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Territorial Income Tax – How To Eliminate Income Tax As An Individual

MEDIA / Articles / 2013 / Territorial Income Tax – How To Eliminate Income Tax As An Individual
In our newsletter we have discussed a number of times the difference between multinationals and small to medium sized international entrepreneurs. We remind our readers that the international financial industry is becoming more regulated, and that the small entrepreneurs are left holding the bag because of increased compliance costs and other bureaucratic nonsense.
But today we will look at an option that is available to individuals. A way when correctly used an individual can eliminate his income taxes.

We already explained the tax benefits of moving to Dubai, but there are other countries that have competitive arrangements for wealthy / entrepreneurial foreign individuals, as you will find out in a minute.

Territorial Income Tax For Individuals

To determine taxes, countries generally use one of two systems: territorial or worldwide.
  • In the territorial system only income sourced inside the country is taxed.
  • In the worldwide system, residents of the country are taxed on their worldwide (local and foreign) income.
We will take a look at the territorial income tax system. It demonstrates that there are countries that do not care what happens outside of their own borders as long as you bring in cash.

Which Countries Allow You To Live Tax Free Within Their Borders?

Dubai is not for everybody. Luckily, there are a lot of (surprising) other countries that could be of interest. And they are not all small tax havens. Some of these countries are very pleasant, and already on the top lists of ex-pats and pensionados.

Please take a look at the following list:

The first 23 countries in the list have understood that entrepreneurs drive the economy and do not bother their subjects with income taxes.

Any of these countries could be an interesting choice if you wish to regain tax-freedom. And with the UAE, Maldives and the Bahamas there are plenty of places where the quality of life pleasant and the wife can get a tan.

The second part of the list focuses on countries that do tax local income, but not the income generated abroad. On this list, there are a number of high quality countries that stand out…

In Asia we have Hong Kong and Singapore. Two world class financial centres with high standards of living and financial and corporate services. If you prefer nature there is Malaysia, a multicultural melting pot with a favourable business climate and friendly policies towards foreigners. The Philippines only taxes worldwide income of citizens, so as a non-citizen you can buy that extra can of San Miguel light.

Across the globe there are some other options that are already high on the agenda for people to visit and settle: Central America. With on the higher end countries like Panama with its business climate and financial services and with Costa Rica with health care services and its breathtaking nature. On the lower end you can find upcoming Nicaragua and diverse Guatemala.

How To Use Of A Territorial Tax System To Your Benefit?

Ok, you have picked a country you want to live in. The question now arises, how to make use of this system.
Although the general idea is clear, it is all in the details. The following things you have to take into account:
  • Passive vs. active income. In taxation the distinction is made between active income (for example salary payments from a trading company) and passive income (for example royalties on intellectual property). You have to check if your country of choice exempts the type of income your business generates (or structure you business in a way that it does, of course…).
  • Permanent establishment. You want to avoid that the local tax authorities claim that the company that pays your income de facto is run inside the country, meaning it has a permanent establishment and is liable for local taxes. You have to make sure that the source of income really is abroad. It has to have what is known as “substance” in the source country.
  • Exiting country arrangements. Of course if you are having a company in a high tax jurisdiction that taxes outgoing dividends at the source (withholding taxes), this arrangement might not work. For example US based companies are taxed 30% on outgoing dividends. In that case you have to look if there is a double tax treaty between the country that is the source of income and the country of destination that can be applied to lower some of the tax liabilities.
  • Visa requirements. In most countries you will need a visa in order to stay permanently. There are usually a number of different visas, but a distinction is between and investment visa and an employments visa. In case a starting entrepreneur does not have the funds to obtain an investment visa, he might need to arrange an employments visa. This might make him liable for local income taxes.
These are the most important issues and there will be more depending on where you are from and what the financial situation is.

A good source of information is the Global Executive overview that is published by Ernst & Young (1). It contains a treasure on information per jurisdiction, its taxation and the tax treaties in place. It is published in 2011 so you should always check if the information is up-to-date.

The bottom line is that if you structure your business in a jurisdiction where you are left alone and move to a place where they are welcoming you like a valuable asset, you are on your way to lowering (or totally eliminating) your taxes, as some of our clients already have done.

A big moment of joy for us always is to see people opening their eyes once they have moved to a low tax jurisdiction. They keep a tremendous amount of wealth for themselves and they start living by their own rules.

Do contact us if you wish to get more information. Freemont can also help with structuring business in such a way that for tax reasons they are considered local in Dubai (and ensuring substance requirements are met).

You might also be interested in:
Do you want to set-up a tax free company in Dubai? Visit Which Free Zone To Choose In The UAE.
In the article UK Tax Avoidance – David And The No-Tax Goliaths we discuss how the hypocrite UK government is battling tax avoidance on one side and stimulating it on the other.
Honduras is a failed state in Central America. They are now trying something completely different: complete economic and social freedom. Honduras Free Zone Makes History.

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Thank you for your interest in Freemont Group, the specialists in company formation, asset protection and legal and advisory . Feel free to contact us with any inquiry you might have. We will provide you with a free initial consultation, and a customized solution for your personal situation.