How world’s best passports holders can reduce their tax liability with the proper internationalization strategy
Firstly – what makes a passport good? In our opinion, it’s how much visa free travel is given and what is the tax situation in the home country, and what social benefits are given through payment of said tax. If you live in one country, the passport doesn’t do you much good! So, we take into consideration the tax implications of a passport living outside of the homeland and how building your life internationally may lead you to increase substantially your net earnings.
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 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 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 wish to reinvest and grow his business. So, for those in this situation, it may be the moment to take an action and consider building your life internationally.
For instance, incorporating your business, let’s say in Hong Kong. This is high-reputation jurisdiction and can open you up to the largest markets in the world (China, SE Asia and India have more people than the rest of the world combined). 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 the profits is done in Hong Kong.
Meanwhile, you may immigrate 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 regular monthly income or investing in Chilean stocks. Then, you spend half 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, 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 deemed residence 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 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 let 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 Singapore, and ensure that your earnings are safe.
This is an example on how 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 returns. So, think about it, 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 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 to get 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 have always 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 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, 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
Finnish passport is one of the strongest travel documents in the world, allowing visa-free to 173 countries. As a Finnish business owner or entrepreneur, one can save 50% or more simply by living abroad.
|corporate||employer side social security||personal rates||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.
A software engineer working for his or her own company and earning $150,000 a year in Finland. Roughly (and we are estimating) he will take home only $60,810. This is in a country where they are experimenting with universal basic income. Need 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, being a tax resident in Thailand and do business through an Estonian limited liability company.
His $150,000 yearly profits will be taxed at 20% once passed at the personal level, if retained in the company may be tax free. Thailand does not have controlled foreign company rules, and as a tax resident, foreign-source income may not be taxable, as long as he does not remit it during the first year after earned.
After corporate tax, he will get $120,000 and he may retain this money in his bank account in a safe offshore bank, after 1 year he may 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 may be able to avoid this three-year rule by demonstrating no ties to the country, such as do not have permanent accommodation in Finland, nor maintaining his 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 ground of a job offer or running a business in Finland. After 4 years legally residing in Finland, a foreigner may apply for permanent residency, which entitles 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 he may no need to renounce his 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. Being an effective tax rate of 46.8%, without considering labor taxes.
He may set up a company in Bulgaria, which will lead him to get a temporary resident visa. By moving there and becoming a Bulgarian resident, he 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), may still be considered as Norwegian tax-residents, unless they get permanent residency in another country.
How to get citizenship in Norway
For those non-EEA citizens interested in getting 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 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 in a 10-year period and they commit to renounce 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, but 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 to personally move to a new residency when looking to legally minimize tax. This is partially 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 was over the course of the next 5 years would be several million dollars, just by relocating themselves and their lives to Cayman Islands. Helps to have a lot of options to go checkout places visa free as well!
The one thing Canadians always ask us about is whether they can go back for 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 obtaining directly the permanent residency. In fact, last week (19th 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 on 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 have secured CAD 200,000 from an authorized venture capital firm or CAD 75,000 from an angel investor.
Other entrepreneur program is the Prince Edward Island Business Impact, to qualify your business plan must be approved and you should deposit CAD 200,000 in an escrow account, refunded once you have the program terms and conditions and you have lived for two years in Canada.
For investors, they may 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 stay physically in Canada 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 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 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 to be potentially 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, become a US citizen, means become 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 earn annually 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 should not stay in the US for 330 days per year, that is, staying a maximum of 35 days per year in the US.
Other way is 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 more than a month, but the criterion is much more subjective and the IRS would 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:
- Engage formally a CPA (free 30-minute call)
- Presented with list of tailored options for your specific situation
- Setup a structure and sign documents
- Help getting corporation, residency and bank account setup
- 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 would be on the list because it’s the most powerful travel document in Asia. With visa free 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. Top marginal income tax rate at 22% and no taxes on foreign-source income, capital gains and investment income.
How to get 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 get directly a permanent residency 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 show exceptional economic merits and/or family ties with a citizen to get 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 no need to pay tax unless actively carrying on business in Singapore. But the NS and lack of dual citizenship recognition make the red passport much less valuable.
Bearing 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, makes the most impact on your life in terms of where you can travel. Allowing access visa-free or visa-on-arrival to most countries worldwide.
But usually, these tier-1 passports come with such a high tax liability. Here, we try to convince you how building your life internationally adopting Flag Theory’s strategies may lead you to legally minimize your tax bill and double your earnings, while benefiting from the mentioned great travel mobility.
Building your life internationally not only will enhance your finances, it will also open a myriad of opportunities and lead you to live experiences 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, source of income, corporate tax-residency issues, employees and clients location, 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.
Apply for a free 30-minute consultation and start your journey towards more freedom, privacy and wealth.
P.S. We are going to launch the Passports.IO 2.0. soon, where you will find new Citizenship and Residency programs and new useful comparison features… Stay up to date subscribing at passports.io.