the 2011 financial year (1 September 2011 to 31 December 2011).

The program is called the DIAC/ATO Temporary Visa Matching Project and the Commissioner asserts that it “enables the ATO:

• To protect the public revenue from potential abuse
• To address potential fraudulent activities concerning refunds, tax system registrations, non compliance with lodgement and debt payment through electronic bulk matching data
• To be more strategic in its approach to addressing and mitigating refund frauds perpetrated on the tax system.”

The visas to be checked include:

Fringe Benefits Tax (FBT) Changes – Restriction of Living-Away-From-Home Allowance and Benefits

The Government has announced changes to the Fringe Benefits Tax regime as it applies to individuals receiving Living Away From Home Allowances and Benefits taxed on a concessional basis. With effect from 1 July 2012, the following changes have been announced:

• Access to the tax exemption for temporary residents will be limited to those who maintain a residence for their own use in Australia, which they are living away from for work purposes, such as 'fly-in fly-out' workers; and
• All individuals will be required to substantiate their actual expenditure on accommodation and food beyond a statutory amount.

Permanent residents will be unaffected by the first mentioned change but will be affected by the additional substantiation requirements.

As the reforms will apply from 1 July 2012, the Government should be able to undertake a consultation process prior to their commencement. This will hopefully allow appropriate transitional arrangements to be put into place.

One of the reasons given for the changes is that the total amount of tax-free living-away-from-home allowance reported by employers to the Australian Taxation Office increased from AUD 162 million in 2004-05 to AUD 740 million in 2010-11.

Germany

Gift Tax/Inheritance Tax: Implementation of a Higher Tax Allowance for Donations between Persons Living Outside Germany?

When an individual is assessed on a limited tax liability basis, the current inheritance and accessions tax law grants a restricted tax exempt amount of EUR 2,000 if the donor and donee do not live in Germany, but German domestic property is transferred, irrespective of the relationship of the people involved with the donation.

In 2010 the European Court of Justice decided that, according to tax law, the amount of a tax exempt allowance for accessions tax must not be dependent on the donor's or donee's residence. This adjudication will now be implemented in German inheritance and accessions tax law. Though the tax exempt allowance for limited taxable acquisitions will not be raised, donees subject to taxation should file an application so that the donated or inherited property is treated the same as it would be treated as a person assessed on an unlimited tax liability basis. In such cases the higher tax exempt allowance will be dependent on the degree of relationship (e.g., EUR 600,000 for spouses, EUR 400,000 for children). However, the entire ‘global property’ transferred is recorded, not only the domestic property and, whether such an application is really advantageous therefore needs to be determined in each individual case.

The new system requires that wage tax data is electronically stored at the Federal Central Tax Office. Tax bracket, religious denomination and tax exemption for dependent children are criteria that are relevant for the wage tax deduction. The start for this new system was initially planned to be on 1 January 2012 and has now been deferred to 1 January 2013.

The old tax card “Lohnsteuerkarte” is already abolished. Currently, the data of the old tax cards can still be used by the employers as long as no changes are required. Employees who need a tax card for the first time and employees who need to make changes to their tax cards have to apply for a certificate for wage tax deduction (“Bescheinigung für den Lohnsteuerabzug”), a paper document which has replaced the tax card and is valid as long as the new electronic payroll tax card is installed.

Double Taxation Agreement between Germany and Spain

On 3 February 2011 a new double taxation agreement (DTA) was signed between Germany and Spain (which is not in force yet). There is a significant change in the new DTA concerning the profits from sale of property. Basically, profits from the sale of property that is not owner-occupied are taxable according to German income tax law if less than 10 years have passed between acquisition and disposal of that property.

According to the previous DTA, profits from the sale of Spanish property were not subject to German taxation. They were exempt from taxation in Germany under the progression clause. Spain had the sole taxation right.

Under the new DTA, profits from the sale of Spanish property can now also be taxed in Germany. However, taxes paid in Spain are credited against the German taxes to avoid double taxation.

Another new regulation affects the application of the Spanish special Expat tax regime for individuals who keep their German dwelling during their work in Spain.

