08/21/2024. Remigijus Šimašius.
Competitiveness is the new slogan in the European Union (EU). About time too, since there is a real danger that overregulation and overtaxation will leave Europe behind the frontrunners in global competition. But the issue of tax, and especially of tax competition within Europe, raises a fundamental question: does Europe have to be more harmonised in order to be stronger, or less harmonised.
It is said by officials and advisers that tax differences among European countries make it difficult to operate in Europe, and that tax competition is eroding European countries’ tax base. So the typical story we hear about Europe and taxes is one of constant struggle towards harmonisation. A deeper look, however, shows quite a different picture: Europe is losing high net worth individual (HNWI) taxpayers not because of competition inside Europe, but because of fierce competition from non-EU countries. Only those EU countries which compete more aggressively succeed in attracting high net worth and talented people on a broader scale.
As global competition for talent intensifies, EU countries are increasingly employing tax incentives to attract skilled professionals, entrepreneurs and investors. These incentives, particularly in the realm of personal income tax and social security contributions, create a varied and dynamic tax environment across Europe.
The EU's Struggle to Retain Wealthy Individuals
Recent data indicates that the EU faces significant challenges in retaining wealthy individuals, who are increasingly relocating to more tax-friendly jurisdictions. According to a report by Business Insider (2024), there has been a notable outflow of High-Net-Worth Individuals (HNWIs) from Europe to other regions due to more attractive tax regimes abroad. The report highlights that countries with high tax burdens are experiencing a net loss of wealthy individuals, who are migrating to jurisdictions with more favourable tax conditions and investment opportunities.
The reports of Henley and Partners (https://www.henleyglobal.com/) may help us to understand the global tendencies in HNWIs’ migration. The migration of HNWIs is driven by several factors, including lower tax rates, better investment opportunities, and more favourable regulatory environments in destinations such as the United Arab Emirates (UAE) and Singapore. This trend underscores the competitive nature of the global talent market and the pressures faced by EU countries to reform their tax policies to retain and attract wealthy individuals (Business Insider, 2024).
The Henley Private Wealth Migration Report 2024 highlights the top destinations for HNWIs, which are those that offer a combination of favourable tax regimes, political stability, robust economies, and high living standards. The countries attracting the greatest number of wealthy individuals in 2024 are the UAE, with 6,700 HNWIs, the United States (3,800), and Switzerland (2,100). Next comes Australia, which expects 1,600 HNWIs, followed by Singapore (1,500) and the United Kingdom (UK) with 1,200, while Canada is set to welcome 1,100 HNWIs. Greece is projected to attract 1,000 HNWIs, Portugal 800, and New Zealand 700.
Countries like China, India, and Russia are experiencing significant outflows of HNWIs for various reasons. China is projected to lose 15,200 HNWIs in 2024 due to slowing economic growth and geopolitical tensions. India's net loss is expected to be around 4,300 HNWIs, as many wealthy individuals seek better lifestyles, cleaner environments, and superior health and education services abroad. Russia, which has lost nearly a quarter of its HNWIs since 2013, continues to see outflows. In the UK, a net outflow of 9,500 HNWIs is anticipated, driven by the fallout from Brexit, political uncertainty, and changes in the “non-dom” tax regime (the system that has hitherto given certain resident “non-domiciled” tax status). Countries like South Korea and Taiwan are also losing HNWIs due to regional security threats and economic uncertainties.
As we can see, countries are losing or gaining HNWIs due to a mix of economic, political, and social factors, prompting many to seek more stable and prosperous environments. The rule of law and security issues are probably the most important criteria, but the presence or absence of a favourable tax regime is also one of the key factors.
The Spectrum of Personal Income Tax Policies and Incentives in the EU
The Tax Foundation's 2023 report highlights the considerable variation of income tax rates among EU nations. For instance, Bulgaria offers one of the lowest flat income-tax rates in Europe at 10%, making it highly attractive for high-income earners and business leaders. Conversely, Scandinavian countries like Sweden and Denmark impose higher progressive tax rates, which support comprehensive social welfare systems but might deter some high-income individuals from relocating (Tax Foundation, 2023).
