We understand that it’s all too easy to become a victim of double taxation. It doesn’t matter if you’re from the US or elsewhere with completely different tax laws.
More often than not, people come to us saying that they’ve fallen into the tax trap and want to avoid double taxation.
So, how do you legally avoid paying income tax on foreign-sourced income?
Well, the good news is that you have various routes available to you. If you want to avoid paying foreign income tax, there are several ways around it, not restricted to the Foreign Earned Income Exclusion (FEIE), which is capped at a US$126,500 tax exclusion per person on worldwide income in 2024.
If you didn’t pass the bona fide residence test and didn’t qualify for Foreign Earned Income Exclusion, or if your self-employment tax is still too high, then the Foreign Tax Credit could work well.
So fortunately, there are several options available, but they are complicated, and this is one area where you don’t want to put a foot wrong. You need the right team to help you, and at Nomad Capitalist, we’re dedicated to providing high-net-worth individuals with tax optimisation strategies. Part of our expertise lies in legally lowering taxes. Contact us today to begin the process.
Can You Lower Taxes on Earned Income at Home and Abroad?
From federal income tax returns to capital gains to taxes on earned income, unearned income and other foreign sources, there are many ways in which a foreign country, and your own, can tax you.
So, what do you do about it?
Well, one way to lower your taxes is to move to a country where income taxes are either non-existent or minimal compared to your total income.
However, not everyone wants to move abroad. After all, sometimes countries that offer zero foreign-earned income tax just aren’t suited to you. What do you do in such a situation?
Then, your options are more limited. You can either accept the tax policies of the country you currently live in, or move about as a nomadic traveller with no permanent address. Unfortunately, neither of these two options works well for anyone.
Countries have really started cracking down on individuals with no permanent address, so in the long run, it’s a terrible idea to go without a permanent residence. You need an address – there is no way around it.
The other option is paying your resident country’s tax, which may not work for you. If you’re a Westerner, you likely disagree with the tax policies in your country, so that is also out of the equation.
Thankfully, there is an alternative for you, but you have to be smart about it.
The Nomad ‘Tax Trap’ and What to Do About It
The most commonly used alternative to legally lowering your taxes is to have an offshore bank account. If done correctly, offshore banking has excellent results, but people generally make two mistakes.
Either they think it’s too difficult, or they think it’s too easy. One of the most common mistakes with offshore banking is that some people think that all you need to do is shift your assets to an offshore account somewhere, and that’s it.
Well, unfortunately, that’s not it.
There’s more to taxes than just simply moving your money to a foreign bank. The right way to go about it is to carefully implement an offshore strategy. The last thing you want is an unprepared-for encounter with some tax authority like the US Internal Revenue Service.
As we’ve mentioned, being a nomadic traveller is no longer a viable option. You cannot possibly spend your time always travelling around the world, just hoping that you don’t fall under a specific country’s tax policies.
So, you need another alternative. But what can you do?
How to Avoid Paying Taxes on Offshore Income
It’s simply too easy to fall into the tax trap if you don’t do your research. US citizens, in particular, will find they have to pay income taxes or self-employment taxes regardless. So there has to be something that can help you, right?
Well, yes, there is. There are options available as long as you’re willing to go the extra mile to protect your local and foreign income.
Tax-Free Countries: Are They Right for You?
By now, we all know that countries such as the Cayman Islands and Monaco do not tax you. These countries make their money through financial services and gambling, for example, rather than penalising their citizens with income tax, real estate tax, taxable income and a plethora of other taxes and associated jargon.
So, no taxes. Sounds great, doesn’t it? Especially if you’re a US citizen and tired of being taxed heavily every year.
But are these countries right for you? Moving to one of them might seem a bit of a no-brainer, but it needs to be carefully thought through. First of all, they require you to move and not that many people want to move to the Middle East or any other foreign country for that matter.
Of course, every luxury is available on a Caribbean Island. But it may be too far from friends and family and, in recent years, the cost of living there has increased.
Still, if you’re willing to make the leap, then it can be a simple process. Moving to Monaco, for example, is quite straightforward.
Pay Zero Tax on Foreign Earned Income
Do you need to be in a ‘tax-free’ country to pay zero tax on foreign-earned income?
There is a lot of misinformation online about countries where you can live and pay zero taxes. For instance, there are many misconceptions about territorial taxes.
Which brings us to an important point – what exactly are territorial taxes?
What are Territorial Taxes?
Territorial taxes are quite different from what we’re used to. Basically, in a country like the United States, you’re taxed on a multitude of things, ranging from property to income taxes to foreign income and just about everything in between.
If you own a business, you may have to pay self-employment taxes. Moreover, if your income crosses into a different margin in a year, you may be subject to completely different tax rates than the year before.
Luckily, certain countries do not tax foreign-earned income at all. They have a territorial tax system, meaning you are obliged to pay taxes in that country when you make money in that jurisdiction.
Why it’s Important to Know About Territorial Taxes
Basically, if you have a job in one of these territorial tax countries, you’ll pay an income tax. If you buy property, you’ll also have to pay taxes on that. However, no income taxes are payable if you do not have any income from within the country.
These countries don’t have any foreign-earned income taxes. So, if you plan on moving to a country with territorial taxes, you are essentially exempt from paying any taxes.
However, once again, we’d like to remind any US citizen reading this that even if you’re not paying taxes in such a country, you will most likely still have to pay back home, depending on your income type. The US is not a territorial-tax country.
How to Get the Best of Both Worlds
Territorial taxes can be a great source of reducing any foreign income taxes. You just need to plan your taxes properly.
