How the world’s best passport holders can reduce their tax liability with the proper internationalization strategy
Firstly – what makes a passport good? In our opinion, the answer to this question comes down to how much visa-free travel it provides, what the tax situation is in the home country, and what social benefits are obtained through the payment of this tax. If you live in one country, a second passport won’t do you much good! So, we take into consideration the tax implications of a passport for individuals living outside their homeland, and how building your life internationally may lead you to increase your net earnings substantially.
This article is just for illustrative purposes; it is not, nor intends to be legal or tax advice. Before taking action, always speak with an attorney. We have a global network of attorneys and accountants worldwide and we can refer you to an expert in your relevant jurisdiction, who can give you the proper advice according to your specific circumstances.
How Germans can reduce their tax liability
As with many other European Union countries, Germans face a high-tax burden. A German entrepreneur running his internet business through a German GmbH is subject to a corporate effective tax rate of between 30% and 33% (including local taxes) and a personal income tax of 25% when passing profits to the personal level.
This is a stumbling block for any entrepreneur who wishes to reinvest and grow their business. So, for those in such a situation, it may make sense to take action and consider building your life internationally.
How can you go about doing that? Let’s begin with the idea of incorporating an existing business, say in Hong Kong. This is a high-reputation jurisdiction and can give you direct access to the largest markets in the world (China, SE Asia, and India have more people than the rest of the world combined). It also provides lower taxes, more freedom, and new business opportunities for those daring to penetrate the largest growing markets of Asia.
It is quite easy and fast to incorporate a company in HK, and profits are taxed at a 16.5% rate. In addition, your company will most likely qualify for an exemption on profits earned abroad, as long as no contracts are signed and no key activity to generate profits is executed in Hong Kong.
At the same time, you could consider immigrating to Chile. Chile has a huge German-descendant population and German expat community.
You can get residency in Chile by proving $1,500-$2,000 in regular monthly income, or investing in Chilean stocks. Then, you will need to spend half a year there to qualify for a tax resident certificate. As a new tax resident, you are eligible for a 3-year tax-exemption on your foreign-source income, which is extendable for 3 more years.
Usually, after leaving Germany, you may not be considered tax-resident if you get tax-residency abroad and do not keep a property for residential purposes in Germany, whether ownership or lease. Even the occasional use of a German property for recreational purposes (as a second or holiday home) may under certain circumstances lead to you being deemed resident in Germany.
As Hong Kong does not levy withholding tax on dividends paid to non-residents and your foreign-source income won’t be taxed in Chile, you may pass your company profits on to the personal level tax-free.
The rest of the year, after qualifying as a tax resident in Chile, you may take advantage from your saved tax-money and benefit from the high-value passport you own, to travel around the world, if your business obligations allow you to do so.
To complement this internationalization strategy, you may choose a jurisdiction to do banking with solvent and high-liquidity banks, such as in Singapore, and ensure that your earnings are safe.
This is an example of how through carrying out the Flag Theory internationalization strategy, you may reduce your tax liability from over 50% to… 0. This, without considering savings on German labor taxes and social security contributions, which are one of the highest in Europe.
We all know how difficult is to boost 10% on business profits or an investment portfolio’s returns. So, think about it, by just adopting the Flag Theory global strategy, you may increase your net profits by 100% while growing personally and professionally by living abroad.
In addition, after 5 years of being a Chilean resident, you may be eligible for a Chilean passport. It won’t really increase your visa-free travel mobility, although you will get visa-free access to Russia. But is always worth having a second passport, as it is an insurance for no matter how bad things are going in your home country, you and your descendants will always have a backup plan and a second place to call home.
How to get German citizenship
For those interested in immigrating to Germany, the country is home to some of the friendliest immigration and migrant policies in the world. The German people have become divided over the issue, however – with some Germans welcoming the migrants and others taking a more nationalist approach.
Those who aren’t happy with the way the country is trending might do well to look abroad – as they have visa free travel to over 176 countries. Germany has an excellent consul system and various embassies abroad generally promote the German economy quite well. You’ll find German manufacturing all over the world, from Singapore to South Africa.
Usually, to immigrate to Germany, it may be enough to prove that you have sufficient financial means to support yourself, that you have rented/purchased a place to live and you have a comprehensive health insurance. After 5 years living in Germany, you may qualify for a permanent residence permit which will allow you to live in any European Union country. Fast-track ways are available for those setting up a qualifying business in Germany, or for high-skilled workers.
After 8 years of legal residency, whether temporary or permanent, you may be eligible for citizenship. To become a German citizen, you may be required to prove ties to the country and speak German.
High taxes in Finland
The Finnish passport is one of the strongest travel documents in the world, allowing visa-free travel to 173 countries. As a Finnish business owner or entrepreneur, one can save 50% or more simply by living abroad.
|Employer side social security
|Employee-side social security rate
In Finland, when dividends distributed are based on shareholders’ work input, not on their share ownership, the dividends are regarded as salary for tax purposes and are fully taxed as ordinary income.
