How To Legally Lower Your Taxes
Take yourself and your business offshore and reap the benefits of legally reducing your taxes.
Imagine for a minute that you’re looking to buy a car for $28,000.
You’re most likely going to read dozens of online reviews, compare prices at various dealerships nearby, and possibly time your purchase just right so you can get the biggest discount.
All that trouble for a savings of maybe $4,000, if you’re lucky.
Now, think about your tax bill. If your annual income is $500,000 and you live in a western country, you’re easily paying $200,000 a year in taxes.
Why not look into lowering that expense?
Let me put that into perspective. In 20 years, you will shell out $4 million in tax.
The truth of the matter is, the majority of people put more effort into checking out the reviews of the sushi restaurant they were thinking of going to on Friday night than looking into how to decrease their tax burden.
Imagine what sort of reviews the IRS would get… And I’m not just talking about personal tax here, it’s exactly the same for your business too.
People rack their brains to know how to grow their business, attract more clients, reduce their spending, and boost their profits. And yet, they somehow fail to factor in their largest expense: taxes.
Perhaps you simply consider all those taxes as a sunk cost. And if you cannot see beyond the country walls that currently confine your business, I guess that’s true.
But the world has changed dramatically and it’s time your thinking changed as well. It’s time to think globally.
Because your businesses can operate in the cloud where borders do not exist, you can “go where you’re treated best”, take yourself and your business offshore, and reap the benefits of legally reducing your taxes.
You stand everything to gain, so here’s how it works.
How to Legally Lower Your Taxes
Choose Your Business Tax Rate
Moving your business abroad is not easy, but it certainly can be done. Depending on your type of business, you could potentially pay 0% tax.
Choose Your Personal Tax Rate
Move your ‘center of life’ abroad and you could potentially pay no tax at all. Explore some of the best offshore jurisdictions first.
Get an Offshore Tax Advisor
You’ll need advice. International tax law isn’t something you want to get wrong. You’d be risking considerable fines, or even jail time. We’re here to help.
Countries Competing For your Business
The greatest advantage governments have is that they’ve brainwashed people to believe that there is nothing better.
Nowhere is this more obvious than in the United States.
People spend their entire lives thinking that the USA is the best place on earth to live, educate their children, go shopping, do business, and invest.
They would never believe that they could get ahead anywhere else.
But things have changed: location-independent businesses are thriving with consulting empires being built over the phone and Amazon FBA sellers sourcing and selling products on a global scale.
You can basically make money anywhere in the world if there is an internet connection.
So, let’s flip this thing on its head. Instead of believing that one country has a monopoly on the perfect lifestyle and business environment, realize that there are countries out there competing for your business.
Let that sink in.
Dozens of countries across the globe want successful people like you, and they’re willing to pay with lower tax rates, fewer regulations, more efficient systems, and many other benefits.
If you’re looking to lower your tax burden, you’ve got options.
It’s time to shop around.
Countries – especially the ones that are looking for immediate access to capital to sustain or accelerate their growth – are seeking successful business owners, investors, and high-net-worth individuals to move to their country.
They will take a small slice of your profits, but largely, they have set up their tax regimes to be beneficial to you.
Nothing excites me more than helping businesses to legally lower their tax bills by setting them up with well-thought-out tax planning strategies so they can go where they’re treated best.
My team and I can help you through the whole process, from shopping around to find that ideal place to creating your holistic strategy so that you can legally reduce your personal and business taxes.
Choose Your Tax Rate
If you’re reading this from a high-tax-rate country, I’m sorry to say, but you’ve chosen to pay that high tax rate.
By choosing to stay put, you are sending your own money down the drain and straight into the pockets of the taxman.
Your government has been successful because they’ve convinced you that you need to hand a considerable percentage of your income over to them on a regular basis.
You cannot go anywhere else. Your business will crumble without them. You owe it to them. The rest of the world is dangerous. You’re safer at home. It doesn’t get better than this…
That’s what they have you thinking.
