Dateline: Dublin, Ireland
The Nomad Capitalist lifestyle is all about “going where you’re treated best” and planting flags in different countries that serve you better than any other.
For example, rather than trusting your savings to Chase Bank or Bank of America, you can deposit money into one of the world’s safest banks located in Singapore. Chances are that the US banks aren’t going under tomorrow, but if another huge recession hits, I’d be less worried having my money in Singapore. Additionally, banking in Singapore offers currency diversification and a certain level of asset protection.
Moves such as banking offshore are often defensive measures, set up to guarantee that – no matter what happens – you and your money will be OK. I’ve been spending most of this month living in Serbia, and people in that part of the world know first-hand that defensive measures can help you dodge a bullet.
Besides such defensive measures are offensive measures; steps you take to protect future earnings and proactively ensure your success. One of the core principles of Nomad Capitalist is reducing taxation. Of the 59,000 people who have applied for my help in the last two years, more than half expressed a desire to lower their taxes.
However, there is more than one factor to consider when planning legal tax reduction. The old days of having a Swiss banker pick up a bag of cash at your house are gone, and were never legal to begin with. In an era of increasing transparency, we always show that being open is better than hiding what you’re doing.
Factors such as your country of tax residence are important in this discussion (if you have a country of tax residence at all).
That’s where the process I call “residence planning” comes in. Residence planning involves setting yourself up overseas that you can make a legally valid claim that you shouldn’t be taxed where you are from.
If you’re a US citizen, this is a more involved process that may include utilizing the Foreign Earned Income Exclusion, tax treaties, or even citizenship renunciation to achieve your goals.
If you’re a Canadian, Australian, Brit, European, or almost anyone else besides a US citizen, you may take advantage of tax non-residency practices, as well as offshoring of your businesses and assets. For citizens of high-tax western countries, your country of tax residence is important. Most people get this part wrong on so many fronts.
However, as I recently explained in an interview, simply moving YOURSELF is not enough. We have discussed what I call the “Nomad Tax Trap” where young digital nomads simply leave home and figure there is nothing more to do. This is often not the case.
On the other hand, merely moving your ASSETS is usually not enough, either. Even Starbucks and Facebook employ people at their big headquarters in Ireland in order to avail themselves of low taxes before shifting profits from low-tax countries to zero-tax countries. Again, it’s the Swiss banker effect: simply depositing your business profits in a foreign bank doesn’t mean not paying taxes. You need a formal plan.
With that in mind, here are six important considerations for residence planning, which will allow you to determine where you spend your time and how you are treated for tax reasons.
What is Tax Residence and Why Does it Matter?
1. Where you live
As mentioned, where you live is important. If you’re a US citizen, you’ll need to spend a majority of your time outside of the United States if you want the best and most straightforward tax benefits, whether your second residence be in Puerto Rico, the USVI, somewhere overseas, or nomadic.
Many people realize that you really can’t just sit on US or Canadian or Australian soil every day and not pay any taxes there. However, there is one oft-repeated misconception regarding the fact that you only need to keep your day count in any country below 183.
This “six month rule” is often repeated and is misleading. The reality is that the “Days Test” is often one of three or four different tests, and exists more to trap you if you spend at least 183 days in any country (especially your home country), but not to necessarily let you out of the tax net if you spend 182 days. Merely spending 182 days in Australia, Canada, etc., and living nomadically the rest of the year is probably a recipe for disaster these days.
That said, your physical presence is an important part of any residence planning. As I recently explained, even if you are using a second residence just to get citizenship or tax benefits, you might as well try and find a place to be resident for tax purposes that you also enjoy living in.
To make matters more complicated, less traditional living arrangements – such as on a yacht or cruise ship – may complicate your tax reduction plans as they often fall under different tax exemptions.
2. Your place of domicile
Your place of domicile is not necessarily the same as where you are physically present. If your last known residence and tax residence was the country you grew up in, you are often assumed to be domiciled there by default, and need to prove that you are not.
One issue that often screws people up is family: if your wife is tax resident somewhere, chances are you will be deemed tax resident, too. That’s even more true if your wife is caring for your dependent children back home.
In many high-tax countries, you need to shift your residence along with your domicile. An Australian who grew up in Australia and has paid Australian taxes will often need to do more to prove that his domicile has changed than, say, I would if I moved to Australia for three years and later decided to leave. The idea is that someone whose entire life revolved around Australia until he decided to leave needs to really prove that he is cutting his ties, whereas I may be given slightly more leniency as someone who doesn’t view Australia as my home.
