Lowering your taxes or eliminating them entirely is something that many of us aspire to, especially if we live and work in the West. Aggressive high-tax policies and burdensome regulation are a fact of life in most advanced Western countries. And it’s not just income tax that reduces the benefit of our hard work.
For seven-and-eight-figure investors and entrepreneurs, high personal income tax, corporate taxes, property taxes, and wealth grabs like inheritance tax all serve to increase the government’s slice of your endeavor.
In this article, we explain the difference between tax-free, low-tax, tax-exempt, and non-dom countries. The international tax system can seem complicated, so we will clear up some basics and provide you with a summary of some of the best countries in each bracket.
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Legally Reduce Your Tax Burden
At Nomad Capitalist, we know through the experience of helping clients on a daily basis that there is another way. You needn’t settle for less, and there are plenty of countries where you can live the life you deserve and significantly reduce your tax burden. Of course, we’re not simply talking about tax havens, and we’re certainly not talking about hiding your money.
There are plenty of safe, legal routes to keeping more of your cash that offer a range of lifestyle and investment benefits. That’s the Nomad Capitalist way – going where you’re treated best – with an offshore tax and lifestyle strategy that works for you. We craft a bespoke plan for each of our clients that includes the best tax-friendly countries to plant your flag.
But before you decide to do that, you’ll need to know what works best. Bear in mind that this isn’t professional tax advice. It’s information you can use to research the core elements of legally reducing your taxes.
Difference Between Tax-Free, Low-Tax, Tax Exempt, and Non-Dom Countries
When it comes to protecting your wealth, there is a big difference between theory and practice. In some way, we all know what we should do but lack the specifics to execute the plan. In truth, there are lots of myths, half-truths, and downright falsehoods out there when it comes to lowering your taxes. So before getting into the details, let’s define define the basic terms:
- Tax-free (Tax Haven) countries do not impose income taxes or capital gains taxes.
- Low-tax countries have a significantly lower average effective tax rate than other countries but tax income you make locally.
- Non-dom is a tax status that excludes your chosen nationality, citizenship or resident status.
What is a tax-free country?
There are certain places like the Gulf States, the Caribbean, Vanuatu, and Monaco where you will pay no income tax, discover them in our article 16 Countries with No Income Taxes. In short, a tax-free country is one where you will pay no personal taxes. However, there are usually conditions attached to this benefit.
What is sometimes referred to as tax havens, these countries generate enough income through other means, like tourism or through foreign investment, to reduce their dependence on income tax.
It’s important to understand that the tax-free label in some countries only applies to your income. In Dubai, for example, a 9% profit tax will be levied on companies. In others, like the Caribbean, you will well need to establish permanent residency to avail of tax-free living, and that comes at a cost. Golden Visa schemes ask you to effectively pay for by buying property, or investing in a business there.
So while some Caribbean destinations, like the Cayman Islands, do not have corporate income, capital gains, payroll, or other direct taxes, you will be asked to pay for the privilege.
Another issue is that while the government in tax-free countries won’t come after you for tax, the authorities in your home country might still do. For that reason, particularly for US citizens, it is important to establish a tax residence in a tax-free country that won’t try to get its hands on the money you earn anywhere else.
Low-tax and tax-free countries are functionally similar, but they have separate types of tax systems. Whereas in tax-free countries, you pay no taxes whatsoever, in low-tax jurisdictions, a territorial system is used to tax locally sourced income. You can still reduce your taxes and even remove them, but you could pay taxes in certain situations, like renting a property or investing in a local business.
One of the other significant differences is that there are more low-tax counties to choose from. Globally speaking, there are many options, such as Switzerland, Portugal, Georgia, Singapore, and Costa Rica, where you can live well, be safe, and reduce or remove your taxes. The territorial tax in Singapore, for example, only charges tax on local income and not foreign investments.
Countries with a territorial tax system can give you more options as far as second residences, but they may require more planning.
Depending on where you’re originally a citizen, certain countries allow foreign residents to avail of reduced or exempted income tax on certain income they receive. As a resident of another country for tax purposes may qualify for relief or exemption on foreign-sourced income and dividends, for example.
These tax treaty benefits exist between certain countries and are there to avoid double taxation. However, you are generally required to be a tax resident of the treaty country.
