From the perspective of an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered by the jurisdiction?
Tax (2nd Edition)
Regarding the re-location of activities, the disadvantages of settling in Spain would be more or less the same than if establishing in another EU member. However, regarding advantages of establishing them in Spain, it is important to take into account the following:
a) In Spain, there is a minor cost for the establishment and incorporation of companies.
b) Minor labour costs than in other countries with a similar income per capita.
c) Better life conditions in Spain than in any other country of the EU (sun, beaches, good weather, good gastronomy, lower prices, etc…)
d) Important subsidies in less advantaged areas.
e) In case of obtaining benefits, a rate of 15% in the CIT for the first two years.
f) First level public sanitary assistance, railway infrastructures and roads.
g) Fluid diplomatic relationships with the countries of Latin America and Africa.
From a tax perspective, Romania offers a competitive environment centered on the flat tax rate of 16% applicable (with some exceptions) to income of individuals, corporate profits and capital gains. In addition, there are several advantages for investors in Romania, as follows:
- Salary tax exemption for employees working as IT programmers. This incentive was introduced in the tax legislation approximately 15 years ago, attracting a lot of international companies to create IT hubs in Romania. Combined with the fact that our country has very good IT schools, Romania is now a regional leader in software programming. Moreover, starting 2017, this incentive has also been extended to employees working in R&D activities developed in Romania.
- There are other tax incentives available for companies involved in R&D: companies operating exclusively in R&D may benefit of a 10 years tax holiday for the corporate income tax, while those doing beside R&D also other types of activities, can deduct an additional amount representing 50% of the R&D expenses, when calculating corporate income tax (i.e., R&D related expenses are 150% tax deductible).
- Companies investing in production equipment, IT equipment and software are exempted from corporate income tax for the part of the profits reinvested in such assets. This incentive was introduced in 2014, is applicable for an indefinite period of time and requires that such profits are kept in the company’s retained earnings during at least half of the useful life of the investments. Hence, a company doing such investment can postpone the payment of tax for the reinvested profits until the distribution of these profits as dividends.
Romania enjoys a very large tax treaty network (close to 90) including a tax treaty with the US without the limitation of Benefits clause.
Regarding the main disadvantages, we can point out a certain degree of bureaucracy and lack of transparency in tax administration, combined with an aggressive approach of the tax authorities in case of tax audits. However, these problems can be overpassed with the support of good advisers or by referring the case to a Romanian or European court of justice.
For an international group re-locating from the UK, Australia would offer the following advantages:
- Australian law operates under the Westminster system, so a group re-locating from the UK would be familiar with the legal structure and processes;
- Australian taxation law is relatively well-developed, so the group would be able to determine tax consequences with greater certainty compared to other jurisdictions;
- Australia has entered into Income Tax Treaties with 45 countries, mitigating the risk of double taxation; and
- Australia offers tax incentives for business innovation, including, for example, the research and development tax incentive.
The disadvantages include:
- The relatively high corporate tax rate of 30%;
- Australia acting unilaterally in introducing the MAAL and DPT outside the BEPS regime; and
- The relatively high complexity of Australia’s corporate tax system and high compliance costs.
Tax advantages lay in the CIT credit for research and development expenses and the inbound assignee regime for individuals. The overall taxation level should decrease with the progressive CIT reduction and the end of the wealth tax.
Most of the advantages to locate or relocate a business in France are non-tax related, such as excellent education, housing and medical systems, good recruitment pool and a fine transportation networks (airports, train, cars and underground) as well as available office premises in the Paris area and a steady economy.
Canada is not likely to be a jurisdiction that international groups would relocate to from the UK as a result of Brexit, as it is neither a low tax jurisdiction nor is it a member of the European Union.
Belgium is known for its highly-skilled and multilingual workforce and its comparatively cheap office and housing market. The country has a central location in Europe is therefore easy to reach. Many relevant political institutions have their headquarters in Belgium, such as NATO, the main EU institutions and SHAPE.
Disadvantages can be found in the fact that Belgium has a complex political structure and that employment taxation is rather on the high end.
In recent years Bulgaria has developed as an attractive place for foreign investments in the area of industry and production.
