Updated September 2019 with info from my new book.
As international entrepreneur you can reduce taxes to zero %.
That’s right. This can be achieved by anybody, yet nobody seems to understand this (anybody but US citizens, because the United States taxes based on citizenship – but serious savings are possible).
In any case, it is about time someone wrote this article.*
Down below we will first discuss a few fundamentals, then have a small case study and then discuss some risks.
Keep reading, it might be the most profitable 5 minutes of your life…
Fundamental 1. Residency.
If you are a non-American you are taxed based where you are resident. This roughly means that you pay taxes based on where you live and where your economic life takes place. Rules determining when you are considered resident differ from country to country.
But the most important facts for you now are: there are countries that don’t have taxes and there are countries that don’t tax income that is generated abroad.
Choose one of those as your new country of residence. The rules for obtaining residency may vary greatly, they may require getting a job, making an investment or starting a company. In any case you will have contribute to the economy of the country you move into (they probably already have useless pricks enough).
Becoming a non-resident
More importantly for now is how to become a non-resident from a high taxed country. This can be relatively easy, or very hard, depending on where you currently live and how you make your money.
You see, your existence in the Western world is as being in the grasp of a giant veracious octopus, sweeping its tentacles and sucking them onto everything of value. The more business ties you have with a country, the more work it will be to become a non-resident.
What do I mean with business ties?
In my case, after I found a job in Dubai, it took me 15 minutes to declare non-residency. I took a plane and stopped paying taxes. Setting up a business after I had already left, meant that I do not have to worry about taxes right from the start (or reporting, audits, permits or bookkeeping, for that matter).
It is a different case when you currently own assets like a bricks and mortar business or real estate in a high taxed jurisdiction. Even immaterial assets like intellectual property can produce a tax liability. Most governments will assume that value was created using the benefits they provided…
…and they just hate to see you go…
Get some advice from an expert on valuations and exit taxes if this applies to you BEFORE moving you or your business offshore. Because most countries will force you to make some sort of final settlement.
- Some countries will require you to proof that you have become resident of a new country before they release their sucking tentacles. If this applies to you, make sure your case is clear and you do not end up in a dispute. Western governments are bankrupt and out for blood. At the same time they are not almighty and you do have opportunities if you have an international mindset.
Make sure you have a solid case, and fear not, my brave lad. Many have navigated these waters before you. With astonishing success…
- It might be a wise idea to get set up a company AFTER you have left. It will save you the trouble. This way, there are cases that you don’t even have to go through the trouble of establishing residency.
- Once you are an establishment non-resident you remain free of all taxes until you decide to go back. And…
Make sure you cut all ties to your current jurisdiction as swiftly as possible.
Fundamental 2. A Tax Free Business
There are countries that don’t have any form of taxes for (offshore) corporations (Dubai, Seychelles, BVI, Cayman Islands, and much more). But governments look at facts. So setting up a company in a low tax jurisdiction alone is not enough to stop paying taxes.
One important factor can be where the company has its permanent establishment. This is the fixed place of business which generally gives rise to income or value added tax liability.
That is why you can NOT just set up a company in the Cayman Islands while living in Europe and not pay taxes.
The good thing is that when you are traveling around, or living in a no-tax or territorial income tax country, you are unlikely to run into these permanent establishment issues.
You will realize that suddenly nobody really cares anymore what you do. Nobody tells you what to do, what forms to fill and how to live.
An interesting experience and a good feeling. To say the least…
More detailed info on where you or your company are actually taxed read Where To Pay Taxes (opens in a new tab).
To make this a bit more lively for you I will explain how this will work for a particular business model (there are much more possibilities). Let’s say you are a consultant, designer, IT specialist, marketing guru, writer.
You are working from your laptop.
Doing basically any business that allows you to send invoices for work done over distance.
You make sure that you become resident in a jurisdiction with no taxes (like Dubai or Cayman Islands) or with a territorial based tax system (like Panama, Costa Rica, Philippines, Malaysia, Hong Kong, Nicaragua) and you work while you are on the road.
You can set up a company in an offshore jurisdiction of choice and you open up an international bank account. You invoice your client and pay yourself a salary. There will be no VAT, no dividend tax, no income tax, no capital gains tax. Nothing.
There are also jurisdictions that don’t oblige you to file annual accounts. So you can save yourself some trouble there.
In certain cases, you don’t even have to register a business. You can send an invoice in your own name.
So there is zero paperwork and there are no taxes.
How does that sound?
Reduce Taxes: Possible Difficulties
Now this set up can be done very easy, but there are a couple of things you have to take in mind:
- Some clients might look strange at having to wire funds to a bank in an exotic country. They might also have to wire funds via correspondent banks, which might add to the learning curve. Make sure they are fine with it.
- For a a lot of quite essential financial products like bank accounts you might need to provide a proof of residence like a utility bill. This can be difficult when you are not living anywhere. Take this into account while making plans.
- We discussed only one simple set up. When your business requires things like hiring staff or renting an office space, you could run into challenges when you have an offshore company and you need for a more solid solution.
- Getting a merchant account or an account with the well known payment providers can be difficult when you are using an offshore account, but it is certainly possible.
- There are so many variables and every individual has a different situation. So it is difficult to get the right information that applies specifically to your situation. You do need to try to understand the basic principles yourself.
Well, there you have it.
The first introduction into how you can pay less taxes while becoming a digital nomad or an international entrepreneur.
If you want to understand the full details of taxation for people like yourself, I created a well-researched, well-liked and affordable book called The Tax-Free Digital Nomad.