When most people think of how they can structure their lives so that they don’t have to pay taxes, their first thought is that they have to go and live in Dubai.
Surprisingly, this just isn’t the case. There are more ways than you might think to set up a life that allows you to legally pay zero or a very minimal amount of tax.
In this article, we’ll cover five offshore methods to lower your tax burden. Find out more about our bespoke tax planning and offshore banking services here.
Five Offshore Methods
There are countries around the world that allow you to live there either full- or part-time and keep more of your money without making drastic changes to your lifestyle. The degree of difficulty involved varies from place to place, but there are possibilities.
The five methods we’ll cover are:
- Zero tax countries.
- Low tax countries.
- Territorial tax countries.
- Non-domiciled status.
- And lump sum taxation.
Not every country or opportunity that we discuss here will work perfectly for everyone. Each individual situation is very different, but you may find something useful to help you go where you’re treated best.
1. Zero Tax Countries
The most obvious way to pay zero tax is to live in a zero tax country, i.e., countries that do not tax their residents.
The biggest problem with these countries is that it is awfully hard to get residence in any of them. Citizenship or residency is often so in-demand that you’ll struggle to get in.
Dubai is the perfect example of this, but the UAE is not the only country that makes it next to impossible to become a resident or citizen of the country. Monaco and Vanuatu both have a zero tax policy, but getting into either one is going to be very pricey.
In Monaco, you’ll be spending an incredible amount just to find a studio apartment in the “bad” part of town; and even just a parking space could cost half a million euros. What you save in taxes, you’ll lose just living there.
Other countries, like Vanuatu, have expensive processes for getting residency. These may require large investments into local companies, real estate, or just large fees to get through the process.
This is why “moving to a tax haven” probably isn’t your best option. You should really look beyond these zero tax countries. There are many costs that people forget they’ll still have to deal with when they see the words “zero tax.” But forgetting those other costs may just put them into an overly complex or pricey situation.
Not all of this is cost of living. There are also different forms of taxation that may be slipping under your radar when you look into these countries.
While starting up a company in the UAE and living in Dubai may be what some people are looking for, we don’t see the average westerner really going for this. The reality of zero tax countries is that they just won’t work for most people.
2. Low Tax Countries
Next down the list are our low tax countries. These are the countries that will tax you if you spend six months or more a year there, but won’t if you spend less than that.
If you are a resident of one of these places, you could use my trifecta method to live in several different places throughout the year to legally avoid becoming a tax resident in any one location.
But, what do you do if you want to spend all of your time in one place?
A low tax rate is much better for many of us than paying somewhere between 35%-50% in taxes. If that’s your goal, there are a few countries that I like where you can achieve a much lower tax rate.
For instance, you could go to Montenegro or Bulgaria where the tax rates are 9% and 10%, respectively. Or, you could go to Panama if you don’t mind paying as much as 25%.
The trick that you need to consider as an entrepreneur is finding a country that not only has a low tax burden, but also has no controlled foreign corporation rules. If you can manage this, you can work your situation so that only your salary is taxed at this very low rate.
While the extra money stays in your business as undistributed, retained earnings. You can leave that money in your foreign company with no regulations telling you that money needs to be moved into the country.
This is a big option moving forward. There are small countries in the world that are looking for people to come and invest in them and these countries will try to make their situation as attractive as possible for entrepreneurs from all over the world.
3. Territorial Tax
Countries with territorial taxes are a much less obvious option, but a great one if your situation fits.
These countries have a very normal tax rate, high enough that some people wouldn’t give them a second thought for decreasing your tax burden. However, in allowing you to live there, they only require that you pay taxes on local sources of income.
This means that your foreign source of income is going to be completely tax exempt.
You’ll find many of these countries mainly in Asia and Central America, usually the same areas where you’ll find countries with lower taxes as well. A few examples of these are Panama and Georgia (sound familiar?), as well as Costa Rica, Nicaragua, Singapore, Hong Kong, Malaysia, and Thailand.
In many cases, if you can get a residence permit in one of these countries – some of which we have guides on, like Panama – you can find ways to legally pay less in taxes by just bringing into the country only what you need to live on.
