Will the Golden Visa Boom Continue in 2021?

In some circles 2020 became the year of the second passport.

For a cool THB 10 million (about $334,000), Thailand is doling out residency to investors willing to build residential real estate. St. Kitts and Nevis slashed the cost of its golden visa by $45,000 — a special COVID-19 discount — as if its Caribbean rainforests and beaches weren’t attractive enough for a second home. Russia, a latecomer to the golden visa world, reportedly will soon open to investors looking for a second home. Applicants must prove they are genuine: A language test may be involved.

High-net-worth individuals are a special currency in these pandemic times, and some are looking to be courted. Golden visa schemes have long flourished in times of economic stress (for example, the 2008 financial crisis), but they’ve taken on a special significance in the era of COVID-19. Potential tax savings aside, the allure for investors living in countries that have weak passports and are subject to visa approvals is strong and will continue to be, even after general travel restrictions are lifted.

Governments know this, causing some unlikely places to try to cash in on the golden visa market. Dominica is famous in the Caribbean for being the “Nature Isle,” an eco-tourism haven with large stretches of untouched land. That didn’t stop the country from unveiling a new entrepreneur visa program at the end of 2020 offering a pathway to citizenship for a minimum $50,000 investment, a relative steal. It may seem unusual for a country that is heralded for being a nature preserve. But one of the real draws is likely the access to the broader world — a Dominican passport offers visa-free travel to 140 countries and the EU Schengen Area. Also, Dominica does not impose a wealth or inheritance tax.

In a year of considerable hardship, 2020 cast a spotlight on the mobile capital of the rich, the efforts to court that money, and the inevitable backlash. For a more micro look at this, the EU provides a perfect example with the European Commission litigating against golden passport programs offered by Cyprus and Malta.

Above all, these activities highlight the tension governments face in trying to boost investment and attract capital in an uncertain time in which they also must take actions that may drive investment and capital away. In 2021 these dynamics aren’t necessarily going to quickly disappear despite the availability of coronavirus vaccines. Repair and recovery during the next COVID-19 pandemic phase could highlight this push and pull even more depending on how governments respond.

Looking to the Rich?

Amid the chaos of the pandemic, San Francisco quietly introduced a pay gap tax targeting companies with CEO pay rates at least 100 times that of their median worker’s salary. City officials thought the measure would be a good solution to reduce economic inequality and fund healthcare. Voters seemingly liked the revenue estimates they received: between $60 million and $140 million annually. They approved the measure in November 2020.

But the San Francisco tax has been trotted out as an example of what’s wrong with California — high taxes that are prompting several tech companies, like HP and Oracle, to move their headquarters to Texas. Alongside them, high-net-worth individuals are threatening to leave as lawmakers introduce wealth tax proposals. Pre-pandemic, discussions about raising taxes on the wealthy, and about wealth taxes in particular, tended to be rebutted with one popular argument: Raising taxes on the wealthy is best done during wars, pandemics, and major economic crises. Now that we are in the middle of a pandemic, the general question is whether this is, in fact, the right time.

Argentina has responded to the pandemic with a new solidarity tax on wealthy taxpayers, to be assessed on their domestic and foreign assets. The one-time measure will hit Argentines with at least ARS 200 million (about $2.4 million) in assets with a graduated tax, starting at 2 percent and maxing out at 3.5 percent for domestic assets worth over ARS 3 billion. Assets held abroad will be taxed from 3 to 5.25 percent.

Net-wealth taxation has become a central presidential campaign platform in some Latin American countries. Bolivian President Luis Arce rode to victory in October 2020 on a campaign that focused on taxing the wealthy. He is planning to implement a wealth tax on those with more than BOB 30 million (about $4.3 million). Finance Minister Marcelo Montenegro says it could potentially net over $14 million dollars, according to Telesur.

Ecuador’s election in February is hinging on the economy and anti-corruption reforms. Presidential candidate Andrés Arauz, who is a top contender, is campaigning on a wealth taxation platform. Arauz envisions an initial one-time 2 percent tax on assets exceeding $1 million, but eventually wants to implement a permanent wealth tax, according to the Financial Times.