But that’s simply not true. You can choose your tax rate. For some, this will be 0% – living the tax-free life to the fullest. Others will choose to pay a low percentage as a trade-off for other benefits.
For instance, you may forego paying 0% in Belize and choose instead to pay taxes in a country like Italy or Portugal where your total tax bill will be substantially lower than what you pay now.
You’ll lower your taxes but not eliminate them, but you’ll be living in Italy instead of Belize.
Do you see the trade-off?
There are plenty of jurisdictions offering either one of these options – zero or low tax.
There are also many countries that offer tax exemptions, tax holidays and other similar incentives to motivate people to move there.
By deciding to go where you’re treated best, you can choose your tax rate and take control of your life.
It’s up to you.
Offshore Strategies That Will NOT Lower Your Taxes
Now, there is an important difference between choosing your tax rate and skirting the taxman.
One is legal, the other is not.
So, before we discuss the techniques you can employ to lower your tax burden, let me dispel two pervasive myths about lowering your tax rate.
First, there are many people who believe that they can pull off the exact same strategies used by Google, Starbucks and Amazon to lower their taxes.
But your business is probably not a multinational company with a hundred thousand employees and offices spread all over the world.
That’s just not your reality.
Your business neither needs nor can it execute such a highly complex tax plan.
Google’s tax plan will not work for you. You need something specific to your business and your personal situation.
The way you do things must be, as they say in Southeast Asia, “Same same but different.”
Don’t copy someone else’s plan because it works for them. That could land you in hot water. Instead, make a plan based on the same principles but that is tailored to you. Think things through and then create solid systems with the help of professionals.
Second, many think that if they open an offshore bank account, they’re automatically exempt from paying taxes on the money in that account.
And, once again, that couldn’t be further from the truth.
An offshore bank account will certainly protect your money, hold foreign currency, and even garner higher interest rates.
But it won’t lower your taxes.
Just because the money is overseas doesn’t mean it won’t be taxed at home.
Ultimately, the jurisdiction where the money is earned is what matters. And if you’re a US citizen, all that matters is that the money belongs to you.
An offshore bank account won’t lower your taxes. So, let’s look at what will…
Lower personal and Business Tax
I’m the goody two-shoes of the offshore industry. I’ve earned that reputation because I insist on doing things legally. Anything less than 100% legal is unacceptable.
The same should be true for you. If you want real freedom – not just lower taxes – then you need to do things properly without cutting corners.
But when you don’t know what you’re doing, it can be easy to slip up here and cut a corner there without even knowing, until you’re slapped with an exorbitant fine or even faced with jail time.
Creating an international tax strategy is complicated.
That is why I have created the tax-free quadrant to simplify the bigger picture and illustrate the different elements you must address to ensure that you can legally lower your taxes.
There are two ways that you are taxed: based on where you live and based on where your business lives.
The difference between the two becomes much clearer when you go offshore, but they are also intricately connected. You cannot talk about lowering your business taxes without addressing your personal tax, and vice versa.
And when you do make the move offshore, you must clearly understand the rules and provisions affecting your business and personal taxes in both the place you are leaving and the place you are arriving.
The tax-free quadrant takes all of this into account with its four separate quadrants:
- Your personal tax in the place you’re leaving
- Your business tax in the place you’re leaving
- Your personal tax in the place you’re arriving
- Your business tax in the place you’re arriving
Each individual quadrant impacts the others. You must have a strategy to address all four or you won’t have a comprehensive tax plan.
1. Your Personal Tax in the Place You’re Leaving
Have you always dreamed of moving your business to the British Virgin Islands – a long-standing offshore tax haven – and saving on tax while you continue to live in the US?
Not going to happen. That’s not how offshore business works.
If you’re personally a tax resident in a high tax country (e.g. the US, Australia, Canada, the UK or New Zealand), then your corporation will also be tax resident there.
It won’t matter if you’ve incorporated offshore.