That being said, each country has different procedures and there are going to be different things that need to be taken into consideration for each individual country.
For example, Belize is only interested in retirees, so their system is set up to give residency to mainly older applicants. The Philippines, on the other hand, has a program for “retirees’ starting at the ripe old age of 35 years young.
Hong Kong is very difficult to get into unless you start a company there, but if you live in the country, you’ll have to pay taxes on all of the income from your business. And Singapore will require millions for you to get in this way.
Smaller countries offer good options when you’re looking into territorial tax countries (places like Thailand and Panama) because they give you much less hassle over your income.
If you don’t need to be earning income in the country where you’re living, places with a territorial tax are a great option for you to lessen your tax burden.
4. Non-Domiciled Status
We don’t deal with this much at Nomad Capitalist because, for most people, this is a very complicated option that we don’t believe has as many rewards.
Non-domiciled status means living in a country, like the UK, but not being considered an officially domiciled resident there. This creates certain restrictions on how you can run your business, as well as other hoops you’ll have to jump through. However, it gives you an opportunity to often pay just a flat fee or nothing at all when it comes to taxes.
Because you are not domiciled in the country, you’re not liable to pay tax on your global income.
If you’ve been paying attention to this article or our blog in general, you know that we believe the best places to live are those where the cost of living and taxes are lower. Figuring out your non-domicile status so that you can remain in a country with a high cost of living doesn’t solve both issues.
Non-domiciled status is an option for people who want to lower their tax rate while living in a country like the UK. It’s possible, but it is a very complicated process that is becoming harder to achieve in many places than easier.
5. Lump Sum Taxation
Our last option isn’t one that gets brought up much anymore. This is likely because lump sum taxation isn’t necessarily going to work for the average nomad and is more a tax strategy of the ultra-wealthy.
That being said, lump sum taxation works as simply as a country taxing you a single sum each year based on what expenses you incur while living there. Switzerland uses this system for non-citizens living in the country.
This could be something like taking your annual rent, multiplying it by seven, and then paying that as your tax.
Other countries have recently taken up similar systems, charging people a flat rate a year to live in the country. The goal behind lump sum taxation is to bring in revenue from the wealthy looking for somewhere they can lighten their tax burden.
It’s a plan that works for places like Jersey and Gibraltar because they would probably go unnoticed if it wasn’t for this type of system.
You aren’t going to be paying zero tax going to a country like this and that lump sum is not going to be cheap for the average person. These sums could be anything from €30,000 to €100,000.
The advantage here is that living in these places will allow you to have a very Western European lifestyle with very little hassle. Governments won’t be concerning themselves about where your business is, how much money it’s making, or where that money is right now. You’ll only be responsible for keeping up with the demands of the lump sum tax.
If what you’re looking for is being left alone to live a particular lifestyle and you have the money to afford it, somewhere like Switzerland, Jersey, or Gibraltar could be good for you.
Looking to the future, however, we don’t see many places keeping these policies. The Canton Islands have been phasing them out and Switzerland seems on the edge of doing so, as well.
This is often due to external pressure. A country offering lump sum taxation will pull wealthy expats and their associated revenue from surrounding countries with higher tax rates. Of course, these other countries do not like losing their revenue source. So, they put pressure on places like Switzerland to give up these systems.
This is the main reason that you might see fewer of these systems in existence in the future.
Conclusion
These are the five different ways you can begin to legally reduce your taxes from what you pay now to anywhere between 10% and zero.
Each individual situation is going to be different. How much you can save and how drastically your situation is going to change will depend on how much you make now and what kind of lifestyle you want to live.
Our clients take all kinds of different paths to go where they are treated best.
As you travel and consider how you can make some of the ideas, concepts, and methods we talk about at Nomad Capitalist a part of your life, make sure you pay attention to the tax laws of the countries you travel through.
Some of them won’t have the same regulations and provisions you’ll find in your home country, making them more tax-friendly to you even if their headline tax rate is higher.
If you want help finding the perfect tax systems and international structures to streamline and reduce your business and personal taxes, feel free to reach out.