The respective Protocol to the Double Tax Treaty states that Articles 4 and 6 to 21 of the Treaty are not applicable for an individual who is subject to taxation according to the special Spanish Expat tax regime (Art. 93 of the Spanish Income Tax Act for Individuals). As long as this person is still subject to taxation in Germany, he will have to declare his Spanish income in Germany and will only receive a tax credit for the tax paid in Spain. According to the “old” Double Tax Treaty, this income has been exempt from taxation in Germany.

Greece

Greece Is the Latest Country to Seek Unpaid Taxes in Swiss Banks

The European Union has announced that it is helping Greece negotiate with Switzerland in order to seek to recover significant unpaid taxes believed to be hidden in Swiss banks. The Greek Government wants to emulate deals agreed with Switzerland by Germany and the UK in recent months.

Netherlands                               

Proposed Changes To ‘30% Ruling’ Concerning Employees Working In The Netherlands Confirmed

Proposals outlined in our October Expatriate newsletter were approved by the Dutch Lower House on 17 November. The changes will be effective from 1 January 2012. For ease of reference we have repeated both the existing riles and now set out the changes below.

Amendments to 30%-ruling regime announced

In a letter of 8 September 2011, the State Secretary for Finance announced that changes will be made to the 30%-ruling regime. Details of the changes, which are expected to become effective from 2012, are summarized below.

Employees of foreign companies who are temporarily assigned to the Netherlands can apply for ‘the 30% ruling regime,’ by which 30% of their employment income can be paid tax free to compensate them for specific expatriate costs (referred to as ‘extraterritorial costs’).

Current conditions

The current conditions for application of the ruling are:

• The taxpayer is hired abroad by an employer resident in the Netherlands: the employer must be an employer which is obliged to withhold wage tax
• The employee must have specific expertise which is sparsely available in the Dutch domestic labor market. Specific expertise is determined by a combination of the following three conditions:
  • The employee's level of education
  • The net level of salary with regard to the employment in the Netherlands corresponding to that in the expatriate's country of origin
  • The employee's relevant working experience in respect of the specific employment. If experience is required for an employment, it has, however, been clarified that this condition is deemed to have been satisfied if the expatriate has work experience of at least 2.5 years in a comparable employment.

If the third condition is not met, it may still be possible to qualify for the 30% ruling if the first and second conditions are met.

Duration

The 30% ruling is granted for a period of 120 months, starting from the date of employment in the Netherlands. A reduction to this period applies if an employment or stay in the Netherlands has terminated within a period of 15 years before the start of his new employment and the employee was appointed or residing in the Netherlands 10 years before he was hired.

Proposed changes

• The condition that the employee has specific expertise, which is sparsely available in the domestic labor market, will be deemed to be met if the employee earns a minimum salary of EUR 35,000 (excluding the tax free allowance of the 30% ruling).
• A reduced salary threshold of EUR 26,605 will apply to employees with a masters degree up to the age of 30 who have been recruited from abroad. Academic scientists are exempt from a salary threshold.
• The maximum duration of the 30% ruling will be reduced from 10 years to 8 years. Rulings issued for employments with a starting date before 1 January 2012 will not be affected.
• The period which is taken into account for a reduction of the duration of a 30%-ruling will be increased from 10 to 25 years for people previously living and working in the Netherlands. This will only apply to new cases.
• Employees living (for two-thirds of a 24 month period before the start of the activities in the Netherlands) within 150 km from the Dutch border are no longer entitled to the ruling. For doctoral students, the period of their doctoral research will not be taken into account, as long as they resided outside the 150 kilometer boundary before starting their doctoral research on the condition that their employment in the Netherlands starts directly after they have completed their doctoral research.
• The condition that the employee should have specific skills that are scarce on the Dutch labor market will still apply, but will only be assessed in exceptional cases or groups of employees. For instance, professional football players have been specifically mentioned with this respect.
• The conditions for the application of the 30% ruling will have to be met during the entire period of application of the 30% ruling. As soon as the conditions are no longer met, the 30% ruling will end. For rulings that have already been granted, transitional rules will apply.
• Transitional rules include that the current terms and conditions of the 30% ruling will still apply to situations in which the 30% ruling has been taken into account more than 5 years on 1 January 2012. For rulings that have been taken into account 5 years or less on 1 January 2012, the salary threshold must be met as of the 61st month of application. Additionally, these employees must also meet the 150 kilometer rule from the start of their employment.