Take, for example, a software engineer working for his or her own company and earning $150,000 a year in Finland. All in all, (and we are estimating) he will take home roughly $60,810. This is in a country where the government is experimenting with universal basic income policies. Needless to say, many Finnish are pleased paying taxes, as they benefit from a largely generous social welfare scheme.
However, the arbitrage for this software engineer business owner to relocate abroad is tremendous. For instance, by being tax resident in Thailand and doing business through an Estonian limited liability company.
By doing this, his $150,000 yearly profits will be taxed at 20% once passed at the personal level, and if they are retained in the company they may even be tax free. Thailand does not have controlled foreign company (CFC) rules, and as a tax resident, foreign-source income may not be taxable, as long as the recipient does not remit it during the first year after earning.
After corporate tax, the software engineer will get $120,000 and he may retain this money in his bank account in a safe offshore bank, and after 1 year he can transfer part of this money tax-free to Thailand to pay his expenses.
In short, applying the Flag Theory, he may be able to increase his yearly disposable income by 100%.
This is a mid/long-term strategy; usually, Finnish citizens may retain their tax-residency for three years after leaving the country. A Finnish citizen may be able to avoid this three-year rule by demonstrating no ties to the country, such as by not having permanent accommodation in Finland, nor maintaining their right to Finnish social security.
How to get citizenship in Finland
For those seeking a Finnish passport, first, they must obtain a residence permit. Residency is usually granted based on the grounds of a job offer or of running a business in Finland. After 4 years of legally residing in Finland, a foreigner may apply for permanent residency, which entitles them to live and work in the country indefinitely. After 5 years of continuous residency, whether temporary or permanent, a foreign citizen may be eligible for citizenship by naturalization, and they may not need to renounce their nationality of origin to become a Finnish citizen.
Norway taxes and internationalization
Norway is a country which is blessed with a plentiful amount of natural resources (namely, oil) which enable most of the country to live above the poverty line. The country has a good reputation when traveling internationally, and the passport is very strong, with visa-free access to 173 countries.
A Norwegian affiliate marketer doing business through his own local company may pay 24% on corporate tax and a 29.76% effective dividend tax when transferring the profits to the personal level. This results in an effective tax rate of 46.8%, without considering labor taxes.
This affiliate marketer could instead set up a company in Bulgaria, which will lead them to obtaining a temporary resident visa. By moving there and becoming a Bulgarian resident, they may be liable to 10% tax on their corporate profits and 5% on the dividends distributed. This is an effective tax rate of 14.5% vs 46.8% in Norway.
Note that usually, if Norwegian citizens living abroad stay 61 days or more in a tax year in Norway and have close relatives living in Norway (spouse and children), they may still be considered as Norwegian tax-residents, unless they receive permanent residency in another country.
How to receive Norwegian citizenship
For non-EEA citizens interested in obtaining citizenship in Norway, first, they must obtain a temporary residency permit. These are usually granted to foreigners who have secured a job offer or have set up their own business as sole proprietors and have high academic degrees. After three years of a temporary permit, they may apply for permanent residency. After 10 years of legal residency, they may be eligible for citizenship, provided that they have been tax-residents during 7 out of a 10-year period, and they commit to renouncing their previous citizenship.
Canadians moving offshore
Canadians have a great reputation internationally (especially when compared to Americans), oftentimes speak a second language (French) and generally, the Canadian passport is a great travel document. The taxes within Canada are high, so it’s pretty cut and dry that following the Flag Theory strategy is a great option for Canadians.
For Canadian businesses owners and entrepreneurs – there is a strong case for personally moving to a new residency when looking to legally minimize tax. This is partly because the CFC (controlled foreign corporation rules and anti-avoidance rules) are very strict for Canadians.
Whenever we consult with Canadians, there is almost always a clear case for becoming a resident outside of Canada. In one notable case, we helped a family save around 30% a year, which over the course of the next 5 years would be several million dollars, just by relocating themselves and their lives to the Cayman Islands. It helps to have a lot of options to go and travel to places visa-free as well!
The one thing Canadians always ask us about is whether they can go back to receive healthcare and whether they can go back to Canada someday. Yes, you can go back. Yes, if you go back and become a resident, you can qualify for healthcare. Yes, there will still be hockey.
How to get Canadian citizenship
For those seeking a Canadian passport, the fastest way to get one is by directly obtaining permanent residency. In fact, last week in June 2017, the Canadian Parliament approved an amendment to the Citizenship Act, reducing the time permanent residents must be physically present in Canada to three out of five years, instead of four out of six years. This means that you must be a tax resident in Canada for at least three years during your path to citizenship.
Back to obtaining residency – Canada is looking for people with great business skills to boost their economy, and they are currently offering permanent residency to them. So, if you are planning to establish your venture in Canada, you may consider applying for the Startup visa program, which mainly requires having secured CAD 200,000 from an authorized venture capital firm or CAD 75,000 from an angel investor.
