Author: Giovana Ferreira

Economic literature is unanimous in stating that several factors influence the flow of direct investments and immigration.1 These include tax policies, infrastructure, local markets, labor opportunities, and, mainly, the quality of life.

In a moment that the United States, the largest economy in the world, is supposed to implement a Copernican twist toward an internal tax policy focused on its own demands, why should other countries dismiss the possibility of implementing their own tax policies through the adoption of special tax regimes such as those to attract new residents?

The legal design of new residents’ tax regimes should focus on three pillars: constitutionalism, tax policy, and global tax avoidance rules. Those regimes encompass programs employed by countries to attract new taxpayers. Over the last few years, citizens of different nationalities have
been migrating, driven by distinct factors that include new residents’ tax regimes. This generally involves the grant of tax exemptions for both active and passive foreign income. The oldest and best-known program of this kind is the English non-dom regime, which is now semi-extinct.

It was based on the equation of new residents’ foreign income taxation as nonresidents.

Evidently, this kind of regime raises theoretical and practical questions about constitutional
power limitations, tax competition, and fairness. Although this topic may not seem novel in
terms of international taxation (for example, tie breaker rules in article 2 of the OECD model income tax treaty or exit tax rules), double taxation treaties were not designed to address this issue comprehensively. They are ill-equipped to manage this emerging global diaspora.

Post COVID-19 dynamics have amplified this paradox regarding new tax regimes for foreigners: While countries promote residency visas with new tax regimes, they simultaneously enforce stricter global antiavoidance rules, such as controlled foreign corporation legislation for individuals and exit tax mechanisms.

This scenario creates a new form of tax competition among countries. On the one hand,
some countries aim to attract individuals by exempting foreign income for new residents; on the other hand, large and developed economies strive to amplify their revenues, taxing nondistributed profits or gains from individuals, as well introducing new taxes on gross income and property. The question is whether there is a right or wrong approach from international tax law. The compatibility of these regimes with tax principles should be established case by case, through the evaluation of each country’s fiscal policies and not through a global approach made by international institutions.

 

National Tax Policies and Specific Tax Regimes

The relationship between national economic goals and new residents’ tax regimes is evident. No country will establish a special tax regime without a macroeconomic goal. Consider two examples: golden visa programs (for example, Greece) and programs designed to attract digital nomads and highly qualified professionals (for example, Spain). The first seeks to attract new taxpayers through foreign investments in the most attractive sector of the Greek economy, the real estate industry.

The second aims to attract new individual taxpayers to expand its tax base and social security contribution revenues.

The latter addresses Spain’s public pension deficit, one of the country’s main macroeconomic problems.
For this reason, all new tax residents must contribute to Spain’s social security system. Another example stems from two intersecting tax policy measures. Following Brazil’s 2013 tax amnesty act, many Brazilians migrated to Portugal, attracted by the nonhabitual resident (NHR) regime.

However, this kind of regime often raises conflicts with international anti-tax avoidance measures.

For example, there are tensions between Portugal’s NHR regime and local and European antiavoidance rules such as CFC legislation for individuals and exit tax mechanisms. Whereas the NHR regime is based on a single law, Portugal’s CFC framework is very complex. It encompasses jurisdictional, transactional, and conceptual approaches, adding significant complexity and leading to legal disputes arising from antinomies, confronting criteria such as lex specialis versus lex generalis and international versus national law.

Regional Conflicts and Global Dynamics

The overlap between national and international legislation regarding individual tax regimes is even more problematic when it involves tax residency and so-called passive foreign investment companies.

It is one of the most sensitive issues when applied to new residents’ regimes because of the fact that it may confront different sets of antiavoidance rules. For instance, since 2021, some EU countries harmonized transparency regimes for individuals while implementing corporate-focused CFC directives. In attempting to curb the use of holding companies for individuals, the EU inadvertently created its own set of favorable regimes for personal foreign investment companies previously existent in some EU state members.

It has created new windows for disputes in the EU’s Court of Justice, through the legal conflicts that stem from the inability to enforce CFC rules when they conflict with EU foundational principles of free movement of capital and persons. Besides, the net of bilateral tax treaties is also more of a hindrance than a help.

