Considerations when choosing a Tax Jurisdiction
How can you legally benefit from your tax residence? One way is to become a fiscal resident abroad where you can enjoy some tax allowances and incentives.
However, it is not easy to make a choice and make sure that the choice is the right one. To get what you expect to achieve, you need to know how to choose the right jurisdiction for tax purposes and estimate its benefits, requirements, procedures, and possible challenges.
While many countries grant the tax resident status to qualifying applicants, only a handful of jurisdictions offer genuinely benign tax regimes (zero or low rates of certain taxes). Moreover, many governments have designed special programs that make it easier for foreigners to obtain the status of fiscal residents plus the tax privileges that come with it.
The mere fact of someone residing in a jurisdiction (permanently or temporarily) or holding their citizenship does not automatically mean that a person will receive the status of a tax resident there. In addition, there is always the risk that a person could qualify as a tax resident under the tax residence rules of more than one country.
The residence status can be chosen by individuals for tax purposes and a variety of other legitimate reasons, including the intentions to launch a business, work overseas, have better access to international education, or the desire to move to a country with political stability.
Tax residence is assigned to a person meeting certain criteria set by the host jurisdiction. The criteria and rules for granting residence for tax purposes are different across jurisdictions. Besides, the criteria for residence in double taxation treaties are often different from those of domestic law. However, there are also some common regularities.
Conventional schemes are based on the standard requirements for every eligible applicant.
- To have a documented real, permanent physical residence address in some rented or owned property (and not just a PO box or in-care-of address) in the host jurisdiction
- To have resided in the host country for more than 183 days during the fiscal year (days of entry/exit are considered days of stay in the host jurisdiction; periods of stay for the sole purpose of education/medical treatment are often not included in the period of stay for purposes of determining fiscal residency status)
- To have vital interests in the host jurisdiction (ownership of the local property and/or business, development of professional activities, membership in clubs/charities, etc.)
- To pay fiscal duties to the treasury of the relevant country.
Country-specific schemes involve reference to a variety of other factors, such as the requirements
- To submit some evidence of the applicant’s willingness to contribute certain amounts to the economy of the host state (this can be an investment or donation to some national project)
- To pay a one-time flat tax.
How to Choose a Jurisdiction in order to Swap Tax Residency
Some taxpayers have long dreamed of a utopia in which ordinary people would legally avoid paying income tax and save their earnings in full – down to the cent, penny, or shilling. To most people living in high-tax jurisdictions, including, for example, the United States of America and Australia, such a possibility seems too good to be true, and in their case, the idea of changing tax residency is out of the question. However, such an opportunity is quite feasible and legally justified in some jurisdictions with zero/very low taxes often called tax havens or countries that offer tax incentives for expats.
The history of such tax havens goes back in history. However, over recent decades, the general public’s perception of such jurisdictions has become mostly negative.
The first tax haven reported was in Ancient Greece, but tax academics identify what we know as tax havens as being a modern phenomenon.
In the 1880s, New Jersey was in financial difficulty and the Governor, Leon Abbett, backed a plan by a New York lawyer, Mr. Dill, and created a more liberal regime for establishing corporate structures, including availability “off-the-shelf companies” (but not non-resident companies).
Delaware followed in 1898, based on lobbying from other New York lawyers. Because of the restrictive incorporation regime in the Anglo-Saxon world as a result of the South Sea Bubble, New Jersey and Delaware were successful, and though not explicitly tax havens, many future tax havens would copy their “liberal” incorporation regimes.
The modern concept of a tax haven is generally accepted to have emerged at an uncertain point in the immediate aftermath of World War One.
Bermuda sometimes claims to have been the first tax haven based upon the creation of the first offshore companies legislation in 1935 by the newly created law firm of Conyers Dill & Pearman. However, most tax academics identify the Zurich-Zug-Liechtenstein triangle as the first “tax haven hub” created during the mid-1920s. Liechtenstein’s 1924 Civil Code created the infamous Anstalt corporate vehicle, while Zurich and Zug developed the Aktiengesellschaft/Societé Anonyme and other brass plate companies.
Tax academic Ronen Palan identifies two of the three major groups of tax havens, as emerging during this period:
- British Empire-based tax havens. The 1929 court case of Egyptian Delta Land and Investment Co. Ltd. V. Todd in Britain created the “non-resident corporation” and recognized a British-registered company with no business activities in Britain as not liable to British taxation. Tax academic Sol Picciotto noted the creation of such “non-resident” companies was “a loophole which, in a sense, made Britain a tax haven”. The ruling applied to the British Empire, including Bermuda, Barbados, and the Cayman Islands.
- European-based tax havens. The Zurich-Zug-Liechtenstein triangle expanded and was joined by Luxembourg in 1929 when they created tax-free holding companies. However, in 1934, as a reaction to the global depression, the Swiss Banking Act of 1934 put bank secrecy under Swiss criminal law. Secrecy and privacy would become an important and distinctive part of the European-based tax havens, in comparison with other tax havens.
