A) National Taxation of Pensions
- In Europe one often sees that due to the Reversal Rule by employer paid pension premiums are exempted from wages taxation. The own contribution is tax deductible. The pension annuity is taxed as of pension age. Taxation is therefore much later and often at a modest rate. If not all conditions are met, instant and total taxation including a stiff fine might materialize.
- Each country can have certain limitiations on these kind of tax benefits. For example Holland has a maximum amount of pension earning wages.
- Other countries have certain extentions of benefits:
- For example the UK has the Lump Sum possibility to receive the total DC pension capital at once as of 2015 and as of age 55.
- Furthermore the UK still has the 25% tax exemption.
- As well as the QROPS possibility to transfer UK pension capital from the UK to a recognized location without taxation.
- Expats who reside in Holland can apply for a 30% tax ruling. If granted they can i.e. receive 30% of their wages without tax. In general these 30% cannot be included in the pension earning wages. Only in specific instances it is allowed.
B) Double Taxation and Pensions
- I.e. the country where the retirering expat resides is entitled to tax regardless of nationality/origin of pension. Many exceptions (often for governmental pensions) do exist.
- It might prevent high tax claims by using international (mostly bilateral OESO based) double tax treaties and unilateral national regulations on double taxation.
- Double tax treaties don’t create the right to tax. They regulate which country may implement existing national tax law.
- Several countries like for example Holland have an extensive international network of bilateral double tax treaties. Use it to your advantage.
C) Expat Salary Split
An international salary split means that the wages are taxable in more than one country.
There are i.e. two different situations:
- The expat works not only in his residence country but also in another country for more than 183 days.
- Board Members with international responsibilities which is implemented by means of partially charging the wages to another intra concern company or by drafting a second employee contract.
A salary split can be very attractive for an expat and his employer if the related employee contract, payroll, tax, social security and pension issues are handled correctly.
If the expat works not only in his residence country but also in other countries,.this in general means that his global wages are taxable in his residence country and the wages related to working in other countries are also taxable in those countries.
The risk of double taxation is often (to some extent) prevented by international tax treaties and unilateral national tax regulations.
For the average expat is relevant to what extent he works in other countries than his residence country. This distinction is less relevant for Board Members as treaties often stipulate that the Board Member’s wages are taxable in the country in which the related company resides.
This makes the implementation of a salary split for such a Board Member less complex. Even though the split still has to acurately describe the actual situation. Which is often checked in a strict manner by national tax authorities.
If the salary split is attractive for the expat this is often caused by differences in progressive tax rates and tax free sums per country.
The conclusion is that if double taxation is totally prevented, then a salary split can be very interesting. Each situation has to be carefully checked to see if this is indeed the case. If not, a salary split might not be attractive at all.
In order to be able to compare the differences in State/Corporate/Private Pension Coverage between countries, you have to compare all pension essentials:
- Kind of systems
- Kind of plans
- Kind and amount of coverages
- Kind of tax treatment
- Maximum amount of tax benefits
- Amount of related costs
- Kind of investment possibilities
- National policy towards international transfer of value
- Mandatory or voluntary participation
- Extent of flexibilization possibilities
The optimization of the salary split position of the expat requires an indepth look at all relevant aspects. Beware of generalizations.
D) International Estate Planning
Besides the mentioned aspects of Wages and Income Tax, expats are advised to also pay attention to the legal and tax aspects of Estate Planning.
Estate planning is the total process of planning your estate to make sure that the value of your assets does not decrease unnecessarily when you pass away. While also ensuring that important aspects of your estate are handled correctly.
You can start planning your estate at any stage in life. It is important to do so once you have substantial assets which you need to manage in the event of your death.
Estate plans are unique to every personal situation but will i.e. include:
- Creating an expat will
- Minimising taxes by setting up the appropriate financial structures
- Guardianship of living dependants
- Naming of an executor of your estate
- Creating or updating beneficiaries on your financial plans
- Pre-organising and potentially paying for your funeral arrangements
- Setting up a power of attorney to direct other assets and investments
The legal requirements concern how to stipulate the will in a correct manner. In which process the projection of the kind and amount of future Inheritance Tax is relevant.
As expats tend to relocate, it is important to make sure that experts advise expats about the differences between countries and how to optimize their estate planning.
In order to determine the applicable civil law, you have to look at the International Civil Law of the relevant countries. Which can be quite difficult as for example certain personal choices in one country are not always accepted as valid in another country.
If it concerns Member States of the EU, the EU Inheritance Regulation of 2015 is relevant. Even though it only addresses the civil law and not the tax issues.
Regarding the Inheritance Tax the national regimes can be quite different. As for example the UK and Dutch system are quite stern while Sweden and Portugal have no such taxes.
It pays off to plan ahead and seek the best advice.
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- Before retirement expats should have checked the tax situation of each pension claim.
- International optimalization of pension taxation is complex. It requires the advice from a specialist. It will be much cheaper than the cost of the lack thereof.