Changing your place of domicile is certainly doable, but it involves establishing ties to a new home as well as ensuring that financial and immediate family ties are cut.
3. Your tax residence
Your tax residence is where you are liable to pay taxes, however, establishing tax residences in friendly countries can also be a good defensive measure for some individuals.
The aforementioned Australian citizen would, in addition to being a resident of and having domicile in Australia, also be a tax resident. By breaking the necessary ties, that Australian can shed his tax residency as well. This is the process known as tax non-residency, and it is an essential part of legal tax reduction.
In a sense, a US citizen can never become tax non-resident of the United States, however, they can obtain other tax residencies and become resident for tax purposes elsewhere. This may allow them to benefit from certain tax treaties, but for most nomads I work with, US citizens either need to choose between low taxes and lots of paperwork, or giving up their citizenship.
In certain situations, it may make sense to establish tax residency in a country that will not tax your particular type of income, or that will apply very light taxation. In several cases I have seen, people who have been deemed tax resident in Greece needed to become tax resident elsewhere in order to get out of paying taxes in Greece. Greece literally wants to see a tax residence certificate from another country.
Not all countries have required this yet, although I suspect that the trend in this era of global mobility will be to increasingly ask “if you’re leaving, where will you pay taxes?” Your country of tax residence doesn’t have to be a place you spend all of your time, but you may need to show ties to that country.
I have also seen circumstances where wealthier individuals obtained tax residency in order to demonstrate that they had an answer to the “where are you paying taxes?” question. Oddly enough, many countries you operate it allow you a pass if you say “I pay taxes HERE”, even if the amount of tax paid was zero.
4. Your citizenships
As indicated time and time again, US citizens are at a disadvantage. While a British citizen can pretty surely keep HMRC off their back with tax residency in Monaco through buying a home and meeting Monaco’s physical presence test, an American cannot.
That means that residence planning takes on a different meaning for US citizens entirely, relying more on physical presence than the domicile of the taxpayer and their assets. Under the Tax Cuts and Jobs Act of 2017, complete tax reduction is now impossible for some taxpayers, meaning high-earners may want to renounce US citizenship entirely.
For everyone else, there are still some minor things to be concerned with. French citizens, for example, cannot become resident in Monaco for tax purposes. Furthermore, some residence countries will not allow certain citizenships to come there.
And when it comes to citizenship planning, take note that there are some countries that will grant you a residence permit but never citizenship.
5. Exit Taxes
You may be required to pay an exit tax when becoming non-resident of your country, or to continue to pay wealth taxes as if you never left. The most straightforward of these exit taxes is in the United States, where anyone who wants to become “non-resident” by giving up their citizenship is subject to an exit tax if their assets exceed $2 million in value on their day of renunciation.
Since US citizens can never escape tax and filing requirements (among other laws) so long as they are citizens, the IRS hits them on the way out, offering wealthy ex-citizens the first approximately $700,000 in capital gains tax-free before taxing the rest at capital gains rates.
Depending on what type of business you run, you may be subject to an exit tax if you become tax non-resident in a country like Canada, as well.
Even some US states have imposed so-called exit taxes; states like New Jersey claim they don’t exist, but residents have been hit with tax bills on their way to lower-tax states.
6. Insurance and Estate Planning
I’ll admit: I’m not the best guy to ask about estate planning. As proactive as I am in most areas in life, my status as 30-something guy with no kids working with pre-retirement entrepreneurs has made me outsource that knowledge to others.
If you have an estate, it’s important to seek estate planning advice, as some countries will seek inheritance taxes from you even if you passed the other tests to be removed from the income tax system. Stories of this are not uncommon.
However, insurance is undoubtedly part of residence planning. If you’re a resident of most western countries, you’ll have access to free healthcare provided by the government. In most cases, you lose that when you become a non-resident, and using free healthcare (if even possible) could easily be a tax tie.
For US citizens, being physically present outside of the United States used to remove the requirement to carry a qualifying Obamacare policy, although that is no longer an issue.
Without physical presence or being resident for tax purposes in a developed country, you will likely need to obtain some form of international health insurance policy. There are a number of services that offer this if you need it, and if you’re from the United States will no doubt cost a lot less as long as you promise not to seek care there.
For others, self-insuring is a better way to go, seeing that hospitals like Prince Court in Kuala Lumpur offer health care and even emergency care at laughably cheap prices.
All of these factors are part of resident planning. Again, if you’re a US citizen, you will likely want to consider citizenship planning as well. This stuff can get pretty complicated, and I’ve spent more than a decade perfecting my personal offshore plans for legal tax reduction. If you’d like my help, I’ve created a process to assist you right here.