Another entrepreneur program is the Prince Edward Island Business Impact. To qualify, your business plan must be approved and you will need to deposit CAD 200,000 in an escrow account, refunded once you have fulfilled the program terms and conditions and you have lived in Canada for two years.
Investors can apply for the Quebec Business People Program, which grants permanent residency to investors depositing a non-bearing interest CAD 800,000 investment through an investment fund for a five-year term.
All programs require you to physically live in Canada for at least 2 years during the five-year period to maintain the residency status.
Apart from residency by marriage, these are the three fastest ways to get permanent residency and eventually citizenship in Canada. If you are willing to move with your family to Canada, the easiest and fastest way is by transferring CAD 800,000 in an investment fund for 5 years.
There is an opportunity cost, as it does not bear interest, and you must be a model tax resident for at least 3 years. For instance, if you reside in Quebec, you will face a top marginal income tax rate of 53.7% for ordinary and investment income and a 26.7% for capital gains. In addition you may potentially be exposed to controlled foreign companies regulations, and your profits retained in a foreign entity potentially attributable.
How Americans can reduce their tax liability
The US passport is one of the most valuable worldwide, providing visa-free access to 174 countries. That said, becoming a US citizen, means becoming a US taxpayer “till death us do part”. Most countries tax their citizens and residents on a basis of residency. The USA is an exception to this (the only other country in the world is Eritrea) in that it taxes its citizens wherever they are in the world, on a basis of being American citizens. Americans must report and file taxes wherever they reside.
If you are a US citizen living abroad, you may qualify for the Foreign Earned Income Exclusion and annually earn foreign-US-source taxable income up to $102,100 tax free. This amount can be increased up to $250,000 if you include your spouse and housing benefits.
To qualify you must not remain in the US for 330 days per year, that is, you can only remain a maximum of 35 days per year in the US.
Another way is by passing the “residency test” of the IRS, proving that you are a bonafide resident in another country. This will allow you to stay in the US for more than a month, but the criterion is much more subjective and the IRS will ask for proof of ties to your country of residence.
At Flag Theory, we are providing assistance to American business owners, freelancers, entrepreneurs and investors living abroad or willing to do so, offering an integral tailored internationalization planning. Our US Expat package offer includes:
- Formally engaging a CPA (free 30-minute call)
- Presenting a list of tailored options for your specific situation
- Setting up a structure and signing documents
- Help to obtain corporation, residency and bank accounts set up
- Ongoing yearly US tax maintenance compliance
Working with Americans can be more challenging due to the tax laws, but there are ways to legally reduce your tax bill and find more freedom far from the Land of the Free.
Passport and taxes in Singapore
Singapore is on the list because it’s the most powerful travel document in Asia, with visa-free travel to 173 countries, including India and China. Asia is your oyster and the little red dot is your home base.
Singaporeans are well respected in business in Asia and unlike some of the other countries on this list, the taxes are low and sensible. The top marginal income tax rate is 22% and there are no taxes on foreign-source income, capital gains, and investment income.
How to obtain a Singaporean passport
Getting Singaporean citizenship is more a fact of achievements rather than a fact of time. First, you must obtain a temporary residence permit if you are a high-skilled entrepreneur willing to relocate there and you have secured financing, or directly obtain a permanent residency by investing S$2,500,000 in a Singaporean business or investment fund.
After two years of permanent residency, you may be eligible for citizenship under the economic scheme, based on your own merits. You will need to demonstrate exceptional economic merits and/or family ties with a citizen to have the application approved. The final decision is at the sole discretion of the Government of Singapore.
The Singaporean system does not recognize dual citizenship. All Singaporeans must also serve in NS – national service. However, the tax situation is fair, as residents outside of Singapore do not need to pay tax unless actively carrying out business in Singapore. But the NS and lack of dual citizenship recognition make the red passport much less valuable.
High-ranked passports such as the German, Norwegian, Finnish, Canadian or American, or others not covered in the article such as the Swedish, Korean, Spanish, French, Japanese or British, among others, make the most impact on your life in terms of where you can travel. They allow visa-free or visa-on-arrival access to to most countries worldwide.
But usually, these tier-1 passports come with a very high tax liability. In this article, we’ve tried to demonstrate how building your life internationally through adopting Flag Theory’s strategies may lead you to legally minimize your tax bill and double your earnings, while benefiting from the aforementioned high travel mobility.
Building your life internationally will not only enhance your finances, it will also open up a myriad of opportunities and lead you to new life experiences that will allow you to grow both personally and professionally.
There is no one-size-fits-all solution for everybody, so several factors such as nationality, type of business, the source of income, corporate tax-residency issues, employees and clients’ location, the existence of tax treaties, among others, have to be considered when designing an internationalization strategy.
Here at Flag Theory, we are ready to offer you a tailored integral solution, including residency, incorporation and banking, according to your needs and priorities for your specific personal situation and business.
P.S. Our website passports.io has a full list of all of the citizenship by investment programs out there, including some great options for individuals looking to relocate to Europe. Check it out and have a look through the many options for second citizenship that you may be eligible for.