This is where Nomad Capitalist comes in. We offer tax solutions to individuals interested in getting the most out of places they already live in or would like to live in. If the investment opportunities aren’t the best, we also provide offshore solutions in foreign banks.
An excellent example of this is Malaysia.
What You Need to Know About Malaysia’s Tax Policies
Now, Malaysia has territorial taxes, so if you have foreign-earned income, you don’t need to worry about taxes too much. But what if you are interested in buying real estate?
If you decide to buy real estate in Malaysia, you will have to pay real estate tax because they have territorial taxes. Instead, you could buy property somewhere like Georgia, where the tax is low and you will get a better return on your investment.
But, if you’re buying property to live in, you can develop a strategy so that when you’re paying taxes back home (again, applicable for US citizens only), you can get a foreign housing exclusion. It’s just a matter of planning your taxes correctly. Similarly, if you reside in a country that has US tax treaties, you can even deduct housing expenses, thus further reducing your tax bill.
As you can see, if you set it up properly, you can save quite a bit of money. But there’s more.
Depending on the kind of business and income you have and your net earnings, it might be beneficial for you to settle your affairs across three, four or even ten different places that benefit you.
Like your granny told you, don’t put all your eggs in one basket. Diversifying your assets internationally can keep your net earnings in a reasonable tax bracket.
Of course, this will open up many opportunities for you, especially if the option to gain a temporary or permanent resident permit or a second passport appeals to you.
You simply need to play your cards right.
Countries with Zero Foreign Income Taxes
There are plenty of countries that have territorial taxes around the world. If you’re a passport holder or a tax resident of these countries, you can easily avoid paying taxes on foreign investments, foreign real estate and more.
To make things easier for you, below is a list of countries, broken down by continent, with zero foreign-earned income taxes:
Asia
Asia has quite a few territorial tax countries which have zero foreign income taxes. As you may have guessed, Malaysia is at the top of our list.
Malaysia
If you are a resident of Malaysia and stay there long enough to qualify for taxes, you can easily pay zero foreign earned income tax, despite the proposal made in the country’s 2022 budget to tax Malaysian residents on their income sourced from abroad except a few industries.
So, you’ll need to be smart about your investment.
Singapore, Thailand and the Philippines
Following Malaysia, there are countries like Singapore, Thailand and the Philippines. All of these countries have territorial taxes. However, you cannot simply take the example of Malaysia and apply it to these countries. Every country on this list has its own set of requirements that will allow you to become eligible based on your locally sourced or foreign income, your role in your offshore business and other factors.
Europe (East)
Georgia
Georgia is the first country we think of with territorial taxes. It is arguably one of the most tax-friendly countries in Europe, offering great rates for both residents and non-residents in almost every venture.
The tax systems in the European Union aren’t the greatest, so Georgia is the next best alternative and a great option if you want to live in Europe for a long time.
The Americas
The Americas, particularly the Caribbean Islands, are renowned for having several tax-friendly countries. However, even though the foreign income tax is significantly lower than in Western countries, the foreign-earned income tax is not zero.
Panama, Nicaragua and Costa Rica
You’ll still have to pay unless you count places like Panama, Nicaragua or Costa Rica. The common denominator between these three countries is that, unlike their neighbouring countries, they all have territorial tax systems.
Tax Mistakes to Watch Out For
When it comes to taxes, most people make some pretty serious mistakes. That’s because they were not aware of certain policies. It can be challenging to keep track of various countries’ tax policies but there are several things that you can do to ensure that you are on the good side of these things.
The most common mistake that people make is assuming that because they live in a new country, they’re exempt from paying foreign income tax. Yes, there are countries where you do not have to pay taxes whatsoever, but sometimes, the only way to avoid paying taxes entirely is by ensuring all your assets are in one country.
As we’ve previously mentioned, it’s not a good idea to keep all your assets in one place. Diversifying your portfolio is a better way to go about things. Besides, if you’re interested in an area such as international real estate, you won’t be satisfied just investing in one particular country.
Diversify Your Income
Diversification requires you to explore your options globally.
Monaco is not a bad place to move to. It has one of the highest living standards globally, but not everyone wants to live there.
On the other hand, if you choose to move somewhere with a high living standard but with a less attractive tax scheme, then you’ll just have to grin and bear the tax liability.
If you’re one of the millions of US citizens with a seven-figure net worth, you already know for a fact that you’ll have to pay gross income, self-employment income and many, many other types of taxes.
US citizens even have to pay for their social security benefits. Not to mention, US citizens spend a lot of time on their taxes, and if you get even the slightest thing wrong, the Internal Revenue Service will be at your door.
It’s almost comical. But it’s not and make no mistake, don’t put off the choices you need to make – now is the time to take your tax situation seriously. You need to follow the rules and set up your properties and business correctly.
In some cases, for example, countries may require you to pay taxes for hiring a civilian employee, renting property and other goods and services. This is especially common if your company is based in a foreign country. The reasoning is that since you’re operating the business from that country, you’re obligated to pay taxes.
It can be a bit frustrating, but you need to work these things out in advance. Nomad Capitalist is all about legality when it comes to taxes because if you get caught out, you put everything you’ve worked for in jeopardy.
Nomad Capitalist Has the Solution for You
At Nomad Capitalist, we help seven- and eight-figure entrepreneurs go where they’re treated best. If you are interested in learning more about our services, such as offshore banking, tax reductions and obtaining a second citizenship and passport, consider working with Nomad Capitalist’s team.
We’re confident we’ll be able to assist and provide you with the right information and guidance you need to legally lower your taxes, expand your wealth and become a global economic citizen.
So, reach out to us today. Learn more about making the most of your resources and elevating yourself to a higher level of financial freedom.
Nomad Capitalist is here to help you go where you’re treated best.