Bulgaria has a strategic location in the center of Southeastern Europe and the main roads of Europe to the Middle East and Asia pass through.
According to its location Bulgaria provides access to the following markets:
- South-East Europe – a 122 million inhabitant, high growth market
- EU – Bulgaria offers the lowest cost, zero tariff access to a 500 million inhabitant market
- CIS, Middle East and North Africa
Bulgaria offers a combination of political and macroeconomic stability and incentives for doing business:
- Stable parliamentary democracy; EU, NATO and WTO member
- Bulgaria’s currency is fixed to the Euro under a currency board arrangement
- Lowest tax rate and one of the lowest labor costs in the EU coupled with special incentives for investors
- EU funding – more than €8 bn in EU funds over the next years
According to Cushman & Wakefield’s rating for 2015, Bulgaria is the best outsourcing destination in Europe. In the world ranking our country takes third place.
Bulgaria accommodates about 50 companies producing components and systems for the global automotive industry. The parts in eight of every ten cars in Europe, are produced in Bulgaria.
The most attractive and well developed sectors in Bulgaria are:
The Business Process Outsourcing Sector:
- More than 30 000 people work in this Sector
- 3% of GDP was generate by this Sector in 2016
- 8 000 € annual starting salaries per Employee
- Bulgaria offers qualified and cost-effective workforce and advantageous rents of commercial space
- BPO sector generates over € 964 million in revenues and thus Bulgaria is the best outsourcing destination in Europe
- The average BPO company in Bulgaria provides services in more than 25 languages
The IT Sector:
- More than 17 500 specialists work in the Sector
- 1.86 % of GDP was generate by the Sector in 2016
- 20 600€ annual wages per Employee
- Established traditions and experience in the sector
- One of the fastest growing sectors of the economy
- The revenues of Bulgarian IT Companies grew by 11%
- Over 4 300 students get a degree in IT each year
- Bulgarian Internet speed is one of the fastest in the world
The Electronics Sector:
- More than 45 000 people work in the Sector
- 6 000 € annual wages per Employee
- Availability of experienced engineers
- Qualified assembly workforce at affordable cost
- Easy access to EU, Russian and Middle East markets
- More than 75% of the production of Electronics manufactured in Bulgaria is exported
- Bulgarian universities are working together with companies in the sector to create qualified workforce
The Machine Building Sector:
- More than 200 000 people, working in the Sector
- 18% of GDP was generate by the Sector for 2016
- 5 000 € annual wages per Employee
- Established traditions and experience in the sector
- Continuous growth between 2000 and 2016
- Qualified work force at affordable price
- Easy access to markets
- Networks of technical universities and colleges
- Available physical infrastructure
Bulgaria is first in the world for the production of lavender. For the past three years, our country has managed to surpass France from the first place and France is historically a leader in this field.
The largest exporter of sunflower seeds worldwide in 2013. Our market share in exports of this commodity in the planet is 17.8%.
The advantages of investment in Bulgaria are many, but there are 5 main reasons to make an investment in Bulgaria:
1. Political and business stability
- EU, NATO & WTO member
- Currency board
- Low budget deficit and government debt
2. Competitive cost of doing business
- 10% Corporate and Personal tax rates
- Competitive cost of labor
- Favorable office rents and low cost of utilities
3. Access to markets
- European Union / EFTA
- Turkey/Middle East
- Educated & skilled workforce
- 80 000 students abroad
- 25% of the population hold university degree
- 46% of the population speak at least one foreign language
5. Government incentives
- Social security benefits
- Tax benefits
- Vocational education benefits
Under current law there are very few advantages from a tax perspective. The corporate tax rates in the United States are among the highest in the world. U.S. companies have been looking to invert to get out of the United States to places like the United Kingdom and Ireland, so until comprehensive tax reform, including a substantial reduction of the corporate tax rate, happen, there are not really any advantages.
There are several significant advantages of Ukrainian tax system:
- an extensive system of double taxation treaties;
- the existence of broad variety of tax incentives in a wide range of prioritized sectors of the economy (agriculture, information technology, aircraft, etc.);
- the existence of simplified taxation regime;
- an active moratorium on tax inspections.
