High-Tax Country Resident Planning To Go Offshore: Eastern Europe

If you are resident in Eastern Europe (which will be the normal situation for a native-born citizen of an Eastern European country) then you are taxable on your world-wide income and capital gains.

The tax regimes in most Eastern European countries are much more alike than they are different, due to the fact that they were constructed after the collapse of the Former Soviet Union with considerable input from western agencies such as the IMF, the World Bank, the EBRD, and of course in particular the EU, which they have now mostly joined, and which has had a major influence on their economic development.

That said, there are differences, which tend to become more marked with time as national policies respond to circumstances. Therefore the content of this section must be understood to be general, and any individual must absolutely take professional advice on their own particular situation.

Residents are usually subject to inheritance, gift and transfer taxes at rates which vary up to the top rate of income tax, often around 40%, although in some countries 'flat tax' regimes have been introduced at much lower rates.

Anti-avoidance legislation as applied to individuals is not well-developed in most Eastern European countries, so that there is little or no law dealing specifically with offshore companies, trusts or investment funds. However, the absence of law is no guarantee that zealous tax-officials won't try their luck, and opportunistic tax grabs are a notable feature of the still somewhat unsophisticated regimes in many Eastern European countries.

Due to the lack of anti-avoidance legislation, investments into offshore capital appreciation vehicles may be relatively safe, and in many cases it will probably be advisable to use trust structures. But it must be realised that the tax regimes in Eastern Europe are likely to develop rapidly, and the sudden imposition of a general anti-avoidance rule could have catastrophic consequences for anyone with substantial offshore assets. An Eastern European national intending to emigrate to an offshore destination will however probably choose to take the risk, as long as departure is reasonably imminent.

Personal investment locally (as distinct from business investment) is not often considered the best option by Eastern European citizens, due to economic and political uncertainty, and is certainly not advisable for anyone intending to emigrate, due to the prevalence of capital and exchange controls, which will impede eventual transfer of assets abroad.

Those Eastern European nationals with international connections or businesses usually try to arrange to receive income in the West, and may be able to ensure that it is paid offshore, thus avoiding the possibility of double taxation, and routing the money into a location from which offshore investments can be made tax-efficiently. Eastern European countries almost all have well-developed networks of double taxation treaties, so that tax paid overseas can normally be credited against local tax; but it is often possible to avoid this situation in the first place quite legally. Even after local tax has been paid on the foreign income, it is at least outside national capital and foreign exchange controls, which remain in place in most countries in the region, and is therefore freely available for onward investment.

Virtually all Eastern European countries have double taxation treaties with Cyprus and Malta, themselves both having offshore tax regimes. This oddity results from arrangements made by the Former Soviet Union, and it will often be the case that foreign trade or employment by a foreign employer will have been arranged through intermediary companies in Cyprus or Malta. It follows that an expatriate may well be easily able to establish an offshore bank account in one of these two countries, which can receive employment income, from which investments can be made, and which can receive investment income. However, the EU Savings Tax Directive came into force in July, 2005, and this may reduce the attractions of a bank account in such places, at least for EU residents..

In choosing between various types of offshore asset for investment purposes, the main consideration for a person intending to emigrate will be his or her intended residential plans following departure from Eastern Europe. If the person plans to move on to an offshore jurisdiction, then investment choices will not be much constrained, but if the plan is to emigrate to a high-tax jurisdiction, then it is vital to study the anti-avoidance legislation of that jurisdiction before acquiring offshore assets. Some jurisdictions tax offshore assets more severely than domestic assets and 'look through' trust arrangements, while others accept trust assets as being outwith the tax net.

This DIY guide can be used to explore high-tax country tax regimes for residents by specifying 'high-tax country name' and 'high-tax country resident intending to stay put'.

www.lowtax.net contains extensive information on the investment, tax and legal regimes in 35 of the main offshore jurisdictions. Further information is available in our Investment Information Providers Section, and the four main types of offshore investment are described in the Guide to Offshore Investment on this site.

NB: The suggestions given above do not constitute investment advice. They are intended only to assist individuals in finding appropriate professional advice, which is essential for anyone planning offshore investment.