- Post World War II offshore financial centres. Currency controls enacted post World War II led to the creation of the Eurodollar market and the rise in offshore financial centers (OFCs). Many of these OFCs were traditional tax havens from the Post World War I phase, including the Caymans and Bermuda, however new center’s such as Hong Kong and Singapore began to emerge. The Tangier International Zone was an extreme case of tax leniency and banking secrecy in the period following its wartime suspension, but that was brought to an end in 1960 as a consequence of Moroccan independence. London’s position as a global financial Centre for these OFCs was secured when the Bank of England ruled in 1957 that transactions executed by British banks on behalf of a lender and borrower who were not located in the UK, were not to be officially viewed as having taken place in the UK for regulatory or tax purposes, even though the transaction was only ever recorded as taking place in London. The rise of OFCs would continue so that by 2008, the Cayman Islands would be the 4th largest financial Center in the world, while Singapore and Hong Kong had become major Regional Financial Centers (RFCs). By 2010, tax academics would consider OFCs to be synonymous with tax havens, and that most of their services involved taxation.
- Emerging economy-based tax havens. As well as the dramatic rise in OFCs, from the late 1960s onwards, new tax havens began to emerge to service developing and emerging markets, which became Palan’s third group. The first Pacific tax haven was Norfolk Island(1966), a self-governing external territory of Australia. It was followed by Vanuatu (1970–71), Nauru (1972), the Cook Islands (1981), Tonga (1984), Samoa (1988), the Marshall Islands (1990), and Nauru (1994). All these havens introduced familiar legislation modeled on the successful British Empire and European tax havens, including near-zero taxation for exempt companies, and non-residential companies, Swiss-style bank secrecy laws, trust companies laws, offshore insurance laws, flags of convenience for shipping fleets and aircraft leasing, and beneficial regulations for new online services (e.g. gambling, pornography, etc.).
- Corporate-focused tax havens. In 1981, the US IRS published the Gordon Report on the use of tax havens by US taxpayers, which highlighted the use of tax havens by US corporations. In 1983, US corporation McDermott International executed the first tax inversion to Panama.
The fiscal policies of these havens are often conceived as elaborate frauds plotted by large corporations and the rich. Why so? The point is this negativity is powered by international organizations and governments or some high-tax jurisdictions. They have realized their weaknesses in the eyes of wealthy taxpayers, who prefer to invest in low-tax jurisdictions. And so they have launched their campaign against tax havens and their incentives for potential investors.
Nevertheless, every year, tens of thousands of high-net-worth individuals in search of favorable fiscal solutions resort to other tax residencies. There are different reasons for that.
A lot of people swap tax residency because they are repulsed by the ongoing discussions of politicians in their home jurisdictions about the virtues of increasing income taxes.
Many individuals are unwilling to accept the loss of their right to privacy while the tightening control over the personal data (including financial information) of individuals becomes more and more pronounced under the OECD’s proposed Automatic Tax Information Exchange (see below) and other tools.
Having recognized this trend, some jurisdictions are shifting into the low-tax category, abandoning the taxation of fiscal residents on their incomes. This is how they try to attract the foreign investment/human capital needed to stimulate the economy.
In other words, many countries today offer a path to financial freedom and allow their residents to keep their earnings. The benefits of such an approach outweigh the gains from the personal income tax. Low-tax jurisdictions offer minimal rates or no tax on wealth, capital gains, gifts, inheritance… All one must do to enjoy such perks is to analyze the facts and make the right choice of tax residency.
How to Choose the Jurisdiction by Assessing the Maximum Possible Benefit for you.
Dozens of states nowadays lure foreigners with zero income tax and other fiscal incentives. But to obtain the relevant benefits, it is not usually enough just to choose the tax residency of a particular jurisdiction and express a desire to get the appropriate status.
One will have to venture a full-scale relocation for long-term residence, meet the standard criteria set for tax purposes by OECD. In this case, you can choose tax residency from the following list of countries that do not charge personal income tax:
Antigua is a Caribbean nation with attractive immigration rules and liberal fiscal laws. By choosing the tax residency in Antigua and moving to the islands for most of the year, you can legally avoid paying personal income tax on worldwide income.
Bahamas is one of the most popular tourist destinations on the planet. The jurisdiction does not tax individuals on income/capital gains. The islands are heavily reliant on the financial sector and the tourism industry.
Bahrain. Among the Gulf states, Bahrain is probably the most favorable place for nomadic professionals. However, it is extremely difficult for outsiders to obtain Bahraini citizenship for permanent legal residence.
Bermuda is a popular tax haven, known as a luxury vacation spot for the wealthy due to the extremely high cost of goods/services. Generates income from tourism and the financial sector.
