You might have been wondering where you need to pay taxes when you are an international entrepreneur or a digital nomad.

Where to pay taxes

I will tell you where to look. And how to look.

If you fail to read this page carefully you will be dependent on very expensive advisers for the rest of your life.

All while you have to do is understand one little concept. It’s called permanent establishment.

(and we will discuss personal taxes ALSO)

 

What Is Permanent Establishment

Permanent establishment means: “a fixed place of business through which the business of an enterprise is wholly or partly carried on” [1]

To read is simple: where do your business activities take place.

According to the OECD Model Tax Convention this is what is considered as part of your permanent establishment [1]:

a) place of management;
b) a branch;
c) an office;
d) a factory;
e) a workshop, and
f) a mine, an oil or gas well, a quarry or any other place of extraction of natural
resources.

So if you want to know where to pay taxes, think where your actual business takes place. Where are the actually decisions made (where does the company pass its resolutions).

Permanent establishment is an important tool for tax collectors to make sure you pay what is due. Because it allows them to look at actual facts and not just what is on paper.

This means that you cannot just set up a company in a foreign jurisdiction and stop paying taxes. When you run a business in a high taxed jurisdiction, you will likely have to pay taxes there.

(And don’t let anybody tell you otherwise).

 

Can  I give a practical example?

Sure…

… If you own a business on the Cayman Islands, live there and all your customers and suppliers are there it is simple. You don’t pay any taxes.

So let’s take a different example.

You are from Europe, you have a company in Dubai, you produce in India and you sell to mainland South America. Where to pay taxes?

This is where it gets complicated rapidly.

A workshop is considered a permanent establishment. So you will likely be liable for taxes in India.

Your company is in Dubai where there are no taxes. But when you as a director are de facto managing the company from a country in Europe this means that the “place of management” is right where you are. So for tax purposes you might be considered a European company (place of management is the most important factor). Ouch!

To proof that the actual permanent establishment is in Dubai might not be so easy. You will need to present a strong case and non-fiscal reasons before the company can be considered a Dubai company for tax reasons. You could state geographical area, availability of work force, favourable times zone. Best would be to have a director that actually manages the company from Dubai.

What you need is what in the industry is called: substance and be able to proof that real activities take place.

 

True. It is not always easy to find out where to pay taxes. There is often an amount of uncertainty. When you really have a multinational company, you will need a tax adviser. But at least you have to basics.

In short: the main determinant of where your company pays taxes is where it has its permanent establishment.

But what about your personal taxes?

 

Where To Pay Taxes As An Individual?

…We continue in the happy wonderland of tax avoidance, like screaming children in a Disney land theme park ride…

But first we need to get one thing straight.

A company is a legal entity. It has an “identity” of its own. So even when you manage to have a completely tax free company, it is of little use when you remain living in a high tax jurisdiction.

Because when you will receive income from that company, you will likely have to declare and pay taxes in the country where you have your residency.

 

Receiving payments from your company

The most common ways (there are others) to receive funds from your legal entity is when you receive an income (salary) or a profit share (dividend).

If you get a salary, you will have to pay income tax. If you get a dividend, you will likely need to pay dividend taxes.

Dividend is almost always taxed (significantly) lower than income.

This is, by the way, the most important tax trick for any starting entrepreneur.

 

So the bottom line is that as an individual you should be living in a country that does not tax income, or does not tax income that is sourced abroad.

And there are a lot of -pleasant- places like that.

 

Conclusion

Surfing the ever changing tax free waves of this world is not always that easy as a small entrepreneur. But if you keep the lessons from this article in mind and you are already ahead of 99% of business owners out there.

 

But if you are mobile, have an international mindset and want to get started, you can step into a world of possibilities

 

 

[1] OECD Model Tax Convention – OECD, 15 July 2014- available at: http://www.oecd.org/ctp/treaties/update-model-tax-convention-2014.pdf