HNWI Scheme in the light of double tax treaties

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In 2011 Malta introduced new beneficial scheme designed for individuals: High Net Worth Individual (HNWI) scheme. The scheme raised some questions about the status of its beneficiaries in the context of double tax treaties. Namely, can HNWI be classified as a resident of Malta in the light of art. 4 MC OECD (and relevant double tax treaties concluded by Malta) and therefore benefit from the treaty provisions?

1.Definition of a resident and remittance basis taxation

The treaty applies to persons who are residents of one or both of the contracting states. Article 4 MC provides the definition of a resident as a person “liable to tax therein – by reason of his domicile, residence or any other criterion of a similar nature”. In the same time it excludes persons liable to tax in that state only on a source base (some states omit this last sentence – e.g. Singapore, also in double tax treaty with Malta, what may lead to interpretation difficulties).

Therefore, for HNWI to enjoy treaty benefits it must be proven that such a person is liable to tax in Malta in the meaning of double tax treaties and domestic law.  The possible difficulties come from the remittance based taxation (applicable to HNWIs) which is not clear cut comprehensive liability to tax required by art. 4 MC. Taxpayers falling under this type of tax liability are taxed on income or capital arising in Malta or any income arising overseas and remitted to Malta. As a result, “comprehensive liability to tax” may be questioned and so the opportunity to benefit from the treaty provisions. There are however arguments in favour of HNWIs as persons being Maltese tax residents enjoying treaty benefits.

2.Why could we apply the treaty to HNWI

Firstly, a brief look at Maltese double tax treaties shows that in art. 4 no distinction leading to extraction of the third category (the non-domiciled resident, next to a non-resident) is made – even in treaties with states which have similar systems (US, UK) no special provision exists. Therefore, OECD does not explicitly exclude persons taxed upon remittance base from art. 4 MC OECD and its definition of a “resident”.

Secondly, the most important element of the “residency” is personal attachment with the jurisdiction claimed as a resident one. In this respect, art. 4 points out, among others, person who is “taxable by the reason of … domicile”. The word “domicile” in this context however does not refer specifically to the domicile concept used in some states for remittance base taxation purposes but to the feature which may prove personal attachment with particular jurisdiction. In case of HNWIs this link with Maltese jurisdiction should be considered on the basis of all relevant circumstances such as:

1)      Owning or renting a property in Malta;

2)      Time spent in Malta and in other jurisdictions;

3)      Having a family relocated to Malta, friends in Malta – in general, a center of personal interest;

4)      Maltese insurance (also required by the scheme, anchors a person in administrative and insurance system of the state).

To sum up, the construction of HNWI scheme combined with factual circumstances and domestic law approach allow treating beneficiaries of this system as Maltese residents for tax purposes.

Finally, it must be noted that combination of taxation of Maltese-sourced income at standard statutory rate and taxation on remittance base of foreign income remitted to Malta may potentially create unlimited tax liability. The remittance basis creates objective taxation on foreign-sourced income but with sort of a deferral (regardless practical side of this solution). The situation of the person subject to remittance base taxation is similar to the situation of persons enjoying special tax treatment (like charity organizations) or tax holidays (e.g. free economic zones). They are objectively subject to tax in particular jurisdiction as residents but by mere fact of fulfilling some requirements they enjoy no effective taxation (they are not subjectively taxed). If however they fail to comply with prescribed conditions, a state has full right to tax then effectively. Similarly, in case of remittance base taxation, a state keeps its taxing right but no effective taxation occurs as long as prescribed conditions are met.

To sum up, although the Commentary to OECD MC might leave some space for disadvantageous interpretation, there are arguments for successful application of HNWI scheme as a Maltese tax residency scheme also from international tax law point of view. 

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