So you have decided to go where you are treated best. You are leaving your high-tax country and looking forward to earning business income, capital gains, and dividends with zero or very low taxes. So now what? In this article, we will explain why expats need a tax residency certificate.
You are finally taking control of your money, and you realize that reinvesting your money and putting it to work for you, either back in your business or into the market, will have a vast compounding effect. Meaning you can increase your wealth and create generational wealth far faster than anyone who is staying back in Las Vegas, Los Angeles, or London.
Most clients who come to us at Nomad Capitalist think that going offshore is easy. Some of the basic elements are. You wind down your business in one country. You file your final tax return and pay your final tax bill.
However, significant planning is involved when moving your business to a new jurisdiction. We help our clients complete this process successfully.
People often underestimate how many aspects of their life that they have to recreate when they go offshore, and if not done properly, the harmful consequences are significant.
Case in point, if you want to put your money anywhere in the world, you are going to have a very hard time doing that if you are not a tax resident of a country.
Many people confuse residency with tax residency and what the difference is. Residency requirements for taxation purposes vary from one jurisdiction to the next, and the definition of “residency” may also differ for non-taxation purposes.
A residence permit gives you the option to live temporarily. For example, A Golden Visa gives you the option to become a resident of that country. Similarly, a US Green Card is a permanent residence requiring you to live there for a specific period.
Once you have become legally resident in a country for a set time, usually 183 days, you become a tax resident.
As a general rule, physical presence is the main factor in determining an individual’s residency, but others include property ownership, family ties, and financial interests.
Let’s clear up the first misconception, being a tax resident does not mean you actually have to pay taxes there.
Some countries charge you a low flat fee, in some cases, $5,000, $15,000, or $20,000. Other territories might charge you only money you remit to their country, for example, a non-dom country, which gives you control over how much money you want to remit. This figure could be zero or a small percentage of your business income for living expenses.
Other countries have no tax at all. So, being a tax resident doesn’t necessarily mean you owe any tax, and if you do, it’s probably 80-90% less than what you pay now.
Being a tax resident also doesn’t mean that you need to live in that country full-time. But, if you are going to move overseas, you need tax residence, and here’s why.
Why Tax Residency Matters to Entrepreneurs
Walk into any bank or brokerage firm, and the very first question they are going to ask you is, “Where do you pay tax”?
Our founder, Mr. Henderson, routinely meets with numerous banks, and when he recently swung through Europe, he stopped in Switzerland and Monaco, the top banking and lifestyle spots where people go to be treated best. When visiting banks in these financial hubs, they don’t even say hello or offer you a coffee; they first want to know where you pay tax.
Many banks now want your tax jurisdiction before they even set up a meeting and will sometimes reject you as a customer because you are paying tax in the wrong place.
Thanks to the Federal Capital Territory Administration (FCTA) and Common Reporting Standard (CRS), tax residence is increasingly on the radar, and where you want to put your money matters.
Countries like the US feel threatened that you have the right to go where you are treated best, they can never entirely shut that down, but they can make it a little harder, and they are using the banks and brokerages to do that. Maybe with the exception of bitcoin and crypto exchanges, however, there is more and more talk of crypto regulations also coming into effect.
Because of increasing regulations, if you want any kind of bank, financing, or brokerage account, they want to know your tax info, as countries worldwide want people to pay taxes.
There are still plenty of countries that have 100% legal tax loopholes. Again, there are high-tax countries that have lump sum programs, like Italy, or non-dom programs, like Ireland, Malta, and Cyprus, which are high-tax countries. However, you don’t need to pay high taxes.
In the long run, zero and low-tax countries like the UAE are caving to the new global minimum tax, not because they need the 15%, but because they want to get along with the rest of the world.
That being said, they are still free zones, so you can have a tax-free company in Dubai. It is very clear that salaries, i.e., the salary you take or the dividend you take from your UAE Free Zone, will still be tax-free. So even though the UAE and other countries are going along with the global pitch to raise taxes, it does not have to affect you.
You may still be able to live a very tax-free life, and even if you need to pay 2% or 3%, it would be simpler and clearly a lot less than the 40% or 50% that you are paying now.
Choosing Your Tax Residency
When choosing tax residency, you need to consider how you are taxed on certain assets that are situated in specific countries.
For example, if you invest in US dividend stocks, you may be remote and tax-free, but those investments are in US companies, so while living in Ireland under the non-dom program, you would pay 5%, and in Dubai, you would pay 30% withholding tax. The difference here is that there is a tax treaty with Ireland but not with the UAE, so where you are a tax resident very much matters.
To illustrate this point again, if you write a book and your country of tax residence may allow you to pay practically nothing on royalties, but if you were to live in the UAE, you would pay 30%.
If your business involves consulting or if you earn all your income from affiliate marketing, and selling products, then tax treaties may not be a significant concern.
However, your tax residency will still affect issues such as stock dividends. Tax treaties become relevant if you have a multinational company with employees and offices in various countries. Typically, this is resolved at a corporate level rather than on a personal level. So where you are, tax resident matters.
The bottom line is that you need to be a tax resident because when you go to banks, they are going to check where you pay taxes.
You can get tax residence in some Caribbean countries for $20,000 and spend just 30 days in the country or as little as $5,000 a year and only a few weeks in the country. Choosing a treaty option is, of course, better. However, you will need to buy a home or maintain an apartment for twelve months of the year. There are other countries where you only need to be there one day per year to be a tax resident.
When choosing your residence, you must thoroughly review your situation and income types to get the best tax residence option. But you need to be prepared to tell banks where you pay taxes so that they can report it and withhold the right amount of tax. This is applicable whether you open an account for yourself, your business, or a brokerage account to trade stocks.
Taking our book royalties example, you may pay 0% on book royalties, but if there is no treaty on US dividends, you will pay 30% on any money you receive for those. However, if you become a tax resident in Ireland as a non-dom, you would pay 5%. So if you wanted to have a multimillion-dollar portfolio of US dividend stocks, which is your main income source, that equates to substantial savings.
Becoming Tax Resident
Once you have chosen your new tax residence, you need to make sure you are not a tax resident in your country anymore. If you are an American, you are always going to be a tax resident (unless you renounce your US Citizenship).
That’s why we often recommend Americans go to strictly tax-free or tax-neutral countries like a territorial or tax-free country where there’s no additional tax levied on that side.
If you move to Ireland, for example, and you pay some tax in Ireland and something to the US, you can do that, but it costs more to plan, as the US systems negatively overlap with other systems.
It’s not just as simple as getting residence. For example, you can get a residence permit in UAE and go for as little as one day per year, but that makes you an immigration resident but not a tax resident.
If you want to be a tax resident in the UAE, you need to make sure you spend more time there than anywhere else to make sure no other country sucks you into their tax net.
So, don’t confuse immigration residence which gives you the option to live somewhere with tax residence, where you made the file a tax return, even if it just says zero.
You can still theoretically live nomadically, but it shouldn’t be between high-tax countries as they could easily try to drag you into the system. So don’t just think it’s 183 days, and that is all that counts; where you go also matters.
A high-level country where they understand the global system may issue you a tax residence certificate, and that’s what you would take and show any country where you are opening a bank account. If you give up US citizenship, you’ll take your certificate of loss of nationality.
Navigating tax residence is not simple. Become a client, and we will help you move your tax residence to a country that allows you to pay less and gives you the tax certificate you need.
Get in touch with Nomad Capitalist today to get your holistic plan to help you go where you’re treated best.