Expatriate Executive: Eastern Europe

Summary of local taxation situation

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 expatriate must absolutely take professional advice on their own particular situation.

Taxation of resident individuals applies to world-wide income, while taxation of non-resident individuals applies to local-source income only. Residence occurs when (usually) 183 days or more are spent in a country. Income includes all the usual categories, and capital gains are normally counted as taxable income.

In some Eastern European countries (including Poland and the Czech Republic) expatriates can benefit from taxation of local-source income only, even when resident, if they are employed by a foreign company, or one with foreign involvement.

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 some countries have introduced 'flat' taxes 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.

Offshore Investment Opportunities

Clearly, the availability of a special tax regime for expatriate residents is a key factor, and checking this out will be a first step for most individuals considering a period of residence in Eastern Europe.

If a special regime is not available, then world-wide income is vulnerable to taxation, and expert advice is needed before residence begins, to shelter foreign income as far as possible. 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.

With or without a special tax regime, investment locally is most unlikely to be advisable. Many expatriates will receive the bulk of their income in the West, and may be able to ensure that it is paid offshore, thus avoiding the possibility of double taxation. The best situation is to be able to take advantage of a special expatriate tax regime, and to receive salary into Switzerland, Luxembourg, or another low-tax area from which offshore investments can be made tax-efficiently.

Virtually all Eastern European countries have double taxation treaties with Cyprus and Malta, themselves both having had offshore tax regimes, somewhat modified when they joined the EU. This oddity results from arrangements made by the Former Soviet Union, and it will often be the case that an employer will choose to pay expatriate (and indeed local) staff via 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 operation in July 2005, and this has somewhat reduced the attractions of a bank account in such places.

In choosing between various types of offshore asset for investment purposes, the main consideration for an expatriate will be his or her intended residential plans following departure from Eastern Europe. If the expatriate plans to move on to an offshore jurisdiction, then investment choices will not be much constrained, but if the plan is to return 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.