British Virgin Islands is an island nation located in the Caribbean known for its picturesque beaches and vibrant nightlife. The popularity of the tourist industry allows the government not to tax residents. Only after twenty years of residency can one apply for permanent residency.
Brunei is a small country with the highest per capita incomes due to its huge oil reserves. Most of Brunei’s wealth is concentrated in the hands of the Sultan and his associates. It is under a dictatorship, with very limited personal, social, and economic freedoms. It is virtually impossible to obtain permanent residency/citizenship.
Cayman Islands is a British Overseas Territory enjoying tax-free jurisdiction status due to tourism and a thriving financial sector, attracting high net worth expats. Such status makes the jurisdiction one of the most expensive places to live in.
Kuwait. Kuwait’s economy relies primarily on oil, which allows it to exempt all incomes from personal income tax. Despite the presence of many migrants, it is difficult to obtain a Kuwaiti residence permit. For example, a sponsorship visa from an employer would be required. Such a system has been heavily criticized as a means of incentivizing forced labor. In the case of digital nomads whose business does not need to be tied to its location, it is simply impossible to obtain a long-term visa under the current legislation.
Maldives. This is a small island nation known for its expensive resorts. Although a short vacation trip to the islands may not seem too expensive, a permanent residence in the Maldives will cost a pretty penny. Only Sunni Muslims may become permanent residents of this island jurisdiction. Citizenship is not available even to foreign Muslims. The islands are subject to the negative effects of the global warming and suffer from huge debts.
Monaco is an interesting option for tax residency. One of the chicest resort destinations. Located on the French Riviera, Monaco is known for luxury casinos and the Formula One circuit. The absence of personal income tax is overshadowed by exorbitant real estate prices, as well as the high prices for goods and services.
Nauru. This island jurisdiction was once one of the richest in the world because of its active phosphate mining industry. However, the depletion of fertilizer reserves has turned this jurisdiction into a declining economy. Today its territory is used by Australia as a temporary detention center for asylum seekers. There is nothing attractive about the island, and the lack of taxes is practically the only advantage.
Oman. A Middle East country rich in oil. Oman is rapidly developing its tourism and shipping industry. The government is working hard to attract highly skilled migrants to fill the vacancies.
Pitcairn. The Pitcairn Islands are a British overseas territory with a tiny population. Located in the middle of the Pacific Ocean, the jurisdiction is known as the most isolated sovereign state. Its economy is based on fishing. Immigration procedures are extremely easy, but residents have nothing to engage themselves in on the islands, and you have to get there by ship.
Qatar. Vast reserves of fossil hydrocarbons have allowed Qataris to achieve the highest per capita income, making the taxation of individuals unnecessary. Visa and immigration rules are quite strict.
St. Barts. Saint Barthelemy, a French-speaking Caribbean Island commonly known as St. Barts is an overseas collectivity of France in the Caribbean known for luxury tourism. The cost of living is much higher compared to other Caribbean Island jurisdictions. It is not difficult to obtain a residence permit if the candidate is a citizen of the European Union. During the first five years of residence the new resident is subject to a 30% personal income tax, and then it will be possible to live tax-free on the island.
St. Kitts and Nevis is a Caribbean tourist country with no resident income tax. It is located near Antigua and offers liberal immigration laws (see below).
Turks and Caicos Islands have the status of a British Overseas Territory. It is heavily dependent on tourism and financial services. Immigration laws are not overly strict and require applicants to demonstrate financial independence.
United Arab Emirates. The UAE is a group of emirates including Dubai and Abu Dhabi. The jurisdiction has huge oil and gas reserves. Besides, it is seeking to diversify the economy through the development of tourism, construction and financial services sectors. In particular, Dubai today is known for impressive megaprojects, from skyscrapers to artificial islands. The country receives a huge number of migrants sponsored by employers. It is possible to get a residence permit by opening a company in the UAE.
Vanuatu is an island nation with zero income tax, relying on tourism and the financial sector. The disadvantage is its rather low level of infrastructure development compared to other tropical resort destinations. The geographical location is far from optimal: it is quite difficult to get to the islands.
Vatican is a very specific state. It is impossible to obtain Vatican residency status without being a high-ranking member of the Catholic Church. With its micro-state status, the Vatican generates its income mainly from donations from religious organizations, pilgrimage and religious tourism, and investments. There are no taxes at all.
Wallis and Futuna. These islands are French Overseas Territories. This circumstance allows EU citizens to enter and leave the territory easily, as immigration laws are similar to those of France. Non-EU citizens have to put up with stricter procedures. The islands are financed by France and make their living through fishing. Tourism is virtually underdeveloped, but expats can easily find beautiful beaches and other places to relax in. The local prices are rather moderate, so the cost of living is not high.