Dateline: Yerevan, Armenia

I’ve been in this business for a while. One of the great benefits of that and of working with people from so many different places is that it makes it easier to notice global trends. Many times those trends are positive, but today I have to highlight one that means more work for you in the end.

This growing trend is toward making it increasingly more difficult to maintain the status of tax nonresident in many countries.

I have a client from Australia who is doing about $700,000 a year selling e-commerce. He keeps a spreadsheet of all his taxes and, from his calculations, he figured that the way we’ve set him up he’s saved about a quarter of a million dollars this year.

He called me the other day, however, and somewhere in the conversation, we discussed the need to be even more meticulous this coming year. Many countries are making changes to policies (and their enforcement) that greatly affect the offshore population.

And the overseas element that is taking the biggest hit is tax non-residency.

Now, the tax nonresident status may not become a thing of the past overnight, but it’s definitely getting harder to qualify for and maintain in many countries around the world.

There is, however, one surprising exception to this change…

For once, the US isn’t the problem

The one place this trend isn’t showing up — believe it or not — is the United States. If you remember from previous conversations, the United States has citizenship-based taxation. No matter where you live, you must pay taxes. Usually, this is a royal pain in the neck for anyone living overseas.

However, for the right kind of person, the US’ system of citizenship-based taxation isn’t such a horrible situation. I know that’s not something you’d expect me to say, but here’s the deal: under the Foreign Earned Income Exclusion (FEIE) if you spend 330 days or more in a foreign country or countries, you can exempt a certain amount of your income (in 2016 it’s $101,300) from taxation.

The big plus to this is that the US doesn’t care where you spend those 330 days. As long as you don’t spend them in the US, you’re off the tax hook for your first $101,300 of income. Not so for citizens from the EU, Australia and Canada (more on that in a minute). So, if you’re a US citizen and you run your own business, there are ways to set yourself up so you pay little to no tax.

Now, if you run a multi-million dollar business or are an employee making a million dollars a year, citizenship-based taxation won’t be so kind to you. In fact, you may want to consider renouncing your citizenship to save on tax.

However, if you don’t fit one of those descriptions, chances are you can structure your business properly and follow two or three simple rules and be sitting rather pretty. As long as you stay out of the country for all but a month, it’s a slam dunk.

There’s nothing subjective about it. Just follow the basic rules.

[Note: There is a second test to qualify for the FEIE called the bonafide residence test that allows you to spend more time in the US every year. However, this test is more subjective and requires that you prove you have a closer connection to another country.]

The real challenge: Residential-based taxation

So, if for once the US system of citizenship-based taxation is NOT the problem, what is?

Maintaining tax nonresident status is really coming unhinged in countries in the developed world with residential based taxation. Remember, there are three types of taxation systems: citizenship-based taxation (which is only used by the US and Eritrea), residential taxation, and territorial taxation.

As far as I know, residential based taxation is used by every single country in the European Union, plus Australia, New Zealand, and basically every OECD country. Essentially, it’s all the high tax countries that are going around chasing tax havens.

Under a residential taxation system, these countries tend to say, “If you don’t live here, you don’t pay tax.”

Because of that, historically what people from the UK and similar countries have done to bypass the system is to go to a place like Dubai to work. When they do so, it’s pretty clear that they are living in Dubai. It is easy to recognize that they don’t have a UK job and suddenly they have a Dubai job.

Once they are out of the UK by virtue of having another job — and they have a formal residence with a work permit — they pay no tax in Dubai (because Dubai has no tax) and they pay no tax in the UK because they’re not living there. It works the same for citizens of France, Canada and all the other countries already mentioned.

However, nowadays there are more and more people who live nowhere — digital nomads with no permanent no home. In response to the difficult-to-track digital nomad lifestyle, many countries are becoming increasingly more strict about following the requirements that define residency.

Unfortunately for the digital nomads from these countries, this crackdown does not work in their favor.

The crackdown on the finite details

For instance, the Australian tax court recently came out with a ruling against a man living overseas who had done basically everything he was supposed to do to be exempt from Australian taxation. His one mistake was that he kept a mailbox service to receive some mail from family and friends in Australia. The court ruled that the mailbox was enough to establish his residency (and demand he pay taxes) in Australia.

This is just one case among many in which the Australian tax courts have become tougher. They are finding more and more excuses. They are placing the burden of proof on Australian citizens to show that they truly do not reside in the country.

Countries around the world are increasingly doing this, and they are not only tightening the criteria but also consistently enforcing it.

But what exactly are the criteria you need to pass to maintain your tax nonresident status? Just the other day I was going through the form for Canada with one of my tax guys and it asked: “Do you receive magazines in the country?” Now, just receiving a magazine or newspaper subscription at your old house in Canada may not be enough to establish your residency there, but it might be. If it’s combined with other small slip-ups, it could be the tipping point.

