Relocated individuals can be hit with an unexpected fine: how to avoid this

Relocated individuals in Europe often learn about the tax intricacies of their new lives rather late in the day: when they receive a fine. An expert from Nordic Star talks about potential pitfalls in taxation for which you should be prepared when relocating from Russia to an EU country

by Andrei Gusev, the Managing Partner at Nordic Star

Based on the experience of Nordic Star’s experts, the majority of relocating individuals come to a new country of residence in the European Union without any ‘tax preparation’. However, the lack of knowledge of tax legislation in the country of arrival entails a risk of fines being charged and, in certain cases, of criminal liability being imposed.?

A tax resident before you know it

It is widely believed that tax residency depends only on the number of days an individual stays in a country. However, many people completely ignore other factors that connect an individual to a new place of residence and that European tax authorities take into consideration when they determine the tax status of a newcomer, namely whether:

-?????? an individual rents or buys immovable property,

-?????? his/her children attend a local school,

-?????? he/she buys communications services,

-?????? he/she is a member of a club, and the like.

Indeed, a newly arrived individual becomes a tax resident in most European countries if the individual resides in them for more than 183 days during a calendar year. It is crucial, however, to bear the following in mind: the country where the individual’s family live or his/her children go to school may give rise to tax residency even if the relocated individual stays in the country for less than 183 days.

Tax authorities may disregard for 3 to 5 years on average a new taxpayer who has come from a different country. However, the consequences are distressing for such a person if he/she does not file a tax return and is subsequently revealed not to have paid any taxes in the new country starting from the calendar year in which he/she started to live there on a permanent basis.

Unexpected new taxes

When an individual becomes a tax resident of a European country, the individual is obliged to disclose in his tax return all his income in all countries and from all sources. Such income will be subject to personal income tax in the country of the new tax residency according to the tax rates of this country, taking into account taxes which were withheld in the source countries when such income was paid out (under the terms of double taxation treaties that are in effect).

Moreover, in Europe an individual may also be subject to such taxes as he has never come across before. For example, he may be obliged to pay a wealth tax which is levied, in particular, in such countries as Spain, Italy and France.?

For example, in Italy the rate of wealth tax is 0.76% (it is levied on the value of immovable property). In France, depending on to which of six categories property belongs, the rate may reach as high as 1.5%. In Spain, the tax rate varies from 0.2% to 2.5% depending on the aggregate value of an individual’s total assets as at 31 December and on the region of Spain where the individual resides (if the individual’s means exceed EUR 3 million, the rate will be from 1.7% to 3.5% regardless of the region of residence).

An important detail is that tax is levied on property in all countries. Thus, a tax resident of Spain who does not apply a special tax regime (see below) will have to pay tax on his real estate in Russia if the aggregate value of taxable property exceeds the threshold established in the relevant region of Spain.

Penalties for not paying taxes

In France, filing a tax return after the deadline or a failure to file one at all may entail a fine ranging from 10% (if an individual voluntarily notifies tax authorities) to 40% of the amount of the tax due according to the tax return. In Italy, the fine will be 30% of the tax that was either unpaid or was paid after the due date. In Spain, filing a tax return after the deadline may entail a fine which will increase progressively: by 1% for every month of the delay (by 15% if the tax return is filed 12 months after the due date) of the amount of the tax payable according to the tax return filed late.

Depending on the amount, European countries also impose criminal liability for the non-payment of taxes. For example, if tax authorities in Spain suspect such non-payment, they will conduct a tax audit for five years (the year of the audit plus four preceding years). If the outstanding amount is higher than the threshold of EUR 120,000, the individual will face criminal liability. During the tax audit, to identify or verify the amount of income, all aspects of the individual’s life in Spain for the period concerned will be scrutinized (for example, the individual’s purchases, and in general what is referred to as ‘lifestyle’). Moreover, criminal liability arises in addition to a penalty and a fine for late payment, which may vary from 50% to 150% of the outstanding amount.

The Beckham Law, and other special regimes

Individuals who have just come to a new country often miss out on the opportunity to apply special tax regimes that would allow them to pay income tax at a preferential rate or, for example, exclude certain types of income from the tax base. It is not uncommon in such cases for individuals to be simply unaware of special regimes and to miss the deadlines for filing an application to apply them.

For example, a special tax regime in Spain is referred to in professional slang as the Beckham Law (David Beckham was the first of the celebrated foreigners who benefited from it). An application to apply this regime must be filed before the end of the first calendar year of residence in Spain provided that the individual was not a tax resident of Spain for 10 years previously. The Beckham Law may be applied for five years and in general provides for tax to be levied on an individual’s income only from Spanish sources at the fixed rate of 24% (47% if the amount exceeds EUR 600,000 per year) and on property in Spain if the value of such property exceeds a certain threshold.

The special tax regime in Italy, in turn, is granted for 15 years and envisages that a fixed amount of tax of EUR 100,000 be paid yearly on all income of the individual from non-Italian sources. It is possible to apply for the regime no later than the filing date of a tax return for the respective year provided that the applicant was not a tax resident of Italy for the last 9 years.

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