In Europe, Spain already has a wealth tax, and decided to raise the top rate on taxpayers with assets over €10.7 million from 2.5 percent to 3.5 percent. The decision stands out on a continent that has cycled through wealth taxes, with only a small handful still standing. But it could also wind up being more symbolism than action. Spain’s national government determines the wealth tax rate, but it can be made moot by the country’s autonomous communities, which administer the tax but can offset it through credits. Madrid is the only region that does this — it credits 100 percent of wealth tax payments — but it is one of the country’s most powerful regions. Finance Minister María Jesús Montero has already suggested that the government set limits on wealth tax rates.

The country is also increasing individual tax rates. Taxpayers earning over €300,000 will see an increase from 45 percent to 47 percent. Spain is anticipating it will collect €580 million in 2022.

In the United Kingdom, Prime Minister Boris Johnson has flat-out said that wealth taxation is not an option. “We need jobs, jobs, jobs not tax, tax, tax,” he told reporters last summer. Chancellor of the Exchequer Rishi Sunak has spoken similarly. But that hasn’t stopped the topic from dominating the headlines and academic circles alike — especially since an independent group of U.K. academics released a widely circulated wealth tax report in December 2020 suggesting that the U.K. government enact a one-off tax. According to their calculations, a 5 percent tax on assets over £500,000 could raise roughly £260 billion over the next five years. Meanwhile, Sunak has hinted in interviews that the government is thinking about tax increases.

Kenya doesn’t have a wealth tax yet, but the government is revisiting the idea because this time around it might actually work. In 2018 the government tried to increase taxes on wealthier taxpayers, but the idea was vastly unpopular. This time the government is folding taxation of high-net-worth individuals into its post-COVID-19 economic recovery plan, although details have yet to be released. A similar story is playing out in South Africa, which explored wealth taxation in 2017 but ultimately shelved it. But the country’s national treasury is now reportedly thinking about folding a wealth tax proposal into the country’s upcoming national budget, to be released in February.

Courting the Boomerang

As some governments consider raising taxes on the wealthy, others are moving in a different direction, trying to attract wealthy individuals via golden visa opportunities. But not all is golden in this world. In October 2020 the European Commission opened infringement procedures against Cyprus — which has since suspended its golden visa program — and Malta, alleging that both countries were offering citizenship without requiring a genuine link to their countries. The pandemic reportedly caused Greece’s golden visa application numbers to crater over 2020.

But there’s seemingly ample space in the market. As the EU cracks down on golden visa programs and investors search for cheaper options, some countries are seizing the opportunity. Meanwhile, anecdotal reports from citizenship advisory firms indicate that inquiries are climbing worldwide.

London-based Henley & Partners says it has seen a 25 percent increase in inquiries from high-net-worth individuals asking about residence-by-investment programs. Most of these people are coming from emerging markets, as has traditionally been the case. India, Pakistan, Nigeria, and South Africa filled out four of Henley’s top five countries for 2020.

Between November 2019 and November 2020, inquiries from India and Kenya as a percentage of the firm’s total climbed into the double digits — 61 percent and 30 percent, respectively. Henley opened a new India office in the middle of the pandemic to handle the demand. The number of inquiries from Kenya jumped 116 percent over the period, according to the firm.

But investors from developed countries are interested too. The United States shot up to second place on Henley’s 2020 list following a 235 percent increase in inquiries. In 2019 the country was in sixth place. Canada saw a similar dynamic, climbing from 16th place to eighth place, according to the firm.

Financial advisory firm deVere Group says it saw inquiries grow by 50 percent from similar countries, as well as Russia and countries in the Middle East and East Asia.

What does this surge tell consultants? Henley and deVere both say it indicates that second passports have become more of a practicality for investors than an optional luxury item.

“Whether it be for personal reasons, such as to remain with loved ones overseas or be able to visit them, or for business reasons, a growing number of people are seeking ways to secure their freedom of movement as they have faced travel restrictions which are, typically, based on citizenship,” Nigel Green, deVere CEO said in December 2020.

Meanwhile, some countries have seized on the COVID-19 pandemic as an opportunity to introduce or relaunch golden visa programs and rules. The United Arab Emirates in November 2020 announced a new 10-year golden visa for professionals in lucrative fields like medicine, biotechnology and electrical engineering, and artificial intelligence. It also loosened its foreign business ownership rules. Up until December 2020, foreign nationals could not own a UAE business without having a citizen sponsor. But recent legislation now allows 100 percent foreign ownership of UAE businesses in most cases. One would be remiss to ignore the potential tax savings involved considering the UAE federal government does not impose a federal income tax or a general corporate tax. The ultimate benefit is that foreign-owned businesses registered in the UAE and foreign residents are eligible for UAE tax treatment once they obtain a tax residency or tax domicile certificate.