In fact, all that an offshore company will give you is more paperwork. If you’re a US citizen, your company will be considered a Controlled Foreign Corporation and, since you are personally based in the US, your company will have a permanent establishment there and will qualify as being engaged in a US trade or business.
All of these provisions, among others, will result in a mountain of reporting requirements for your offshore company… that will ultimately be taxed in the US anyway with very few tax savings, if any.
You personally need to leave a high-tax country to enjoy tax reduction benefits.
There are countries that do not have these provisions. Most western countries do, but there are countries that are more lenient and want your business and so they will not subject you to such strict provisions.
But if you’re in the US, the UK, Australia, or Canada, you cannot set your company up offshore and then live at home. You need to leave.
That doesn’t mean you can’t go back to visit. It doesn’t mean you need to renounce. And if you decide that you don’t like living abroad, you can always go back and pay taxes again.
But it’s not that difficult these days to find new locations you’d be happy to call home. There are plenty of incredible places to live and run a business around the world.
You must be sure, however, that you have successfully exited the tax system of your home country. If you think that this merely means living in your home country 182 days or less per year, then think again.
It’s far more sophisticated than that. If you’re looking to leave a country, spending less than half a year there is not enough to count as ‘leaving’.
Recently, countries have started to consider an individual’s center of life, where they derive their economic subsistence, and where their center of vital interest is located, among other factors.
That’s why you need a solid plan if people come asking questions. In most cases, you’ll need to dissolve all ties with your previous country:
- Close bank accounts
- Sell your car
- Sell or rent out your home
- Change your mailing address to another country
The fewer ties you have to the country of your previous tax residency, the better.
If you get the right professional help, personally leaving a jurisdiction should be a straight-forward affair. US citizens, however, should keep in mind that they will remain liable to file annual tax returns wherever they are in the world.
US Citizens and the FEIE Advantage
If you’re a US citizen, there is no escaping the fact that you’ll always be a US taxpayer unless you renounce your citizenship.
The renunciation matter gets complicated if you still want to be spending some time in the United States and enjoy the advantages that US citizenship provides.
But if you’re a US citizen who is a tax resident abroad, you get to enjoy a sizable tax exemption.
Sure, the $105,000+ exemption might not seem big in the grand scheme of things if you’re a six- or seven-figure entrepreneur, but every little bit helps. That’s already a start on your tax reductions strategy.
All you need to do to qualify for the Foreign Earned Income Exclusion (FEIE) is spend 330 days in a given tax year in a foreign country or countries.
Based on the FEIE rules, you won’t be asked where your new tax residence is located. All you need to prove is that the US is no longer your home.
It doesn’t necessarily mean that you will pay no tax, especially if you’re making more than the threshold, but it does mean that your tax bill will be reduced dramatically for the first $100k.
2. Your Business Tax in the Place You’re Leaving
Whereas moving your personal tax presence is relatively simple, moving a business entity is more complicated. However, it all depends on whether you’re a tax-resident in the jurisdiction where your business is located.
For example, if you’re not a tax resident in the US and have an LLC there, you can just up and move your business to a new jurisdiction – you won’t have US tax obligations anymore.
If you are a US tax resident and have an LLC that you wish to move abroad, you’ll need to contribute it to a new jurisdiction.
Things also depend on the nature of your business. Is it a one-man show? Can the owner quit and move assets to a foreign country? Then just do that.
Or, is it an actual business with daily operations taking place? You’ll need to talk to a tax advisor to move such a business because you might be liable to pay tax and you definitely want to minimize that.
In such a scenario, the ideal way to transfer your business to a new jurisdiction would be to sell the business to yourself.
And what if you own some intellectual property, say a patent worth $100,000?
You could also do a tax-free reorganization to a foreign country (ideally, one with low or no tax), but western countries such as Australia and Canada will try and make you sell it and pay tax over the sale.
Moving your business abroad does not always mean that you have to undo your entire business structure. Sometimes that is the case. Sometimes it’s not.