At the same time there are also several disadvantages of Ukrainian tax system:
- the lack of stable tax legislation;
- an unstable judicial practice in tax disputes;
- difficulties in interacting with tax authorities.
Cyprus provides an ideal base for businesses from all over the world wishing to establish a base in the EU. It is strategically located at the crossroads of three continents, it has a well-developed business infrastructure and a business-friendly, low-tax regime with a wide network of double taxation agreements. It also offers a high quality of life, low operating costs and substantial tax exemptions (including a 50 per cent income tax exemption for the first 10 years of residence for individuals earning above EUR 100,000 per year).
There are further advantages for businesses relocating from the UK - because Cyprus used to be a British colony, the whole legal, financial and administrative infrastructure is very similar to that in the UK, and English is very widely spoken and used in business.
The Ecuadorian tax system contemplates tax incentives for foreign investment:
- No withholding tax on dividends distributed to shareholders not domiciled in Ecuador provided the shareholder does not reside in a tax haven jurisdiction for Ecuadorian tax purposes. UK is not considered as a tax haven by the Ecuadorian authorities.
- No 5% tax on the exit of the currency from Ecuador to a foreign jurisdiction provided the foreign shareholder does not reside in a tax haven jurisdiction for Ecuadorian tax purposes. As Ecuador does not have a local currency, the tax authority has established a 5% tax to the exit of currency to avoid flight of capitals.
- A 10pts discount to the corporate income tax (22% tax rate) to promote reinvestment of profits in certain activities defined by the law.
- No income tax for the next 5 years to new entities set up to engage in certain activities promoted by Government (“Productive Activities”). The tax holiday starts on the 1st year the entity generates taxable income attributed to the new investment. This tax holiday may extend to 10 years if the Productive Activities are considered basic industries as defined by the law or if the investment is carried out as a public project in a public-private joint venture.
- No income tax advance due for 5 years to new entities starting the date the entity initiated its trade or business.
- No 5% tax on the exit of currency from Ecuador applicable to the repayment of capital invested in Productive Activities.
- Tax incentives stability for a period of up to 15 years by signing an investment agreement with the Ecuadorian Government.
From a tax point of view, Ecuador presents the following disadvantages:
- The income tax advance if applicable, may expose the entity to excessive taxation. Income tax advance is determined based on assets, equity, taxable income and deductible expenses. If the income tax advance is higher than the income tax liability at the end of the year, the advance becomes the income tax due by such entity.
- Indirect taxes calculated over the value of assets of the entity may impact the effective tax rate of the entities.
- Tax law changes frequently.
- The courts frequently dismiss claims of the taxpayers and rule in favor of SRI.
Much would probably depend on the nature and scope of the group’s activities. Notwithstanding uncertainty caused by Brexit many advantages of the UK jurisdiction will remain. The UK will continue to possess a well-developed, sophisticated financial infrastructure. Its high level of connectivity with the rest of the world will not change. Whatever the eventual political settlement over Brexit, the UK Government has indicated that it intends to maintain existing trade etc standards and regulation. Consequently, but subject to the Brexit settlement, activities in the UK should continue to be compatible with similar activities within the EU. The UK courts are well used to dealing with international disputes and are often flexible in procedure and cost effective. They are likely to remain a forum of choice for the resolution of international disputes. The tax authority always scores well in comparison exercises with other national fiscs and is recognised as honest and sophisticated. Whilst the UK will not become a low rate tax haven, it is the policy of the UK Government to reduce corporate tax rates. The UK has a track record of using the tax system to encourage and incentivise business. Self-evidently the language of business in the UK is English.
Disadvantages attributable to Brexit will depend on the eventual political settlement but will most likely include the loss of membership to the single market and customs union, potential consequent loss of passporting rights, and inability to rely on the EU Arbitration Convention, which established a procedure to resolve disputes where double taxation occurs between companies of different Member States. Without an agreement with the remaining EU Member States, for example, directives, such as the Parent-Subsidiary Directive and Interest and Royalties Directive, will no longer have direct application to UK companies. Consequently, UK companies receiving dividends, interest and royalties from EU companies will have to rely on double tax treaties to eliminate (if possible) withholding taxes on such distributions. Depending on the terms of the tax treaty, companies might incur additional costs when distributing profits from certain EU Member States and might have to consider restructuring to distribute dividends more efficiently.