What does this mean for your employees who already obtain the 30% ruling?

Starting 1 January 2012, the employer of an employee who has applied the 30% ruling, should examine whether the employee qualifies for the 30% ruling according to the new rules unless the transitional rules are applicable.

The new reduction period of 25 years and the maximum application period of 8 years will only apply to new cases. However, please note if the employee does not meet the salary criteria and/ or the employee was (is) living within 150 km from the Dutch border, the employee is no longer entitled to the 30% ruling.

Please note that employees who already applied the 30% ruling for more than five years on 1 January 2012 do not have to be examined and will retain rights for the remainder of the 30% ruling. If the criteria for the 30% ruling are not met, it is possible to reimburse the actual extra-territorial expenses under certain conditions.

Sweden         

Simplified Qualification Rules for the Expert Tax Scheme

The Swedish Government is to introduce new provisions relating to the Expert Tax Scheme. With effect from 1 January 2012, foreign individuals who receive monthly remuneration exceeding SEK 88,000 (2012) will automatically be eligible for the scheme.

The Swedish Expert Taxation Scheme applies to foreign key personnel such as executives, experts, scientists, researchers and others whose skills are difficult to find in Sweden.

The main feature of the scheme is that income taxes and social security contributions are based on only 75 percent of the taxable income. The relief applies to all salaries and benefits such as free housing and allowances for living costs. The tax reduction also applies to stock options and other special compensation, provided it is offered by the Swedish employer. A number of ‘perks’ (moving costs, children's schooling, home travel, etc.) which would normally be subject to income tax are also tax exempt under the scheme.

Application for tax relief must be submitted by the employer or foreign person within three months of the start of employment. If granted, the relief will apply to the first three years of employment in Sweden. However, foreign key personnel may reside in Sweden up to five years. Swedish citizens are not eligible for the scheme and neither are individuals who have been a resident in Sweden during any of the prior five years. Finally, the employer must be a Swedish company or foreign company that has a permanent establishment in Sweden.

In essence, experts, research workers and other key personnel may be taxed under the Expert Taxation Scheme if the skills required for their position are such that it is significantly difficult to recruit domestically. Employers are therefore required, among other things, to show thorough documentation of the recruitment process in order to confirm the difficulty of finding comparable skills though local hire. However, under the current provisions and legal practice very high levels of competence and specialization are normally required. This means that it is often difficult to predict if the relief is likely to be granted for a specific individual or not, even if detailed and comprehensive supporting information is submitted.

Under the new provisions an employee is deemed to fulfill the requirement of specialist expertise if the remuneration package received for the work in Sweden exceeds two price base amounts per month. The new remuneration threshold is set by the price base amount (prisbasbelopp) for the calendar year in which the work in Sweden commences, this means that for 2012 a salary of SEK 88,000 per month is required.

Individuals who do not meet the new salary criteria will still be able to qualify for the scheme under current provisions, i.e., by having unique competence which is unavailable or not readily available in Sweden. For such individuals, full documentation of special expertise and difficulties in recruiting locally will still be required.

United Arab Emirates and Kenya

New Double Taxation Agreement

The UAE and Kenya have signed a double taxation avoidance agreement. UAE's national airlines will be exempted from taxes in Kenya. Students, sovereign funds, staff members of airlines, together with income and capital in both the public and private sectors will also be exempted from tax.

United Kingdom            

HMRC Announces the Postponement of the Statutory Residence Test (SRT) Until 6 April 2013

In Budget 2011, the Government announced its intention to introduce the SRT with effect from 6 April 2012. A consultation period followed during the summer, after which it was anticipated that draft legislation would be released before the end of 2011. The Government has now decided to allow further time to finalize the detail of the SRT and this will now be introduced with effect from 6 April 2013. Reforms to the concept of ordinary residence will also take place at the same time. The draft legislation is now expected to be published near to Budget 2012, together with a further consultation exercise.