Whatever your situation, let’s talk.
3. Your Personal Tax in the Place You’re Arriving
We’re getting to the exciting bit – choosing a new country (or countries) to live in. There are two ways you can go about selecting a new jurisdiction for personal tax reasons:
Choose a zero- or low-tax country and obtain tax residency
When it comes to choosing a no or low tax country, don’t feel trapped into thinking that you must move to the United Arab Emirates or the Seychelles – two of the many traditional offshore havens.
It’s true that you should choose a country that has smaller taxes, but don’t cloud your thinking by settling for a 0% tax rate only.
Sure, there are jurisdictions such as the British Virgin Islands, the Cayman Islands, the UAE or the Seychelles where you could pay no tax, but these aren’t very desirable places to live.
Why not do a trade: pay a low percent of tax for a better quality of life? As I mentioned before, there are quite a few benefits to paying a little tax.
For one, you’ll be able to tell the tax authorities where your home base is so that no other jurisdiction tries to get you to pay their tax.
Nomad Capitalist clients commonly move to a territorial tax country such as Malaysia, Thailand, Costa Rica, Georgia or Singapore, among others.
You can live there for as long as you want and if your income is foreign-sourced, you won’t have to pay local tax at all.
And don’t forget about countries that offer all sorts of simplified tax regimes, flat tax rates or foreigner exemptions. For example, Italy will take you in if you pay them 100,000 euros in tax. That’s all they require.
Depending on your income, that could be a great deal. Say, you make 10 million dollars a year, which would make Italy’s tax bill less than 1%. It’s worthwhile checking for other such tax arrangements.
Live the life of a perpetual traveler
Your other option to reduce your taxes in quadrant three is to live the life of a perpetual traveler, if that appeals to you.
As a perpetual traveler, you would go to multiple places every year and only spend a limited time in each location so as not to trigger tax residency requirements.
You can travel as much as you like, but if you’re like me and benefit from having a base, consider my Trifecta Method.
From a lifestyle point of view, I personally like Montenegro in the summer, London in the Fall, and Malaysia in between.
You could pick and choose your own countries or just go traveling around the world while working and making money at the same time.
Just know that if you spend six months or more in any single country, they will likely try to tax you.
Obtaining Tax Residency Status
For both scenarios, it’s very important to obtain the status of tax resident in a tax-friendly country.
Even if you’re a perpetual traveler or you’re leaving your home country, the tax authorities will want to know exactly where your new tax home is located.
If you’re able to spend 90 days in one place, rent a place, get a driver’s licence, obtain a residence permit there and more, it will be helpful to solidify your tax residence case.
Establish new connections and shut down old ones when you move from your home country to a new jurisdiction. Make it look like it’s your home.
You won’t need to live there full-time, but you’ll need to ensure that the time you spend your original ‘home’ doesn’t exceed the time in your new one.
For example, if you’re spending four months in your home country and two weeks at a time in 16 other countries per year, your tax residency case isn’t that strong.
4. Your Business Tax in the Place You’re Arriving
You’d think that moving your business to a zero- or lo- tax jurisdiction would be straight-forward. But, of course, countries like the ‘fun’ of making things quite complicated.
For example, you can’t move to Portugal to take advantage of their non habitual tax residence (i.e., zero personal tax rate) and have an offshore company there. They simply don’t allow offshore companies to be registered under your name.
And then there are the curve balls, such as the US being a legitimate offshore haven for some people, and certainly not for others.
Wherever you choose, make sure that you move your company to a low-tax country and spend as little time in your home country as possible.
You don’t want to give the tax authorities a reason to think you might be a ‘double-agent’. Move overseas, hire employees or open offices to have an easier time in reducing your taxes.
And just a quick word on tax havens – they are dead as we know them. Belize might be a 0% tax country, but it’s not reputable nor desirable to live there. Neither are the Seychelles.
