Dateline: Kotor, Montenegro
I’ve spent the last five years writing this blog and using my own name and face in an attempt to drag a once nebulous business into the sunlight, and prove to average entrepreneurs that “going where you’re treated best” is not only legal when done correctly, but in your best interest.
In fact, offshore investing may present you with many advantages and provides a broad range of investment strategies that you can benefit from outside of your home country.
There are many reasons why people invest offshore, but legal tax reduction is among the most common. Every month, thousands of business owners from around the world apply to work with me to help them legally reduce their tax burdens.
They know that many countries offer tax incentives to foreigners. The favorable tax rates proposed by a foreign country are intended to endorse a healthy investment environment that draws foreign assets. For a small nation with little capital and a small population, attracting investors can increase its economic activity.
Countries like Hong Kong and Singapore started doing this decades ago, realizing that foreign capital was the route to success. Now, they’re up to money in their eyeballs and don’t need any more. However, countries like Montenegro are still on the way up and open to investors. The flat tax rate here is a mere 9% on both business and personal income.
So how does going offshore work?
In a nutshell, an entrepreneur will establish a corporation in a different country; this is called an “offshore company”, but it can be in an “onshore” jurisdiction like Montenegro or Hong Kong, too.
This corporation works as a shield for the business, protecting them from the higher taxes they would get in their home countries. These companies pay either very low tax, or zero tax based on the principle of being in a tax haven, a territorial tax country, or simply a low-tax country like Montenegro.
In many cases, you can legally reduce your tax to 0%. In my case, I was able to reduce my global tax rate from 43% to about 1%. The 1% covers investment profits I make in low-tax countries where paying some tax is unavoidable. The rest of my income is global in nature, similar to Amazon sellers, e-commerce and dropping shipping businesses, or anyone selling products online.
For many entrepreneurs, going offshore can be the difference between success and failure. If your business is based in the United States, your higher tax burden may make you less competitive with someone whose company is based in Hong Kong.
But is going offshore right for you? Every individual’s case is different.
When am I ready to go offshore?
People who know our site have asked this question frequently for many years now: How do I know when I’m ready to go offshore? How will I know when I must start putting these things in place? When does this need to happen?
I do have an answer. However, it may not be an answer you want to hear, and it might not be the easiest answer. After all, the internet is full of so-called offshore gurus who make a living by selling you stuff you may or may not need. To them, EVERYONE needs an offshore company.
I disagree with this approach. Not everyone needs an offshore company. In some rare cases, an offshore company can actually have ZERO BENEFIT for a location independent entrepreneur or investor.
You see, through many years of doing this, I have figured out not only the strategies but the psychology of it as well.
What I’ve learned is that there is a magic number for when going offshore makes sense for you. For instance, when you start making over $100,000 a year, it’s probably time to put some plan in place and to make sure you are not going to get nailed on your taxes.
If you make less than $100,000 a year, an offshore structure may make sense. Having offshore bank accounts is always a good idea, and you may want to work toward a second passport. But when to actually incorporate your business offshore is a delicate issue.
How to know exactly
To know exactly when the time is right for you, it really comes down to answering a couple of hard questions.
When someone needs help, I look at the following formula: is the pain of making a decision greater than the pain of actually staying where you are? If the first is higher than the second, you are not ready.
And by pain, I do not mean physical pain that makes you wail on the floor like the pain of your appendix bursting. By pain, I mean the amount of money you are paying in taxes, the limitations of not having the second passport, or the feelings of being stuck and not free.
You might feel that living in a place does not feel right, or that your investments are not in the best location and you are not earning enough money.
Whatever the reason that is causing you to look into the Nomad Capitalist lifestyle and its strategies we talk about, if that reason is causing you enough pain, then you should think of going offshore. The pain of not having this stuff has to be greater.
I recently spoke with Dean, a business owner in California who paid $378,000 in taxes last year. I knew that I could help him reduce that to almost zero with the right prescription of corporate structure, bank accounts, and legal residency.
Dean decided to get some help because he realized that every day that went by, he was paying another $1,000 in taxes. He said it was causing him a lot of anxiety, because he knew that having that money to re-invest would lead to millions of dollars in extra money for him down the line.
For Dean, the pain of doing NOTHING was worse than the pain of doing SOMETHING.
In another story, I talked with a guy named Francois who told me that he is paying about $5,000 in taxes a year. I figured out pretty quickly that he was someone who is chasing after shiny objects, and that his cry for help was not necessary.
He was chasing after the idea of “I should have a residency,” or “Oh, I should have a company, wouldn’t that be nice?”… rather than “I do not want to pay this many in taxes.”
What causes you pain is not for me to determine. After all, plenty of people live in California and pay MILLIONS each year in taxes, yet are happy to do so to enjoy living in Malibu.
However, paying $5,000 in tax probably isn’t causing enough pain to justify going offshore quite yet. Once you make more money and can afford to do it the right way, then is the time for you.
I do not think he liked the answer because what entertained him in the process was not the pain he was trying to fix, but rather the fun of saying “what if I get this or that residency?”
For me, going offshore is about solving problems and satisfying burning desires. Years ago, I too wasted time debating the finer points of stuff I didn’t need or even want, and it got me nowhere. I speak from experience when I say that while the idea of getting a second passport may be fun, there has to be some motivating factor to get you to do the work that’s necessary.
I have encountered this with people who mainly focus on whether they should get a company in Cyprus or Hong Kong. While location does matter, they do not necessarily understand why. It’s just mental fodder. The most important factor is whether or not where you establish your business can legally save you a $100,000 or $500,000 or more in taxes.
When to decide
Making the decision to actually take action is easier when you pass the ‘shiny objects’ stage and realize you have a problem and a desire to solve it. Invest in yourself and commit to yourself to fix it.
That is when you are ready.
Paying only $5,000 in tax is not worth flying all over the world to pay administrative fees and fill out lots of paperwork. It is much easier to stay where you are right now. It is simpler to live with the problem.
However, when you start paying, $50K, $100K, or even $500K in tax, then paying a small fraction of it on a ticket and going somewhere and making a trip out of it doesn’t seem that bad after all. Similarly, paying for professional help to do the job right becomes more important than cutting corners with some shady service provider.
It should be much easier to tell you that there is a magic number, but what I have found through years of working in the field is that I cannot convince you. You have to convince yourself.
What I’ve found through years of experience in doing this stuff personally is that your mindset is important. If you seek out shiny objects, you’ll only create more frustration when you don’t get the desired results, or any result at all.
Whatever the point is that convinces you to commit to it, then that is your magic number and time to take action to go offshore.