Conventional rules either are inapplicable (for example, the incompatibility of CFC rules with treaties) or place foreign investments in discriminatory positions, challenging article 24 of the OECD model convention. This is evident in treaties with dividend exemption clauses, especially given that some countries proficiently use tax and fiscal incentives as a way of bringing in foreign direct investment.

 

A Case-by-Case Perspective

Although new resident regimes aspire to legitimacy, they face pushbacks from hard and soft antiavoidance rules.  In turn, there is a battle between principles of fairness and constitutional supremacy to implement tax incentives. In fact, there are other relevant elements at play when someone thinks about moving to another country.

Many of the jurisdictions that offer new residents’ regimes can provide a good quality and low cost of living, pleasant weather, good infrastructure, and a convenient geographical location. Therefore, this preexisting ecosystem can be a pillar to implement tax-base-shifting policies, which are in general a non-tax erosion measure.

In this context a new residents’ tax regime can be a wise choice for a country to attract skilled professionals and new contributors to their social security system.

New residents’ regimes can create tax loopholes, avoidance, and inequality, but this can be controlled by a dynamic review of the rules, like exit tax mechanisms (for example, the oneyear rule for capital gains taxation in the Italian regime). From another angle, the assumption that new residents’ tax regimes are always addressed to ultrawealthy individuals is incorrect.

For example, many of those who adhered to Portugal’s NHR regime were middle-income individuals seeking to reside in a quiet place with a low cost of living. In summary there isn’t a one-size-fits-all
answer to whether new residents’ tax regimes are good or bad.

From an individual standpoint, the right to freedom includes legitimate aspirations to change residence, considering the tax burden. In this vein, we all know that international tax law should respect constitutional national rules.

We’re living in a moment in which the speech from international institutions of the necessity of tax system’s standardization in the name of fairness is now being questioned. Countries have different characteristics and opportunities in terms of howmto increase the number of taxpayers, new contributors to support their social security systems, and so on. Conclusively, international tax law,
constitutional tax powers of countries, individuals’ freedom of movement, and fairness should be balanced for each situation regarding a new residents’ tax regime.

Text originally published on Tax Notes.

Moving forward with the process of adapting Brazilian legislation to the Global Anti-Base Erosion Rules, the government published Provisional Measure No. 1.262/2024, converted into Law No. 15.079 in December 2024, which partially adopted the OECD Pillar 2 rules.

The new rules aim to establish a minimum effective tax rate of 15% for large multinational groups operating in Brazil. The global minimum tax is known as a Qualified Domestic Minimum Top-Up Tax (QDMTT) or simply Top-Up Tax, which, as the name suggests, is a complementary tax. In Brazil, it will be paid as an additional to the CSLL (Social Contribution on Net Profits).

If the multinational group in Brazil assess an effective rate of the Corporate Taxes lower than 15%, considering all the Brazilian entities, an additional CSLL will be levied, corresponding to the OECD Top-Up Tax, until the percentage of 15% is reached.

Such rule applies to the multinational groups that have global annual turnover equal to or greater than € 750 million in at least two of the four fiscal years immediately preceding the one analyzed.

The point is that in Brazil the main factors that reduce the effective tax rate are tax incentives These include regional tax incentives in the SUDAM and SUDENE geographic areas, which will be the focus of this article.

Currently, legal entities with projects for installation, expansion, modernization or diversification in priority sectors of the economy for regional development in the SUDAM and SUDENE geographic areas are entitled to a 75% reduction in IRPJ (Legal Entities’ Corporate Tax) calculated on the basis of the operating profits (“Lucro da Exploração” in Portuguese).

The operating profits are based on the net profits adjusted by excluding amounts that are not directly related to the legal entity’s core business (for example, financial income that exceeds financial expenses and income and losses from equity holdings). This is because the tax incentive aims to relieve precisely the profits resulting from the legal entity’s core business, which promotes the development of the geographic areas of SUDAM and SUDENE [1].

The purpose of the Top-Up Tax is to tax excess profits, which correspond to the so-called GLoBE profit (net profit after adjustments provided for in the Law). On top of this amount, a percentage of the book value of investments in tangible assets and payroll expenses (“substance-based income exclusion”) will be excluded from net income.