For example, Ireland and the United Kingdom have tax treaties with the United States, Australia, Canada, and many others, which means no tax is charged on activities or transactions that are usually subject to taxation.
If you live in a country but are taxed on permanent residence abroad in certain circumstances you can claim non-domiciled status. It means you’re not subject to tax there on your worldwide income or assets, and you can bring some cash into the country without having to pay capital gains on it.
It’s even possible to have a permanent residence, and be a citizen of a country, and claim non-dom status there if you can prove you have a more substantial connection to another country. If you can show that either you or your father was born in another country or eventually plan to return there, you can claim non-dom status.
In the UK, for example, one of the best-known non-dom programs, you are not taxed on foreign earnings and only pay tax on your UK income. As long as you don’t bring foreign income or gains into the UK, or they’re below £2,000 in the tax year, you don’t have to report them.
If you decide to bring more foreign income into the UK, things get more complicated. Read our 2023 Guide to UK Non-Doms Taxes to get the full picture.
If you think that Britain is the only nation with a domicile system, you’ll be pleasantly surprised to know that Ireland, Malta, Cyprus, Switzerland, Holland, Belgium, and Italy all provide special arrangements that could help alleviate your tax burden.
These can include exemptions on foreign-sourced income, customs duties, VAT in some industries, temporary relief from corporate income, or tax holidays for foreign investors.
Achieving Lower Corporate Taxes
As more countries have sought to encourage investment by making their tax policies more friendly, tax rates in emerging and smaller countries are coming down. We know about the established tax havens where citizenship by investment is an achievable route, and we know about some more far-flung places where real economic activity is not really a feature.
Places like the British Virgin Islands, the Caymans, Vanuatu, and to some extent even the UAE, and Hong Kong are becoming less competitive when compared with the overall benefits that can be achieved by establishing a company elsewhere.
While the OECD is pushing for a global minimum corporate tax rate of 15% and 27 EU member states are required to have it done by 2023, outlier countries that have not signed up are sensing a competitive advantage. And while no tax isn’t possible in any of them, countries like Barbados (5.5 to 1%), Hungary and Montenegro (9%), Andorra, Bosnia and Herzegovina, Bulgaria, North Macedonia (10%), as well as Gibraltar (12.5%) are all low-tax countries for business.
Dialing in Your Nomad Strategy
The objective is to go where you’re treated best and achieve the best balance of tax and lifestyle benefits. Part of this is understanding the difference between tax-free, low-tax, tax-exempt, and non-dom Countries, but of far greater importance is having a strategy that meets your unique objectives and circumstances.
It could be to protect your wealth for future generations or enjoy great weather, food, and culture and travel extensively by gaining a second residence. It could be to incorporate a company overseas, access new investment opportunities, or have a backup plan if you need to diversify your wealth. It could be all of these things. Whatever your motivation is, the desire to pay no tax or little tax must be part of the bigger picture.
Our Founder, Andrew Henderson, is living proof that you can achieve anything if you’re willing to expand your horizons. He says,’’ Nomad living doesn’t require you to give up modern luxuries or carry a suitcase all over the world. It can be as simple as moving to Dubai or Kuala Lumpur or Cancun… …and enjoying the greater freedom, lower taxes, improved lifestyle (and better weather!) that comes with that.’’
For US citizens who reside outside the United States, you will be required to file income tax returns and pay other taxes as if you were living in the United States. One option to overcome this and escape the long arm of the IRS is to renounce your US citizenship. For many people, expatriation won’t make sense, but for high-net-worth people, you will no longer have to file a US tax return, report your bank accounts, report any non-US sourced income, and pay taxes on your worldwide income. Simply put, you don’t have to file and pay taxes as a US citizen would.
If you want to retain your US passport, there are still advantages to gaining second citizenship, whether through descent, naturalization, making a donation, or citizenship by investment, and you can still dramatically reduce your taxes.
The main takeaway is when it comes to your offshore strategy, nothing works alone.
That’s why we create and implement bespoke, holistic strategies for successful investors and entrepreneurs to legally reduce their tax bills and diversify and protect their assets. If you want to become a global citizen and maximize your freedom, become a client today.