Estonia provides a compelling example of tax innovation within the EU. Estonia has implemented a unique tax system that includes a 0% tax rate on reinvested corporate profits. While this is a corporate tax policy, it indirectly benefits individuals by fostering a growth-oriented environment. Estonia also offers competitive personal tax rates, including a flat rate of 20% on individual income, which is relatively moderate compared to other EU countries (Tax Foundation, 2023).
Many countries decide to rely more on targeted competition by offering favourable tax regimes for highly skilled expats and returning emigres by providing lower levels of income tax, as well as catering for HNWIs by, in addition, offering “non dom” – or Non-Habitual Resident (NHR) – schemes.
Portugal offers a notable example of how targeted tax reforms can enhance a country's appeal. In recent years, Portugal has introduced several tax incentives aimed at attracting both international talent and former emigrants.
One key reform is the NHR scheme, which provides significant tax benefits to new residents. Under this scheme, eligible individuals enjoy a flat income tax rate of 20% on Portuguese-source income and, in some cases, receive exemptions on foreign income for up to ten years. This initiative has successfully attracted many high-skilled professionals and retirees from around the world, bolstering Portugal's reputation as a favourable destination for talent (PwC, 2024).
Additionally, Portugal has made strides in simplifying its tax system and reducing social security contributions for businesses. These changes are part of a broader strategy to stimulate economic growth, attract foreign investment, and reverse emigration trends.
Italy has similarly leveraged tax policy to attract skilled individuals and HNWIs. In 2023, Italy introduced a tax regime aimed at enticing high-income earners by offering new residents a flat tax rate of 7% on income generated abroad. This scheme targets wealthy individuals who have moved their wealth overseas, incentivising them to return to Italy. The policy provides a considerable tax advantage compared to the country's standard progressive tax rates (KPMG, 2024).
The Italian government has also introduced favourable tax regimes for individuals in certain professions, including reduced social security contributions, aimed at fostering an environment attractive to high-skilled professionals and entrepreneurs (KPMG, 2024).
Greece has also embarked on a strategic overhaul of its tax system to attract international talent and investors. One of the key initiatives is the special tax regime for non-domiciled individuals, which offers significant benefits to expatriates and wealthy individuals. Under this scheme, Greece provides a flat tax rate of 7% on income earned abroad, making it an attractive option for high-net-worth individuals and retirees seeking favourable tax conditions (KPMG, 2023).
Spain is another EU country actively using tax incentives to attract skilled professionals and investors. Spain has introduced several tax regimes designed to appeal to international talent, including the "Beckham Law," which provides significant tax benefits to foreign workers.
Under the Beckham Law, expatriates moving to Spain for work can benefit from a flat tax rate of 24% on their income, compared to the higher progressive rates applicable to Spanish residents. This regime is available for up to six years and is aimed at making Spain a more attractive destination for international professionals and high-income earners. Additionally, Spain offers favorable tax conditions for retirees and investors, making it a competitive choice for those seeking a beneficial tax environment (My Spanish Residency, 2024).
Cyprus is another example of how tax incentives can be used to attract skilled professionals. The Cypriot government has implemented several tax policies designed to make the country a competitive destination for international talent and investors.
One notable incentive is the Cyprus Non-Domicile Tax Regime, which offers significant tax benefits to individuals who are not domiciled in Cyprus. Under this regime, qualifying individuals enjoy exemptions on dividend and interest income, as well as substantial reductions in personal income tax rates. This policy is aimed at attracting HNWIs and professionals, enhancing Cyprus' appeal as a business and financial hub (Cyprus Next, 2024).
Additionally, Cyprus offers a favourable personal income tax rate structure, which benefits those in high-income brackets. The combination of low personal income tax rates and attractive incentives for non-domiciled individuals positions Cyprus as an appealing destination for professionals seeking a tax-efficient environment (Cyprus Next, 2024).
Denmark, despite its traditionally high tax rates, has introduced specific tax incentives aimed at attracting skilled professionals. The Danish "27% tax regime" offers a flat tax rate of 27% on income earned by foreign employees who relocate to Denmark for work. This scheme, which applies to certain high-skilled professionals, aims to make Denmark a more attractive destination for talent by reducing the effective tax burden for eligible individuals (BDO, 2024).
