Save thousands of dollars establishing a new Tax Residency
As promised before yesterday, I’m going to explain to you why personal tax residency is the key to reduce your tax burden and have the freedom to choose where you spend your hard-earned money.
First of all, I would like to clarify that contrary to what many people think and say, if you are a permanent traveler and you are not settled in any country, in particular, you have no tax residence and therefore you do not owe taxes to any government.
This is FALSE.
It’s been said that only two things in life are certain: death and taxes.
Permanent travelers that have not properly structured a new tax residency and are not paying taxes might be subject to taxes in the last country where they were domiciled, or in their country of citizenship, and it is likely that they are evading taxes.
Which is something that we strongly do NOT recommend?
The world provides us with many opportunities and options. With the help of professionals, and properly implementing a Flag Theory strategy, you can legally minimize your effective tax rate.
That being said, taxes are complex issues and even more so when we speak in cross-jurisdictional terms.
There are many factors to consider such as the tax laws of your country of origin, the place where your business is established or domiciled (more on that in next letters), the nature of your income, an asset class that you own, etc.
This is why you should always seek tax advice from a highly-qualified accountant or tax advisor before taking action. Potential downsides of not doing so are simply not worth it.
We can refer you to one in your jurisdiction. We have built a global network of top-notch CPAs, financial advisors and tax attorneys over the last 6 years.
Why saving money on taxes is so attractive
The following is NOT tax advice but will help you understand how implementing the proper personal tax residency strategy will allow you to increase your bottom line by double-digit percentages.
Logically speaking, there are two ways to get more money in your pocket:
Increase your net income
You dedicate a lot of valuable time of our life and assume high risks to increase your earned or passive income.
You can take simple and legal steps to take pay 30% or 40% (or even more), less in taxes without requiring any extra work, new investment or risk. This can be accomplished by just applying the proper internationalization strategy.
I will tell you how.
Each country has different tax laws and you may be able to benefit from specific articles given your personal situation and circumstances. However, in general, we can classify them into three large groups of countries that tax individuals based on their residency.
- Tax-Free countries: A small group of jurisdictions that do not impose direct taxes to their residents, although they may have indirect taxes (like consumption taxes or import duties) such as UAE, British Virgin Islands, Cayman Islands or Monaco, among others.
- Territorial tax countries: Jurisdictions where foreign-source income may not be subject to taxes. This group can be divided between those countries that levy taxes on a remittance basis such as Malta, Thailand and Singapore, and others that tax regardless of whether the money obtained abroad is remitted to the country or not, such as Georgia, Hong Kong, Macau, Malaysia or Panama.
- Worldwide income tax countries: Jurisdictions that tax residents on their worldwide income, regardless of whether it is accrued locally or abroad. We can divide this group between relatively low-tax jurisdictions such as Andorra, Liechtenstein, Hungary, Bulgaria or Serbia and high-tax jurisdictions such as Germany, Spain or UK.
This group can be further divided by those which have CFC laws and those which don’t (more on that in the next letter).
If you properly structure your business and investments internationally or you provide professional services deriving your income from foreign-sources and you establish your tax residency in a tax-free, territorial tax or low-tax country, you could dramatically reduce your tax burden to 0 or close to 0.
Usually, to be eligible to claim for a tax residency certificate, you must spend more than 183 days (half year) within the country territory.
It might make sense to move to a low-tax/tax-free jurisdiction and establish your base there to claim tax residency. After that you can enjoy your tax savings and travel around the world, spending the requisite amount of days in this country.
Certain countries, such as Antigua, will allow you to be a tax resident for as little as 30 days per year…
This is a high-level overview. Tax residency laws vary between countries and the process of changing your tax residency may not be as simple as it seems. Most jurisdictions will require meeting certain requirements and residency tests, and if you take the wrong decision you may end up being subject to tax in both countries. To get a true answer, you need to look at the tax treaties and other bilateral agreements.
This is why we highly recommend that get proper tax and legal advice and that you check and pass statutory residence tests and determine whether your current country of residence has tax treaties that may facilitate the process, help you avoid double taxation and gives you clarity about your tax situation while allowing you to structure your business accordingly.
There is ‘no one size fits all’ solution. You will also want to consider what are the countries where you collect the payments when establishing a tax residency as you wouldn’t want to be charged with a withholding tax.
If you wish to navigate through the requirements of tax residency, you can check out our jurisdiction comparison tool: Residencies.IO.
P.S. There is another small group which I haven’t mentioned. It only exists in the US and Eritrea. These two countries tax their CITIZENS on their worldwide income, regardless of whether they live in the country or not.
As the United States IRS requires American citizens to file and report taxes on a yearly basis, regardless of where they are resident, Americans have fewer options when it comes to establishing a tax residency to minimize taxes. However, Americans living abroad can benefit from the FEIE, where those who spend less than 30 days within US territory or pass the bona fide foreign residence test are eligible for an exemption of approximately $104,100 of annual salary income (net investment income/capital gains). This amount can be increased if you file jointly with your spouse or include housing benefits.
Alternatively, Americans could move to Puerto Rico, where under the Acts 22 and 138, some could apply for an investment income tax exemption.
However, if you are American, I strongly recommend seeking US-specific legal or tax advice. Take care that you are filing the right forms if you live abroad. If you have any offshore bank accounts, you should report them. If you own shares in any foreign companies, you’ll likely need to report and file tax returns for these as well.
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