Dateline: Tivat, Montenegro
One of the most frequently asked questions I get in my course of work is one that reveals just how many misconceptions still exist in regards to investing, living, and doing business overseas. The question typically sounds something like this:
What tax haven countries can Americans move to and get citizenship?
A desire to legally reduce taxes is at the heart of a question like this. But moving to a tax haven is not the simple solution to this problem that many believe it to be. To effectively reduce your taxes, you must consider several moving parts.
That is why the question above is not one, but actually three or four different questions. It may not seem like such a complicated question on the surface, so let’s break it down.
The first issue to be addressed is the idea of moving. Asking how to move to a tax haven already creates several misconceptions about what is required to legally reduce your taxes. If this is your ultimate goal, the solution is not necessarily to pack all of your belongings and relocate your life and business operations to one brand new country.
This is particularly true for US persons.
The US government doesn’t really care where its citizens move just as long as they move out of the United States. The Foreign Earned Income Exclusion (FEIE) allows US persons who spend at least 330 days outside of the US – whether they spend that time in one country or one hundred – to exclude the first $105,900 of their personal income from taxation (in 2019).
As long as you are outside of the US for at least 330 days in a 365-day period, those tax savings are yours.
And you do not need to move to or restrict your travel destinations to tax havens only. You do have to be careful with how much time you spend in non-tax-haven countries, though. Many countries around the world will consider you a tax resident if you spend 183 days a year or more in the country.
But, if you plan correctly, you can live almost anywhere tax-free.
For example, a few years ago I created my trifecta method where you have a home in three different countries and split your time between them throughout the year. If you spend four months a year in each one, generally, you will not be considered a tax resident in any of them.
However, not everyone enjoys the nomad lifestyle. Some people really are looking for a single country where they can permanently move their life and be free of any tax obligations. If this describes you, you will need to buckle down and examine the limited tax haven options available to you that will make this possible.
Let’s begin by tackling one more myth. Many people assume that “moving to a tax haven” means that they have to both live in and do business from the same place. In reality, it is best if you live in one place and incorporate your business in another.
There are several reasons for this that are best understood by example. So, let’s look at both sides of the equation by asking two new questions.
1. Where can I base myself to reduce my personal taxes?
2. Where can I base my company to reduce my corporate taxes?
Personal Income Tax Havens
If you do not want to become a nomad (as explained above) to avoid becoming a tax resident in another country, there are three main types of tax havens where you can live full-time without being taxed by the local government. They are:
- 1. Zero Tax Countries
- 2. Territorial Tax Countries
- 3. Tax Exemption Countries
1. Zero tax countries are what most people are referring to when they talk about tax havens. These are countries that have a personal income tax rate of 0%, which essentially means that they do not tax their citizens.
Zero tax countries include places like the Cayman Islands and St. Kitts and Nevis in the Caribbean, Vanuatu in the middle of the Pacific Ocean, and the United Arab Emirates and other Gulf countries.
Many of these countries are unappealing as a place to live long-term, at least for most people. And the few that are really appealing have strict entry requirements, such as buying a half a million dollar house just to qualify for residence or citizenship.
2. Territorial tax countries use a system of taxation that only taxes local-source income. This means that they will only tax money that you earn within the geographical limits of the country. Depending on how your income is earned and how you personally take your income, a territorial tax country could allow you to live tax free. But it is not the solution for everyone.
That said, here are some of my favorite territorial tax countries:
- Hong Kong (in some cases)
- Costa Rica
3. Tax exemption countries are few and far between but they do exist. These are countries that normally tax their residents, and often at very high rates. However, qualifying individuals can enjoy a tax exemption of up to 100% of their income for a certain period of time.
For example, Portugal offers a non-habitual residence tax scheme to both its citizens and its residents. You must be structured properly for the program to work in your favor, but if you qualify, you can live tax-free in Portugal for a total of ten years. Once the ten years are up, you will be taxed at the same rates and according to the same rules as everyone else in Portugal.
Tax exemption countries always have an expiration date.
These are all of the ways to pay zero tax on your personal income. Whichever type of country you choose will subsequently affect your overall tax equation and must work in tandem with where you choose to incorporate your business.
Corporate Tax Havens
The only way to pay 0% corporate tax is to incorporate your business in a corporate tax haven. Places like Belize, the British Virgin Islands (BVI), the Cayman Islands, Hong Kong, Seychelles and others offer 0% corporate tax structures.
Why can’t you live in one of these places if you’ve based your company there?