In Sweden, 25% of gross income is tax-free for foreign workers earning above €10,000 a month, and the period of this preferential taxation is to be extended from five years to seven years. In the Netherlands, immigrant employees may have up to 30% untaxed benefits from the employer. A proposal for a general 30% deduction from taxable income proposal is being discussed in Germany now.
The United Kingdom's Shift: Lessons from Policy Changes
The recent shift in the UK’s tax policy illustrates the real-world consequences of altering tax incentives. Historically, the UK attracted a significant number of highly skilled professionals and entrepreneurs due to its favorable tax environment, including tax breaks and reliefs for high earners.
However, recent policy changes, including the reduction and removal of certain tax reliefs, have led to a noticeable shift in talent migration. High-income earners and skilled professionals are increasingly seeking more tax-friendly jurisdictions, contributing to a net outflow of talent from the UK. This shift not only affects the country’s talent pool but also has significant implications for public finances, as the loss of high earners translates into reduced tax revenues (UK Treasury, 2023).
As mentioned above, nearly 10,000 HNWIs were predicted by Henley to leave Britain in 2024 due to mounting economic and political challenges, which had been further exacerbated by Brexit and by (then upcoming) elections. This migration is driven by dissatisfaction with the current investment climate and concerns over policy changes, including the potential end of the non-dom tax regime and increased taxes on estates and private education (markets.businessinsider.com).
The UK’s experience underscores the critical role that tax incentives play in shaping talent migration and highlights the broader impact on economic performance and public finances.
The Impact of Tax Harmonisation Efforts
Amid these diverse national approaches, there is a growing push within the EU for tax harmonisation. Initiatives for harmonising tax policies are driven by a desire to simplify cross-border business operations, prevent tax-base erosion, and counteract harmful tax practices.
According to the EU's 2024 Taxation Report, harmonisation efforts include proposals to standardise personal income tax rates and align social security contributions. Proponents argue that these measures could create a more predictable and equitable tax environment across the EU, reducing the competitive advantage that some countries currently hold due to lower tax rates (European Commission, 2024).
Critics argue that this could undermine the competitive edge of individual countries, reducing their ability to tailor tax incentives to attract talent and investment. Tax competition acts as a mechanism to control government spending and encourages fiscal prudence. By allowing countries to offer competitive tax policies, it promotes a dynamic and responsive economic environment. The balance between harmonisation and competitive tax policies remains critical in maintaining the dynamic nature of European economies.
Conclusion
The European Union must be more ambitious and more competitive. Allowing countries to compete should be part of the strategy, and individual countries know this. The temptation that exists within the EU to forbid competition among member states (which has been a dominant element of tax harmonisation so far) might bring temporary benefits to those countries which are less competitive and slower. But we have neither data nor analytical insights that would suggest that these steps contribute to the competitiveness of the EU as a whole. On the contrary – it often kills the islands of European competitiveness. Individual member states understand this on a practical level, and they know how to attract talent – better, it seems, than the European Commission!
References
- Business Insider. (2024). Millionaires’ Migration: How Wealthy Individuals are Shifting Their Tax Burden. Retrieved from [Business Insider](https://www.businessinsider.com/millionaires-migration-hnwi-wealthy-tax-breaks-investments-business-owners-immigration-2024-5)
- Cyprus Next. (2024). Cyprus Taxes. Retrieved from [Cyprus Next](https://cyprusnext.com/taxes/)
- European Commission. (2024). Annual Report on Taxation. Retrieved from [EU Taxation](https://taxation-customs.ec.europa.eu/news/annual-report-taxation-art-2024-tax-mix-takes-future-challenges-2024-07-03_en)
- KPMG. (2024). Italy: Taxation of International Executives. Retrieved from [KPMG](https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2024/01/fa24-008.pdf)
- My Spanish Residency. (2024). Taxes in Spain. Retrieved from [My Spanish Residency](https://www.myspanishresidency.com/taxes-spain/)
- PwC. (2024). Portugal: Personal Income Tax and Social Security Contributions. Retrieved from [PwC](https://www.pwc.pt/en/pwcinforfisco/statebudget/pit-and-social-security.html)
- UK Treasury. (2023). Impact of Recent Tax Policy Changes on Talent Migration. Retrieved from [UK Treasury](https://www.gov.uk/government/organisations/hm-treasury)
Bình luận