Special Tax Regimes for Mobile Individuals and Their Impact on the EU’s Single Market – Bloomberg Tax

Preferential tax regimes are often used to attract high-income and high-wealth foreigners by offering them a lower tax burden on their income and wealth. Such developments have indirectly created an environment in the EU where member states compete against each other for labor and capital. In the end, this will likely have a harmful effect on the EU single market, unless member states reconsider their tax policies.

The EU Tax Observatory recently published an empirical study of tax competition between member states, paying close attention to the taxation of individuals. The study found that certain preferential tax regimes implemented by member states could be harmful to the EU single market if they continue.

This comes in the wake of a recent crackdown by the EU on member states selling golden visas and schemes to acquire EU citizenship by investment. Reported abuse of such schemes by Russian oligarchs shone a further spotlight on the practice in certain member states, particularly since the invasion of Ukraine.

Typically, when an EU member state offers lower tax rates on wealth and, especially, on (high) personal income, it must find a way to cover the lost revenue that is a natural result of preferential tax regimes, since state expenditure and commitments do not reduce.

To achieve this, some member states have opted to increase social security rates which are paid by the general population and only some foreign workers. (Foreign workers who are temporarily assigned to work in another member state will in most cases be exempt from social security contributions in the host member state because they continue to be covered by social security in their home country.) The EU Tax Observatorys report shows that this option is generally preferred by countries in the eastern part of Europe.

Other member states have opted to compensate for the lost revenue by increasing taxation on the general population or by introducing other forms of taxation.

This contrasts with some non-member states, such as Switzerland, that actively pursue a policy of attracting talent and capital by offering low taxes at both the individual and corporate level, with no intention or need to raise revenue elsewhere to compensateon the basis that attracting business increases overall tax revenues and GDP.

For the past 15 years since the global financial crisis, the Organization for Economic Cooperation and Development, G20 and EU have been laser focused on addressing the harmful effects of tax policies and practices globally that provide perceived unfair advantages to certain businesses and corporates. This has produced a number of initiatives, such as enhanced transfer pricing rules, anti-avoidance treaty provisions, new nexus and apportionment rules for the digital economy, reporting of potentially aggressive tax arrangements, abolition of harmful tax practices, and, most recently, a minimum global corporate tax rate. Taxation on personal income and wealth, however, was not a part of that Base Erosion and Profit Shifting (BEPS) agenda.

It is only more recently that the EU has picked this topic up following the study published by the EU Tax Observatory. In January 2022, the University of Munich produced a report, at the request of the European Parliaments Economic and Monetary Affairs Sub-committee on Tax Matters, that considered tax competition for mobile taxpayers. The report looked at preferential personal tax arrangements and tax rates within the EU, and the evidence for tax-induced mobility. The study considered preferential tax rules in Greece, Cyprus, Italy, Portugal, Austria, Belgium, France, Malta, Finland, the Netherlands, Sweden, Ireland and Luxembourg.

Consequently, we can expect that the attention of policymakers will begin to turn towards harmful tax practices with respect to the taxation of mobile taxpayers, particularly as the long-running G20/OECD project grinds to a conclusion with the agreement on BEPS 2.0 Pillar One (allocation of business profits) and Pillar Two (minimum corporate tax rates). The time is certainly near when similar focus is given to personal tax competition between states.

Now that the pandemic has accelerated hybrid home working, more individuals are looking to work remotely across borders. A consideration for tax rates in such arrangements is often a significant influence on a choice of destination for remote working. If this trend of remote working across borders continues to increase, as many predict, it will potentially shift tax revenues from high-tax to low-tax countries, thereby depleting state revenue in high-tax countries. Several countries already promote themselves as digital nomad and remote worker destinations by offering work visas that do not require a local sponsor, often in conjunction with tax concessions (and nicer weather).