In some cases, it is because the government has instituted laws that dictate that this will be the case. For example, you can incorporate your business in Hong Kong and enjoy a 0% tax rate if you live outside of the country, but if you choose to live in Hong Kong, the government will tax your business at a rate of 16.5%.
In other cases, you will not be able to live in your corporate tax haven simply because it is difficult to get in. For instance, Belize is more focused on the retirement population and may not grant you a residence permit if you are younger. Moving to the BVI, on the other hand, might be more difficult because it is a British Commonwealth country. And, though you could move to the Cayman Islands, it is expensive.
The Cayman Islands is also a good example of how, even if it is accessible to you, living in a corporate tax haven may not be the best value option. The Cayman Islands is a great destination with beautiful beaches and world-class amenities, but it also requires all residence permit applicants to buy a very expensive home in order to qualify. If you’re wealthy, that might be within your reach, but that doesn’t mean that it is your best choice.
I recently worked with a client whose business makes about $3 million a year and I asked him if he was willing to invest $1 million to become a resident of one of the nicer islands. He was very hesitant about it to the point that I knew that even if he said yes, he wasn’t going to do it. Many people are not going to do these programs, not because they can’t afford them but because they know that there are better options available.
In general, there are disadvantages to personally living in most corporate tax havens. Fortunately, these disadvantages do not affect your ability to incorporate your business there and gain the zero tax benefits for your company.
But, if you want to fully live a zero-tax lifestyle, you will need to turn your focus to the rest of the world to find places that will allow you to personally live there tax free.
Balancing the Equation
In most cases, moving to a tax haven is less like picking a spot on the map and more like balancing a delicate equation. Both parts of the equation must work together to fully eliminate your taxes.
For example, a Belize company setup would essentially be worthless if you continued to live in the United States because, as a controlled foreign corporation (or CFC), everything your company earned would be taxable in the US.
And if you were to move to France instead to get out of the US, your situation would be even worse because you would now need to pay taxes in France where rates are even higher.
If you decided to live in Monaco, instead, although it is a zero tax country, between the bank deposit and the real estate requirements, it would cost you several million euros just to get in. Then, if you were to set your company up in Malta, you’d still be paying 5% corporate tax.
Your costly investments to get into a zero tax country would have failed to fully eliminate your taxes.
You have to optimize both sides of the equation.
How do you do that? You want to find a country to personally live in that meets one of the criteria we’ve discussed: zero tax, territorial tax, or tax exemptions. Or, if you’re willing to pay a small amount of tax, there are plenty of low-tax countries out there. Then, set your company up in a tax haven.
In its simplest form, the equation would look like this:
Personal Income Tax Rate + Corporate Tax Rate = Total Tax
And for anyone except US citizens, it usually is this simple. What we’ve discussed will suffice: move to a tax haven, set up your affairs, become tax non-resident in your home country and you will be fine for the time being. Your home country will leave you alone if you just play by the rules and you can legally pay very, very little tax, if not zero.
However, US citizens are not as lucky as basically everyone else in the world. For them, citizenship throws the equation off balance.
Solving the Citizenship Variable
The United States is the only country in the world that enforces taxation solely on the basis of citizenship. US citizens and permanent residents are taxed no matter where they go.
Yes, the Foreign Earned Income Exclusion (FEIE) offers minor relief, but for anyone who earns passive income or more than $105,900 of active income a year, further taxation is inevitable.
For these folks, the equation gets much more complicated and would look something like this:
Personal Income Taxes Abroad – Tax Treaty Exemptions + Corporate Taxes Abroad + US Personal Income Taxes – FEIE + US Corporate Taxes = Total Tax
Yes, it’s ugly and complicated. Basically, it means that if you are a US citizen, you are not going to be able to pay exactly zero, even if the tax rates in the countries where you live and where you set up your company are both zero. Despite the exclusion, under a new set of provisions in the Trump tax reform you will be taxed.
There’s no way around it. You will not be able to pay zero tax as a US citizen.
The only way to solve the citizenship variable and restore the original equation is to get a second citizenship and then renounce your US citizenship. Having a second citizenship alone is not enough because, until you remove your US citizenship from the equation, you cannot legally eliminate your taxes.
So, how do you get a second citizenship? The short answer is… it depends.
I’ve spent the last decade of my life investigating the long answer to this question, so we’ll just aim for a short summary here. First, let’s go back to the original question: “What tax haven countries can Americans move to and get citizenship?”