These countries are quickly changing the game by letting you get away with less and less.

And when you read the list of things they want you to NOT do when you leave the country… it’s a little bit ridiculous. Some of these countries have 50-60 things that you’re not supposed to do. In part, that explains why enforcement of such rules has been relatively lax in the past. But there’s no doubt that they’re getting tougher on enforcement now.

It used to be that if you had one bank account that you didn’t do much with, it wasn’t a big problem. Now, however, countries are really cracking down and saying “No bank accounts! Period. End of story. Or else we’ll assume you live here.”

What they’re also saying is that you can’t live “nowhere.” Claiming the nomad lifestyle for tax purposes is not enough anymore. Indeed, similar to tax havens, though the digital nomad lifestyle is not coming to an end, it’s going to change dramatically.

Coming changes

I’ve said for a long time that the tax havens of the world are going to be developed countries. Let’s be honest, the United States (and Delaware especially) is already one of the biggest tax havens in the world for foreigners. As countries in the rest of the world tighten the strings on their citizens, you’re going to see more people going to the United States.

The powerful tax havens like the US or the Netherlands are quickly squashing the little tax havens, creating change across the board. Undoubtedly, digital nomad tax policy is going to change and the idea of living nowhere is slowly coming to an end in many places.

Again, not in every country. It’s not really coming to an end in the United States (ironically the most difficult country for tax), because current US policy states that as long as you’re outside the country, you qualify for the FEIE.

Conversely, other countries are demanding to know where you live. This is the biggest change of all. I’m currently helping someone from a high tax, bankrupt European country who needs to get a letter saying that he pays tax somewhere else. In his case, he needs it right away.

He doesn’t have time to pursue a second residency by spending time somewhere and paying a little tax to get on the tax roll and structure everything just right. Fortunately for him, he has high enough assets that some countries are willing to give him the letter right off. Not everyone will be that fortunate.

And that’s the kind of direction the world is going.

Governments are not going to take your word for it that you’re gone. They want you to show a closer connection to somewhere else. It’s not going to be (and it already isn’t) enough to say you live somewhere. You need overwhelming proof.

Your tax nonresident action plan

So what’s to be done? Because you will need to do something. Take this as a Nomad warning: a lot of the nomads who just started out in Chiang Mai making $1,000 to $2,000 a month and assumed they were fine because they were off the radar are going to come face to face with reality very soon.

These are the nomads who are now making more money — even if it’s not that much, $60,000-$70,000 — and the government is going to ask them now where their tax payments are. The people who didn’t cross all their T’s and dot all their I’s will be in for some unpleasant surprises.

There will be some blowback from these governments. People who’ve been under the radar will be brought into the daylight. That’s why you need to set up your overseas plans perfectly from the get-go.

That means following a couple of important steps. First, you need to check off all the boxes, fill out every form and meet every requirement to ensure your tax residency is done perfectly. Doing this can be very mundane, but that doesn’t remove the importance. Some countries will ask you questions from “Do you own a car?” all the way down to “Where do you keep your surfboard?”

Like I said, there are dozens of these questions and you’re never going to know exactly which ones apply to you and what the consequences will be. There are different ways to handle each question, but the reality is that it’s all rather subjective. It’s not hard and fast, which makes it extremely important to get the right kind of help.

The second step is to figure out where you want to establish a formal residency. Consider where you want to live and how you want to live. You can still travel quite a bit, but if the government asks where your closer connection is, you’ll need to have convincing evidence of that connection.

That means planting a few flags in one country. It certainly doesn’t mean planting all your flags in one place (i.e. don’t move all your money to one country’s bank account), but it will be increasingly important to have some kind of connection to another country. Even if it’s not your full-time base, having evidence of roots somewhere other than your home country is going to be a good step.

No one-size-fits-all solution

Again, the right answer is very subjective. You have to look at your whole situation. Do you have a corporation? If so, are you one guy or ten? What is your business? What about family? Where are they willing to go?

This is one of those situations where I can’t give a cut and dry answer in a blog post. Beyond being incredibly meticulous and establishing a formal residency, there is no one-size-fits-all advice here. And even those two steps require a case-by-case approach. You need a personalized strategy of what you’re going to do and how you’re going to present it.

This is not me withholding information, it’s just the nature of this industry. If you want to enjoy a life of greater freedom and fewer taxes as a tax nonresident, my advice is to get the right kind of help so you can set yourself up correctly from the start. Believe me, it will cost you more if you don’t.

Andrew Henderson
Last updated: Dec 26, 2019 at 8:14PM