You’ve made a strategic decision to optimize your wealth. By leaving a high-tax environment, you’re poised to reap the rewards of earning business income, capital gains, and dividends in a low-tax jurisdiction. But what’s the next step? In this article, we’ll delve into the pivotal role of securing a tax residency certificate for expatriates. This document not only ensures adherence to tax laws but also unlocks a plethora of financial advantages, setting you on a path to financial prosperity.
Taking control of your finances means recognizing the exponential growth potential of reinvesting your earnings—whether back into your business or the broader market. This approach accelerates wealth accumulation and the creation of generational wealth.
It’s a common misconception that transitioning offshore is a straightforward process. While some aspects are indeed uncomplicated, such as winding down operations in one country and settling final tax obligations, the relocation of your business to a new jurisdiction demands meticulous planning. Our dedicated team, with its extensive experience and expertise, is committed to guiding clients effectively through this intricate process, ensuring a seamless and successful transition, and instilling in you a sense of confidence and security.
Many people underestimate how much they need to reconstruct various aspects of their lives when moving offshore. If not managed correctly, the repercussions can be severe, potentially leading to unexpected tax liabilities and legal complications.
Tax Residency Explained
Many often confuse the terms’ residency’ and ‘tax residency,’ not realizing they can have different implications depending on the context. To clarify, ‘residency’ refers to the right to live in a country, while ‘tax residency’ is a status that determines the country where you are liable to pay taxes on your worldwide income. The criteria for tax residency vary significantly across jurisdictions, and what qualifies someone as a resident for tax purposes might differ from other non-tax residency definitions.
A residence permit allows you to live in a country temporarily. For instance, obtaining a Golden Visa can make you a resident of the issuing country. In contrast, a US Green Card grants permanent residency, subjecting holders to live in the country for specific durations.
Typically, you attain tax resident status after legally residing in a country for a specific period, commonly 183 days. This process involves fulfilling particular criteria, such as maintaining a permanent home, establishing social and economic ties, and demonstrating an intention to stay in the country.
While physical presence is the primary criterion for establishing someone’s residency status, other factors like property ownership, family connections, and financial interests also play crucial roles.
Let’s address a common misunderstanding: being a tax resident does not automatically require paying taxes in that location.
In some nations, you might only pay a minimal flat fee—perhaps $5,000, $15,000, or $20,000. Elsewhere, you may be taxed solely on the funds you transfer into that country, such as in a non-dom jurisdiction. This gives you the flexibility to choose the amount you remit, which could range from none to a modest fraction of your business earnings for daily living costs.
There are also countries with zero taxation. Thus, acquiring tax residency does not necessarily entail owing taxes, and if you do, the amount is likely substantially less—perhaps 80-90% lower—than what you currently pay.
Moreover, being a tax resident does not mean you must permanently reside in that country. However, securing tax residency is essential if you plan to relocate abroad, and here’s why.
The Importance of Tax Residency for Entrepreneurs
When you step into any financial institution, from banks to brokerage firms, their primary question is, “Where do you pay tax?”
Nowadays, many financial institutions require knowledge of your tax jurisdiction before scheduling an appointment and may even decline services based on your tax residency.
The influence of the Federal Capital Territory Administration (FCTA) and the Common Reporting Standard (CRS) has heightened the awareness of tax residency. The destination of your investments is becoming increasingly significant.
Countries like the US are concerned about the freedom to choose tax-efficient environments, although they can’t eliminate this choice. However, they leverage financial systems to impose more restrictions, except in areas like cryptocurrencies, though discussions on crypto regulations are intensifying.
As regulations tighten globally, banks and brokers are keen to know your tax details, driven by a universal push for tax compliance.
Despite this, numerous countries still offer legal tax advantages. For example, Italy, Ireland, Malta, and Cyprus provide attractive tax incentives through various programs, allowing you to enjoy lower tax liabilities.
Moreover, even as jurisdictions like the UAE adapt to the global minimum tax, they maintain tax benefits, particularly in free zones. For instance, income from the UAE Free Zone—salaries or dividends—remains tax-free. Despite global trends towards higher taxes, it’s still possible to lead a tax-efficient life, significantly reducing your tax burden compared to standard rates in high-tax countries.
Choosing Your Tax Residency
Selecting the right tax residency is crucial, especially when your assets and income are internationally dispersed. Consider, for instance, investing in U.S. dividend stocks. While you might benefit from tax-free status in some jurisdictions, the location of the investment company plays a significant role. Living in Ireland under the non-dom program would subject you to a 5% tax, whereas in Dubai, the tax would escalate to 30% due to the absence of a tax treaty with the UAE. This disparity underscores the importance of your tax residency status.
Revisiting the scenario with royalties, being a resident in a country that offers favourable tax conditions could mean paying little to nothing on royalties earned. In contrast, residing in the UAE would impose a 30% tax rate on the same.
Tax treaties might be less impactful if your income primarily comes from consulting, affiliate marketing, or product sales. However, tax treaties play a crucial role for those running multinational corporations with global offices and staff. They are generally handled at the corporate level, affecting where you declare tax residency.
The necessity of being a tax resident becomes apparent when dealing with banks, as they verify your tax payment locality.
Options for acquiring tax residency vary. When selecting your tax residency, it’s essential to carefully assess your financial landscape and income sources to choose the most advantageous option. Being transparent about your tax residency to financial institutions is crucial, whether you’re opening personal, business, or investment accounts.
Establishing Tax Residency
After selecting your new tax domicile, ensure you’re no longer a tax resident of your previous country. We often advise Americans to choose strictly tax-free or tax-neutral countries, such as those with territorial or no tax systems, to avoid additional taxation.
Consider Ireland, where you might pay local and US taxes. While feasible, this approach requires careful planning due to the potential conflicts between US and local tax systems.
Securing a residence permit, like in the UAE, allows for minimal physical presence—sometimes as little as one day per year—establishing you as an immigration resident but not a tax resident.
To establish tax residency in the UAE, you must predominantly reside there to avoid the tax jurisdictions of other countries.
It’s crucial to distinguish between immigration residence, which allows you to live in a location, and tax residence, which may require you to file a tax return, even if it reports no income.
Living as a migrant is possible but avoid high-tax countries to prevent being trapped by their tax systems. Remember, it’s not just about staying 183 days; the location is also critical.
In countries familiar with global tax systems, obtaining a tax residence certificate can prove your status for banking purposes abroad. Navigating tax residency is complex. Become a client and let us guide your transition to a tax-friendly country, ensuring you receive the necessary tax certifications.
I am Shivani Bhakar leading as an Assistant Manager for Corporate Services at IMC Group, Singapore.