While we’ve established that you do not need to live in a tax haven to enjoy a tax-free life, if your goal is to live in one place and one place only and you do not want to pay taxes, you’ll need to get citizenship in a tax haven.
Unfortunately, most zero-tax countries are not going to grant you citizenship.
Zero-tax Vanuatu offers a citizenship by investment program, but it’s not particularly good and there are some challenges with it. None of the Gulf countries are going to give you citizenship (ever), and Monaco will only give you citizenship after you have lived there for about 12 years.
Could you get citizenship in a territorial tax country? Maybe.
Costa Rica and Nicaragua might grant you citizenship, and Panama supposedly offers citizenship through its Friendly Nations Visa program. However, Panama does not have a great track record of fulfilling their promises of citizenship, so I wouldn’t count on it.
More importantly, although there are a few territorial tax countries where you can obtain citizenship, the real question is whether you want to live in them. Nicaragua has some nice beaches, but if you’re imagining a place like the Cayman Islands when you talk about moving to a tax haven, Nicaragua may not offer the life that you’re looking for.
The other challenge is that none of these countries are going to give you citizenship immediately, so you will have to continue paying taxes in the US for at least another five years before you can become a naturalized citizen and renounce. And this really turns into six or seven years when you take into account the processing time to get your citizenship finalized.
If you can put up with paying taxes for a few more years, then this option could be your solution. Simply move to a tax haven, structure your business in a way that is friendly to where you live, wait the allotted time while paying taxes back home, claim your new citizenship, and then renounce.
If you want to speed up the process, however, you should consider citizenship by investment programs, which vary in terms of cost, location, and desirability.
Vanuatu, as we discussed, is not a program that I would recommend. However, zero-tax St. Kitts and Nevis has one of the fastest and best value programs available. They will grant you citizenship in as little as 60 days (usually 4-5 months without the extra fee to expedite the process) in exchange for a donation of $150,000.
With a St. Kitts and Nevis citizenship in hand, you can officially renounce your US citizenship and enjoy a tax-free life. St. Kitts and Nevis will not tax you no matter where you live and no matter how much you earn, making this one case where you could live, work, and set up your business all in one country.
However, if you don’t want to be restricted to one country and you are willing to move around to avoid becoming a tax resident, your options do open up more.
You can get a second citizenship in one of dozens of countries, renounce your US citizenship, and then become a tax non-resident in your new home country. Once you do, with the right strategy in place, you can balance out your equation and live tax free just about anywhere.
What If I Don’t Want to Renounce My US Citizenship?
For the folks who do not want to renounce their US citizenship, Puerto Rico offers some middle ground. If you can commit to spending the majority of your time in Puerto Rico, you can you enjoy single-digit tax rates (about 4%) on your income.
But Puerto Rico needs to be your bona fide residence.
This is not how you see people promoting Puerto Rico these days; but that is how it works. You need to live there.
Once you are there, you won’t get the savings immediately, but you will start the clock toward eliminating or reducing your taxes on both passive and active income.
In this way, Puerto Rico is a sort of tax haven for Americans. Puerto Rico’s Act 20 and 22 are for the person who wants to pay very low tax rates without having to renounce their US citizenship or revert to everything else that we’ve discussed in this article.
But it will not be the right fit for everyone. Those set to benefit the most from Puerto Rico’s tax haven offerings are the folks with bigger businesses that they hope to sell in the near future, as well as cryptocurrency investors, hedge fund managers, big traders, or anyone with large capital gains.
Even if it is the right tax haven for you, you must do proper planning to make Puerto Rico work to your benefit. The typical people promoting Puerto Rico want you to think that it is for everyone, but it’s not.
It’s not a silver bullet.
Personally, I’d rather have my choice of all the other options than be tied down to Puerto Rico. I’d rather have the choice to travel around the world, incorporate my company where I want, and have a second passport. Most of all, I would rather not depend on a bankrupt island that is tethered to the US to maintain such a policy in the future.
Knowing where you can move to live tax-free is not as simple as asking how to move to a tax haven. You must ask yourself important questions not only about where you want to live and incorporate your business, but how both of those decisions work together to balance out your overall tax equation.
Other factors like your citizenship, tax residence, and investments will also impact how, where, and how much you will be taxed. If you hope to legally and permanently eliminate your taxes, you cannot oversimplify a decision that is quite complex.
If you really want tax freedom, you have to be willing to put in the work and invest in the help to determine exactly how to balance the equation and come out on top.