Russia’s proposed golden visa program will offer at least two avenues for permanent residency: invest RUB 10 million (about $135,000) and hire at least 10 Russian workers or buy at least RUB 30 million in property or government bonds, according to local reports. The government is hoping to court investors from Africa, Asia, and the Middle East, and the tax savings could be substantial. Russia imposes a 15 percent personal income tax on worldwide earnings, compared with a top rate of 24 percent in Nigeria, 30 percent in India, and 45 percent in South Africa.

Affording Tax Incentives

Investment certainty is a huge part of the equation for global elites, and those concerns have been amplified by COVID-19. At the beginning of the pandemic, governments rushed to implement tax incentives, freezes, and other measures to boost personal and corporate liquidity. The costs to government coffers are still unfolding, but a question to ask in 2021 is whether governments can still afford this. Or will we see a rollback of incentives, COVID-19-related or otherwise, to deal with potential budget crises? Some of this activity is already appearing in Jamaica and Kenya.

After several decades of very little economic growth, in 2020 Jamaica launched an ambitious economic stimulus plan, including an JMD 18 billion (about $125 million) tax cut package slashing both corporate and individual income taxes. Some measures, like a reduction in the general consumption tax rate, were designed to boost tax compliance. Others, like a reduction in the country’s assets tax on financial institutions, were designed to reduce burdens on business.

Over the past few years, Jamaica has gradually revised its assets tax regime — which was widely regarded as distortionary — to reduce burdens on business. Initially, the country imposed two types of assets tax: a 0.25 percent tax on the “taxable value” of assets held by government-regulated deposit-taking institutions, securities dealers, life insurance companies, and property and casualty insurance companies; and a flat, sliding-scale tax from JMD 5,000 to JMD 200,000 (based on the value of their assets) on nonfinancial institutions.

Jamaica repealed the assets tax for nonfinancial institutions in 2019 to reduce costs for micro and small businesses and better align taxation with profitability, according to the Ministry of Finance. In 2020 the ministry followed up with a proposal to halve the country’s assets tax on financial institutions from 0.25 percent to 0.125 percent, effective from 2021.

But once COVID-19 hit, Jamaica had to walk back some of its plans and decided to keep the 0.25 percent rate for another year to fund its COVID-19 recovery. Minister of Finance and the Public Service Nigel Clarke has acknowledged that the assets tax ultimately is a tax on consumers and is “not good for monetary transmission.” But the money involved was too large to pass up. Retaining the current rate increases the country’s COVID-19 fiscal contingency fund from JMD 7 billion to JMD 10 billion.

The Ministry of Finance said the banking sector volunteered to pass up the reduction, but behind that there’s been considerable dissent and concern over how Jamaican institutions can remain competitive in light of the tax.

Kenyan lawmakers addressed their sustainability issues by voting in December 2020 to undo nearly all their COVID-19-related tax cuts because they believe the country cannot afford them.

In April 2020 Kenya temporarily cut both its corporate and highest individual income tax rate from 30 percent to 25 percent and cut its VAT rate from 16 percent to 14 percent under the Tax Law (Amendment) Act, 2020. But the old rates kicked back into effect on January 1, after the Kenyan Parliament voted to reverse the cuts.

The only COVID-19-related tax cut that remains is a full exemption from pay-as-you-earn tax for individuals making less than KES 24,000 (about $218) per month.

The government estimates that cuts will ultimately cost Kenya KES 65 billion in revenue through December 31, 2020. Those losses will affect the country’s general economic recovery as well as progress on its top four priority programs — universal healthcare, affordable housing, manufacturing, and food security — according to the national treasury.

Before the pandemic hit, Kenya was already struggling with considerable levels of debt. It is on track to reach 70 percent of GDP by 2023, according to the IMF. In this environment, eliminating tax cuts was more or less unavoidable, according to Musalia Mudavadi, leader of Kenya’s Amani National Congress party.

These abrupt changes could put considerable strain on businesses in such an unprecedented time and sink taxpayer confidence. For example, Aly-Khan Satchu, a Nairobi-based investment adviser, told Reuters that the Kenyan government is “deploying knee jerk responses.” Given that sentiment, it’s not a tremendous leap to consider investment alternatives, particularly if governments are doing the courting.