It is often argued that sovereign states are free to compete for talent, tax revenue and capital, just as they are free to compete on trade and technology. As we have seen with the BEPS project, however, the global community takes a dim view of harmful competition arising from excessive tax exemptions and negligible tax rates, and is willing to act multilaterally to discourage such practices.

Although EU initiatives on taxes on personal income and wealth have a long way to go before an agreement is reached and changes are implemented, the EU continues to introduce a range of other reforms that will have a lasting effect on the EU labor market. In 1996, the EU adopted a directive that defines a set of core terms and conditions for employment that an undertaking must follow when it posts employees from one EU country to another (the host country). This directive has been revised recently and one of the more significant revisions concerns salary. According to the revised directive, posted workers must be paid at least as much as local workers in the same position (the so-called equal pay condition) and the payment must include all mandatory elements of a salary and not only a base salary.

Additionally, the EU has implemented mandatory registration of posted workers in the host country. Several member states have extended the registration obligation beyond the scope of the EU directive, such as requiring registration of workers posted from a non-EU country and registration of self-employed persons. Non-compliance with the core terms and conditions for employment and the registration of posted workers is usually heavily sanctioned and is often treated as a criminal offense. Recently, authorities have been focusing on labor inspections and more audits are expected.

There are more EU directives coming into effect that place additional requirements on employers, such as written contracts with clearly defined terms and conditions when work is expected to last at least four weeks. The EU is also putting pressure on member states to define and update minimum wages and engage social partners to organize and to bargain salaries and other working terms and conditions collectively.

Countries will be forced to comply with EU defined norms and parameters of what constitutes fair tax competition, and they will need to look for international solutions when they think about new tax policies and other initiatives aimed to attract foreigners and capital. Otherwise, the current imbalances in the EU single market regarding movement of people and their capital will create losing and winning member states that, in the end, could erode the foundation of the EUs free movement of persons, services and capital.

The more holistic approach to policies and initiatives is already relevant for the increasing number of cross-border remote workers. The EU Economic and Social Committee has just published an opinion urging member states to offer flexibility in taxation of remote workers, such as implementing thresholds that would postpone the triggering of taxation in the host member state. The same flexibility is proposed in the field of social security contributions.

Although there is a generally positive view on diminishing burdens on remote workers and their employers, these discussions are facing new issues. One of these concerns is the definition of remote workers. If certain relaxations are implemented in respect of remote workers, should they apply only to individuals working from home or should they also encompass those working from a hotel or a short-term rental? Should relaxations applicable to remote workers apply irrespective of the type of work an individual performs, or should there be other requirements? For example, no interaction with local markets, etc.

These discussions will determine whether the future holds an aligned approach to remote working or a situation where each member state acts unilaterally. The outcome of these discussions and solutions could eventually influence general attitudes towards the EU and national governments, especially if some states are left behind, unable to access qualified workforces and sources of capital. It should be remembered, of course, that tax positions between member states of the EU are largely governed by bilateral tax treaties rather than EU regulations, so this is an area where the OECD plays an important role.

The Netherlands provides an interesting example of an existing preferential tax regime for inbound workers. The Dutch regime offers an exemption to foreign workers in which 30% of their income is free from Dutch taxes. This is generally considered to be a very advantageous tax regime that has attracted a lot of qualified workers to the Netherlands. However, the Dutch government is currently considering abolishing the regime altogether.

Similar to the crackdown on golden visas and corporate profit-shifting, we can expect multilateral action by the powerful high-tax countries in the OECD and G20 to force the abolition of harmful individual tax practices in smaller states seeking to attract expats, digital nomads and inbound investment.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Daida Hadzic is KPMG Head of Quality for Global Mobility Services (EMA) and Daniel Foster is KPMG Director, Tax & Legal, Global Mobility Services, Switzerland.

The authors may be contacted at: danielfoster@kpmg.com and Hadzic.Daida@kpmg.com

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Special Tax Regimes for Mobile Individuals and Their Impact on the EU's Single Market - Bloomberg Tax