The substance-based income exclusion allows, in theory, for revenues from the legal entity’s core business not to be affected by the GLoBE profit. However, the percentages applied to tangible assets and payroll expenses in Annexes VI and VII of Law No. 15,079/2024 represent only a partial exclusion, so that revenues from the legal entity’s core business will too be subject to the Top-Up Tax.

It should be noted, therefore, that there are two rules that were enacted for different purposes: (i) Pillar 2, which aims to tax surplus profits, partially excluding investments focused on the companies’ main activity; and (ii) the SUDAM and SUDENE tax incentive, which aims to reduce the income tax calculated on the profit arising from this main activity.

Let’s see how these rules interrelate: the multinational group that sets up its company in the SUDAM and SUDENE areas needs to prove its investments in geographic areas covered by the incentives. This is done by presenting, among other documents, invoices for the purchase of equipment/machinery needed for the production process (tangible assets).

According to current legislation, the profits derived from the companies located in SUDAM and SUDENE areas will benefit from a reduction in the effective rate of IRPJ. The reduction can be up to 75% of the IRPJ, resulting in an effective IRPJ rate of 7.5% on the basis for calculating the operating profit. The benefit does not apply to the CSLL.

On the other hand, the Top-Up Tax calculation base, corresponding to an additional CSLL, will be the GLoBE profit, which is calculated differently from the operating profits of SUDAM and SUDENE. If the calculation of GloBE profit results in an effective tax rate lower than 15%, the additional CSLL will be levied as a Top-Up Tax in order to reach this 15% minimum rate.

In practice, the government will reduce the IRPJ on one side and tax that same profit on the other.

This problem is not exclusive to the Brazilian legislation. There is a global discussion about the consequences of developing countries adopting Pillar 2, since most of these countries base their tax policies on granting incentives in order to attract foreign investments [2].

In this context, the OECD proposes that countries grant tax benefits through Qualified Refundable Tax Credits. This mechanism legitimizes refundable tax credits paid in cash or offset against other taxes not covered by Pillar 2.

In this model, Refundable Financial Credits are treated as income and do not reduce the basis for calculating income tax and the effective rate of corporate taxes. This is because, by including them in the denominator and not in the numerator of effective rate’s calculation formula, the effective tax rate tends to be higher, thus reducing the additional CSLL to reach the 15% minimum rate.

Specifically with regard to the SUDAM and SUDENE tax benefits, the law stipulates that the government may, from 2026, convert them into a Qualified Refundable Tax Credit. The intention is to bring them into line with the substance requirements adopted in the calculation of the GLoBE profit exclusion.

This change demands attention from the academic community and taxpayers. In recent years, under the pretext of “updating legislation”, the government has repeatedly reduced the financial benefit of tax incentives, including investment grants and interest on equity.

In order to ensure that changes to the SUDAM and SUDENE tax incentive mechanism to adapt to Pillar 2 do not damage taxpayers, the following approach is suggested: the value of the operating profit should be granted as a government credit (which is not taxed) that can be offset against the “CBS” (Contribution on Goods and Services) payable from 2027, or reimbursed in cash, adjusted by the SELIC rate.

This approach reconciles the objectives of the SUDAM and SUDENE tax incentives and the OECD’s own Pillar 2 guidelines with tax incentives for regional development. Furthermore, this approach already has precedents in our legal system, such as the system like the tax credit for green hydrogen established by Law 14.990/2024.

For all these reasons, if the conversion system is implemented in the way described, or in another way that achieves the same result, it can be said that the Pillar 2 rules and the SUDAM and SUDENE tax incentives are not incompatible.

Otherwise, antinomies could be created at the outset of the application of the Pillar 2 rules in Brazil, increasing litigation and, consequently, breaking down the desirable equity between companies located in the country.

[1] SUDAM and SUDENE geographic areas cover the states of North and Northeast of Brazil, which are historically less economically developed.

[2] Kostic, Svetislav V., Pillar 2 and alternatives for attracting (as well as keeping) foreign investments. Disponível em https://kluwertaxblog.com/2024/08/14/pillar-2-and-alternatives-for-attracting-as-well-as-keeping-foreign-investments/

 

Text originally published on JOTA.