Gibraltar will exit the European Union at the same time as the United Kingdom. It is anticipated, however, that Gibraltar will remain competitive in a post-Brexit world.
This is because Gibraltar is a modern, dynamic, well-regulated international finance centre, with well-qualified and trained professionals, and impressive infrastructure and logistics for all business needs.
Gibraltar has an attractive corporate tax rate, with only profits accrued or derived in Gibraltar taxed at 10%. In addition, there are no capital gains taxes in Gibraltar, VAT, wealth taxes or inheritance tax. Stamp duty is payable only on transactions concerning Gibraltar real estate.
Gibraltar is largely self-governing, with its own Government and Parliament, which enjoys wide-ranging devolved powers. The legal system is based on the English legal system, with the Privy Council being the ultimate Court of appeal.
There are also attractive residence regimes for high net worth individuals and for higher executives possessing specialist skills, which effectively cap tax in Gibraltar at £30,000 on world-wide income.
Gibraltar has, over the years, become renowned as the jurisdiction of choice for global leading insurance, funds and internet gaming businesses. Its skills and experiences are easily transportable to other industries, with distributed ledger technology, crypto-currency related ventures, fintech and other forms of cutting edge financial services business already growing in size and importance.
Advantages to re-locating activities in Switzerland include overall business-friendly and modern regulations, a strong political and financial stability, efficient and accessible authorities (including tax authorities, with the possibility to request a tax ruling to clarify the tax consequences of a planned structure or transaction), multiple favourable tax regimes (see 17. above) and quality infrastructure.
Some disadvantages include the high cost of doing business in Switzerland, as well as strict regulations in some areas of law such as immigration law, particularly regarding work permits granted to non-EU nationals.
Israel is a member of the OECD and generally follows OECD principles with respect to taxation. Israel is also a party to over 50 double tax treaties which facilitate cross-border transactions and provide protection against double taxation.
In recent years, Israel has witnessed significant progress in its economy and capital markets as well as its high-tech industry and has attracted multinational corporations, investment funds and internet companies seeking to invest in, and access, its local market. In addition, Israel generally encourages, through incentive legislation and other programs, inbound investment and outbound exports aimed at strengthening its economy, including enacting and continuously simplifying laws that provide various tax benefits, reduced corporate tax and dividend withholding rates, such as the new IP Regime.
In addition to the patent box regime already mentioned, Italy features a Notional Interest Deduction regime available to resident companies and Italian permanent establishment of non-resident companies. Particularly, under such regime, companies may claim a deduction corresponding to the net increase in the equity employed in the entity, multiplied by a rate yearly determined by the Italian Ministry of Finance. Specific anti-avoidance rules apply.
A super-deduction and an iper-deduction regimes are available in respect of certain assets purchased by 31 December 2017. Under the super-deduction regime companies can determine the amount of tax deductible depreciations on the basis of 140% of the acquisition cost of the assets. Such percentage is increased to 250% for assets qualifying for the iper-deduction regime (typically, high tech assets).
Finally, it is worth mentioning that individuals carrying out an employment in Italy ma benefit from a 50% exemption on their employment income provided that:
- They graduated from university;
- They worked abroad for at least 24 months before moving to Italy;
- They become tax resident of Italy.
The 50% exemption applies from the first period of Italian tax residence and the following 4.
Whereas Kenya does not have a specific holding company regime, Kenya is considered to be a key hub for multinational entities seeking to expand their operations into Eastern Africa. Some of the key advantages of setting up operations in Kenya especially for multinational entities operating in the manufacturing sector include:
The most significant benefit is that Kenya only taxes income derived or accrued from Kenya. In this respect, income earned outside of Kenya and subsequently repatriated to Kenya will not be subject to tax in Kenya, based on current law. This also applies to expatriate employees who may have global income as their global income will not be subject to tax in Kenya unless they are tax resident in Kenya.