What does this mean for your internationally mobile employees?

The announcement means the current UK tax residency rules will continue to apply until 5 April 2013. The challenge this presents to internationally mobile employees and their employers is that it was already widely recognized that the rules in their current form do not operate in a satisfactory way. There is a lack of clarity to the rules, which stem from them being a combination of case law and HMRC guidance, as opposed to binding legislation with statutory weighting. In view of the fact that they will remain in force for a further tax year, we have highlighted below some of the areas to consider but given the complexities individuals and their employers are advised to seek professional advice.

Outbound assignees

For assignees leaving the UK, HMRC have in recent months stepped up their scrutiny as to whether the individuals are working full time overseas for a full UK tax year (6 April to 5 April). This along with certain day count tests are requisites of an individual breaking UK tax residency.

Two particular areas where we have seen HMRC challenging non resident status are:

1. Start of full time employment overseas. It has not been uncommon for individuals to leave the UK immediately before the end of a UK tax year, but not to commence their formal work until shortly after the next UK tax year has started. Outbound assignees should be aware of the need to ensure that they are both outside of the UK and have commenced their formal role on assignment before the start of the UK tax year following their departure from the UK, to strengthen the position that they are non resident in the UK.
2. Non incidental workdays in the UK – HMRC released an update earlier this year stating that they reserve the right to review the UK tax residency position of outbound assignees spending 10 days or more undertaking non-incidental work back in the UK. The issue of non-incidental workdays has been viewed as a historical grey area, but broadly if individuals are performing work in the UK which is of similar nature to that performed outside the UK, HMRC may seek to contend that the UK work is non-incidental.

While it was anticipated that the implementation of the SRT would provide clearer rules for assignees leaving the UK, we would expect HMRC to continue to scrutinize these areas until the eventual introduction of the SRT in April 2013. Individuals who continue to undertake work in the UK but are working in low tax jurisdictions, and those jurisdictions with which the UK does not have a double taxation agreement, are most susceptible to HMRC challenge.

Inbound assignees

The main area of HMRC scrutiny has been in respect of Resident but Not Ordinarily resident (RNOR) status. The RNOR status, which enables assignees to claim relief for overseas workdays, has broadly been available to individuals who arrive in the UK intending to be in the UK for less than 3 years and who meet other criteria such as not being UK home owners. Recent tax cases and HMRC practice has looked increasingly at the nature of an individual’s connections to the UK and whether they had developed a settled pattern of presence in the UK. A settled pattern of presence in the UK could result in an individual being considered to be Resident and Ordinarily Resident (ROR), regardless of their intentions, and therefore unable to claim overseas workdays relief.

Again, we were awaiting the introduction of the SRT to have clarified HMRC’s future plans for the RNOR and ROR statuses and to help all understand who would be eligible for overseas workdays relief going forward. In the meantime, assignees and their employees should seek professional guidance so that, where applicable, they are aware of steps they can take and pitfalls to avoid in strengthening their claim to overseas workdays relief.

Impact of the domicile review on internationally mobile employees

The points below have been announced as part of the ongoing review into the UK’s domicile rules.

• Foreign currency bank accounts – HMRC has indicated that they plan to give exemption from UK Capital Gains tax to withdrawals from foreign currency accounts from 6 April 2012. This is welcome news given the complexities and inherent unfairness of the current position.
• Statement of practice 1/09 – this relates to the way that assignees working both in and outside the UK who are eligible for overseas workdays relief, identify the remittance of employment income to the UK. HMRC have indicated that they are committed to introducing legislation to give greater certainty to assignees and to simplify the compliance process, but they will not take steps to do so until 6 April 2013.

Currency Comparison Table

The table below shows comparative exchange rates against the euro and the U.S. dollar for the currencies mentioned in this issue, as at December 9, 2011.