Where to live to avoid paying tax on world income? The answer is not so obvious

Independent financial advisor Natalia Smirnova wrote in her Telegram channel Smirnova Capital about what is important to take into account when calculating your own tax burden, especially if you live in one country but receive income in other countries. Oninvest publishes her post in full.

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Where to live in order not to pay tax on global income? It would seem that the answer is obvious: you just need to live in a country where there is no income tax. Or in a country with a territorial principle of taxation (countries with non-dom tax regime and taxation on the principle of remittance).

In reality, however, this does not mean that you will not have any taxes anywhere at all. Moreover, it does not mean that income registered abroad will not be recognized locally. Let's briefly discuss this issue, as it is one that I often encounter with my clients.

- Where there is no personal income tax at all

There are countries where there is no personal income tax in principle. In such jurisdictions neither local nor foreign income is usually taxed, if it is personal income of an individual.

- Where foreign income is not taxed

The second group is countries with territorial principle or non-dom/remittance regime. There, tax is usually taken from local source income, and foreign income is either not taxed at all, or is taxed only when transferred to the country.

But there is a nuance here: in some countries foreign income is exempt from taxation on a territorial basis, in others - on the remittance rule, i.e. the tax appears when the money is "brought" into the country. These are different models and should not be confused.

Everyone forgets about it for some reason, but the absence of tax in the country of residence does not cancel it in the country of source of income. For example, dividends from the USA will be subject to withholding tax in that country (for example, you live in the UAE, which is tax-free for individuals, but your American dividends are subject to a 30% withholding tax in the USA).

In the case of renting out real estate, income tax will be in the country where the property is located (if you live in the UAE but rent out an apartment in Germany, you will be taxed in Germany). Business income will be taxed where the economic activity is actually created.

And quite often tax-free countries do not have a double tax treaty with popular source countries (USA, etc.), i.e. no preferential tax rates. So moving to a tax-free country may even de facto raise taxes at the source of your income, such as the US.

That is, the scheme "move to a low-tax country and forget about taxes" works only partially. You need to look separately at each stream: dividends, interest, rental income, salaries, fees, royalties, capital gains. And look at taxes in the source country.

If the company is registered abroad but is actually managed from your country of residence, this income may be recognized as local income rather than foreign income.

The key question here is not only where the company is registered, but also where the center of management and control is located, where decisions are made, where the actual business is conducted, where you personally do the work. If you live in country A and your company formally sits in country B, where there are no taxes or they are very low, but all the operations, negotiations, management and sales come from country A, the tax authorities may have questions for you.

That is why not only personal tax residency is important for entrepreneurs, but also the place of actual management of the business, as well as the economic reality of the transaction.

Not everything is so unambiguous. It is not correct to look only at the tax in the country of residence, it is important to assess withholding taxes for each type of income, and to take into account the existence of a double taxation treaty, and also, in the case of a business, to look at where it is managed from and where the economic value is created. And then understand the tax burden.

This article was AI-translated and verified by a human editor