Attorney, Family Office

Concept

Tax residency plays a key role in determining the tax obligations of individuals and legal entities. In today’s world where borders are becoming increasingly transparent and business increasingly global, strategic tax residency planning becomes the sole tool for optimising the tax burden.

Our strategy is based on combining the advantages of various jurisdictions and using legal tax incentives available to international entrepreneurs and investors. This makes it possible to significantly reduce the tax burden while complying with all legal requirements.

In the international taxation system two main principles apply:

Residence-based principle

All income of tax residents is taxed including income earned abroad.

This principle is considered more conventional, as it forms the basis of the OECD Model Convention.

Source-based principle

The state taxes income derived from activities on its territory.

Accordingly income received outside the state is not taxed therein.

Countries competing for capital often use the territorial taxation model. For example Singapore and Hong Kong exempt foreign (“offshore”) business income from taxation.

Other countries provide the same relief to individuals:

🇬🇧 United Kingdom (“non-domicile”)

🇮🇹 Italy (“Investor Visa Special Regimes”)

🇨🇭 Switzerland (“Forfait Regime”)

🇮🇪 Ireland (“SARP”)

🇪🇸 Spain (“Beckham Law regime”)

Our proposed tax planning strategy consists of applying the territorial principle of taxation to exempt income from taxes at all operational levels. For this a combination of Spanish personal tax residency and a Hong Kong company is used.

I. Advantages of the strategy

Tax benefit

26.41% Average corporate income tax rate in OECD countries	0% Corporate income tax in Hong Kong
42.5% Average personal income tax rate in OECD countries	24% — on the first €31,750 0% — on the remaining Effective personal income tax rate under the Beckham regime

Average total tax losses:

100% - 26.41% = 73.59% (corporate income left after tax)
100% - 42.5% = 57.5% (personal income left after tax)
73.59% * 57.5% = 42.31% (net remaining wealth)

When accumulating capital the entrepreneur would lose on average 57.69% of their profit. The proposed strategy allows avoiding such losses.

No administrative burden

A Hong Kong company does not require accounting or administration only archiving of invoices for audit purposes.

The residency scheme we propose implies exemption from declaring foreign assets including CFCs.

II. Strategy description

🇪🇸 Spanish residency

The territorial taxation principle in Spain is set by the Beckham Law which provides the following conditions:

income from non-Spanish sources is not taxed;
active income (understood as salary) is taxed at a quasi-fixed rate of 24% up to €600,000; amounts above are taxed at 47%;
wealth tax applies only to assets located in Spain;
there is no requirement to declare assets outside Spain including CFCs (Form 720).

🇭🇰 Company in Hong Kong

A Hong Kong company is registered for the client in which they may hold up to 100% of the shares.

This may be either a family/consulting SPV or an operational company — in any case the client’s incoming cash flows are consolidated there.

In Hong Kong companies are not subject to tax if they are not managed from Hong Kong and do not have counterparties there.

The Hong Kong company pays for the client’s personal expenses which are deductible for tax purposes.

If necessary the company may pay out dividends to the client once per quarter or once per year. Dividend payments from Hong Kong are exempt from declaration in Spain under the Beckham Law.

III. Tax risks and mitigation

Under the Beckham Law income is exempt from tax only if received outside the territory of Spain. If the Hong Kong company is managed from Spain and/or earns income on Spanish territory it is deemed a tax resident and must pay corporate taxes.

To exempt dividends from tax in Spain the client must:

not be a “dependent agent” of the Hong Kong company;
not create a “permanent establishment” of the Hong Kong company in Spain.

A “dependent agent” is a person authorised to conclude contracts on behalf of the company and who regularly concludes them. According to the modern OECD approach this also includes persons negotiating the terms of agreements on behalf of the company.

A “permanent establishment” is a place from which the business is conducted, i.e., has employees and an office. A home office of remote workers may also qualify.

To comply with these restrictions we recommend appointing a proxy or a management company as director of the Hong Kong company who will sign agreements on its behalf. The client would remain on the board of directors to manage and control the company.

IV. Structure setup costs

Expense item	1-year cost
Incorporation of a company in Hong Kong	$1,900
Opening an account in a Chinese bank	$7,000
Spanish residence permit (Digital Nomad)	$5,800

V. Ongoing maintenance costs

Expense item	Monthly	Annual	5 years
Company renewal in Hong Kong	$115	$1,400	$7,000
Company audit in Hong Kong	$185	$2,200	$11,000
Payroll tax	$635	$7,620	$38,110
Total:	$935	$11,220	$56,100