You must think about 21st-century tax havens, the ones of the modern era. For example, Malta could qualify with its 5% tax because it gives you so many options as to where you can bank, visit and live – the entire EU.
Business Tax Reduction FAQS
As always, questions arise about a topic that’s as complicated as business tax reduction. Here are some of the most frequently asked questions we get and their answers.
How to avoid paying taxes legally?
There are many ways to legally avoid paying tax.
One of the most common paths to achieve that is to incorporate your business offshore, open a business bank account, and move your personal tax residence to a jurisdiction that charges 0% tax too.
How to reduce business taxes?
Reducing your tax bill can be done in many ways.
You can move your business to a country that charges a low percentage of tax or one that doesn’t charge any tax at all.
Normally, paying a low tax percent gives you access to a high-quality jurisdiction that’s well-respected globally, which is important when you try to open a business bank account.
How to invest business profits to avoid taxes?
The best way to invest business profits back into your own business is through tax deferment that becomes available to you when you incorporate your business offshore.
You will get to defer paying any tax that might be due, as long as you keep your profits in your business. You can invest this money back into your company for research, development, marketing or other growth strategies.
How to avoid paying business taxes altogether?
Here at Nomad Capitalist, we don’t recommend that you set out with the goal of avoiding business taxes.
Traditional offshore havens aren’t as appealing anymore and chasing that 0% in business tax might not make sense in the long-run.
There are ways you can structure your company to pay 0% tax, but they come with the trade-off of operating in a jurisdiction that isn’t regarded very highly.
It’s just not worth your while.
The Special Rules for US Citizens
The United States is pretty much the only country in the world that taxes its citizens on their worldwide income, no matter where they actually reside.
It comes as no surprise, then, that there is a special set of rules for US citizens when it comes to doing business offshore.
It’s true that US citizens have fewer opportunities to pay 0% tax. But it’s not impossible.
You can definitely do something about it and dramatically lower your tax burden if you’re a US citizen living overseas as an expat or nomad.
Setting your business up to operate in a zero- or low-tax jurisdiction is always a great idea (think Puerto Rico), but keep in mind that you might not be able to pay 0% tax as a US citizen.
But how does 12% sound? Or 8%, even? Going from 40% in the United States to 8% will certainly feel like an improvement.
That said, you should keep in mind the stringent reporting requirements that demand that all American citizens’ bank accounts worldwide be reported to the IRS.
You may be able to avoid these reporting requirements (FBAR) if you’re married to a foreign spouse or have a foreign business partner, but these exceptions must be used with great caution.
Be careful when trying to reduce tax as an American business owner because the government has truly tightened its grip on offshore incorporation and banking.
Governments want to tax as much of your profit as possible.
Now is the time to get away.
To Sum Things Up…
We’ve covered a lot of tax reduction strategies in this article, so let’s regroup and summarize.
It is clear that the world has changed. There are now many more opportunities to make money from almost anywhere in the world.
Physical location doesn’t matter as much, which threatens the traditional work setup that countries have relied on to fill their coffers by way of tax.
Because of this, many countries are willing to go to extraordinary lengths to compete for your business, offering tax incentives to move your business to their jurisdiction.
From tax exemptions, to flat tax rates – there are ways you could avoid personal and business tax altogether.
Meanwhile, the US, Australia, the UK and other western countries are continuing to suck their people dry by charging exorbitant personal and business tax rates.
They have enough power and enough sway over their populations that they can just keep taxing them and be fine. Your country does not want to compete.
And while most people don’t bother to do anything about it, you’re here because you’re asking questions.
I’ve given you loads of techniques and strategies to think about in this article, but the most important bit of advice I can give you is to think holistically.
Consider all four quadrants before you make any moves to reduce your taxes.
You’ll likely need some advice, as international tax law isn’t something you want to get wrong.
You’d be risking considerable fines or even jail time.
My team and I help high-net-worth individuals reduce their tax bills every day.
Get in touch if you would like to find out more.
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