Kenya provides a host of incentives targeted at attracting and retaining investment, such as tax benefits for investors in Special Economic Zones (SEZs). Examples of these include:
(a) the exemption from tax on dividends payable to non-residents by enterprises operating in SEZs;
(b) a reduction of withholding tax on interest payable to non-residents by SEZ enterprises from 15% to 5%; and
(c) allowing a capital deduction of 100 per cent of the cost of buildings and machinery owned by the SEZ enterprise.
In addition, there are a number of tax incentives aimed at encouraging investment outside the key cities of Nairobi, Mombasa and Kisumu, which include capital allowances of up-to 150 % for entities engaged in manufacturing activities (including power generation companies).
Kenya’s laws are still developing and growing by the day. Therefore, they may change from time to time creating some level of uncertainty. In addition, Kenya does not have a wide double tax treaty network and only 11 Double Tax Treaties are currently in force.
There are a number of advantages for Poland as a post-Brexit location for UK business. The majority of them result from the fact that Poland remains part of the EU which means that it is part of the single market and there are no customs duties on trading with other EU countries. Polish law is broadly harmonized with EU law, in particular with respect to VAT matters, as well as withholding taxes on the distribution of dividends, royalties, and interest. Poland is also a party to approximately 80 double taxation treaties which reduce the risk of double taxation of the income in cases of cross-border transactions.
The Polish tax system offers certain instruments which secure the position of a taxpayer, such as individual tax rulings and advance pricing agreements.
Although the tax authorities are currently focused on the increase of collections from taxes, it should be noted that the tax rates in Poland remain at a relatively low level compared to other EU countries. The income tax rate applicable to business profits is 19% and employment income is taxed at the 18% and 32% progressive rates.
The disadvantages are that Polish jurisdiction is prone to frequent changes in the tax regulations, the tax authorities’ very formal approach to taxpayers, as well as the extensive time necessary for cases to be resolved by the courts.
Not applicable to Japan. However, Japanese multinational financial institutions are definitely looking for an alternative location to the UK after the Brexit, for example, the Netherlands, Germany and Ireland, taking into consideration various factors.
The main advantages for re-locating a company to the Netherlands can be summarized as follows:
- The Netherlands has a network of nearly 100 bilateral tax treaties to avoid double taxation which, in many cases, provide reduced or no withholding tax on dividends, interest and royalties. Furthermore, the Netherlands has concluded nearly 100 Bilateral Investment Treaties.
- The authorities are easily approachable for clarity and certainty in advance. Moreover, taxpayers can secure their tax position by way of advanced tax rulings.
- There is no statutory withholding tax on interest and royalties.
- The Netherlands have a tax consolidation regime for corporate groups by which tax losses can be off set horizontally and vertically.
- For certain expats a special tax program is available in the so-called 30% regime. In this regime 30% of the expats salary be provided tax exempt.
- The Netherlands has a well-developed participation exemption, i.e. a full exemption on qualifying dividends and capital gains.
- Administrative procedures are quick and affordable.
- The Netherlands is geographically located in the center of Europe and has excellent infrastructure. The average education is amongst the highest in the world and the English language is the secondly spoken language.
- A disadvantage of relocating to the Netherlands is that the Netherlands have introduced a broad bonus maximum of 20% of the fixed salary, while in the EU Directive regarding bonuses stipulated a maximum of 100% of the fixed salary.
Even though Norway has a favourable exempt method, and a competitive tonnage tax system, there are few tax incentives. Most international groups would probably not see Norway as a realistic alternative for relocation of activities after Brexit.
German law in general as well as German tax law are applied strictly following the rule of law. In addition, Germany has a profound infrastructure, a highly qualified multilingual workforce and is the geographical center of Europe, so a good place for re-locating for logistical reasons. Frankfurt is deemed to be the financial hub of continental Europe, is the residence of important financial regulatory authorities, like the ECB, and therefore a place offering direct access to key regulators and market participants. Finally, Germany is financially and economically robust.
An advantage in relocating business activities to Austria may lie in the modern group taxation regime, the extensive double tax treaty network with in total more than 80 countries. Austria has a participation exemption for dividends and qualified shareholdings in foreign corporations. Important factors are strong political stability and the geographically location of Austria in the center of Europe. The new government program foresees a reduction of corporate tax rate for retained profits. Furthermore there is no inheritance or gift tax in Austria.