Image by Bill Ruhsam
Editor’s Note: This post is the 2nd in the mini series from our international tax & finance whizz, Marion Harrington. The 1st post is here. In this post, Marion tackles some of the basic and most common questions about the subject of international financial planning…
What Is International Tax Planning?
To research and propose a completely legal and transparent structure where tax, both individual and corporate (if applicable) is minimised taking into consideration nationality, residency and domicile. It is *not* about attempting to evade taxes or hide your money away – but it is about leveraging your location independent lifestyle in a tax-beneficial way.
What’s the Difference Between Nationality, Residency, Citizenship and Domicile and Residency?
That really depends on the definitions of individual countries and it’s in this area that many people get so bogged down that they give up altogether. For the USA and UK, Nationality and Citizenship is essentially the same thing; in Europe we are all European citizens although each country has retained its own national passport.
Residency can refer to either to tax home or physical home. You can have a different tax residency from your physical residency. Each country has its own definition of what residency means. Sometimes you can have a complete hybrid!
Domicile is largely a UK legal concept that has been adopted by some other nations. There are 3 types:
- Domicile of origin
- Domicile of choice
- Domicile of dependence
It is possible, although a bit of a hassle, to shake off a domicile of origin by declaring a domicile of choice. Domicile of dependence usually refers to spouses and minors but not always. See, we told you it was complicated!
What Do You Want to Achieve With Your Financial Situation?
Just like travelling or succeeding in any field in life, if you haven’t figured out your destination in the first place you certainly won’t be able to sort out an itinerary or route to get there. Have a go at answering these basic posers:
- Can I accurately describe and quantify my ideal income/tax situation?
- Am I prepared to pay any tax at all?
- How do I feel about paying tax to a country even if I’m not living there?
- How enthusiastic am I about contributing to the economy of the countries in which I stay?
Some people find it easier to determine what they don’t want first. Those responses and thoughts can then be used to produce the flip side – what you do want.
Do you eventually plan to permanently return to your country or origin?
This question appears with great frequency on many government tax forms as you walk through the bureaucratic procedures required prior to medium/long term absence. The answer can have huge implications on tax planning so it’s very important that you give the subject some thought.
What are your proposed travel plans over the next 12 months, 3 years, 5 years and how are you intending to derive an income?
The answer will help partially define the most suitable type of tax structure for you and the individual tax regimes that you will need to investigate.
Will you be working your way round the world as you go or lugging your laptop as a tool for running a remote business?
Some countries maintain that if your services are carried out while you are on their soil, you become liable to pay tax to that regime.
To what lengths are you prepared to go in regards to achieving your tax and financial goals?
Unfortunately, the days when you could engineer a situation where you ended up a complete tax nomad i.e., not filing any sort of return in any jurisdiction anywhere in the world have largely disappeared.
Should you read otherwise, particularly on the internet – Caveat Emptor (Buyer Beware). Deeper investigation will reveal that these sorts of propositions are usually right on the edge of legality – a combination of smoke and mirrors – as well as being outrageously expensive.
It is certainly possible to legally lever yourself into a very low or no global tax situation but whether that is practical proposition or not will depend on you being clear whether you would consider:
- Limiting your upper income limit
- Breaking all ties with your country of origin–bank accounts, season tickets, burial plots
- Changing your “normal place of abode”– this could include selling existing property
- Changing your passport/nationality
Do I Have the Option for Dual Nationality/Citizenship?
It may be that you were born in a country different from that of your parents and that qualifies you for either right of abode and/or second passport. Your country of birth could offer a more favourable tax regime than the one where you are currently filing your taxes. If you’re not sure, start by asking other members of your family.
Other ways of achieving dual nationality status include marriage and even adoption but before you go along that route, make sure that you do your homework. It may not even be necessary depending on your desired end result.
What other questions do you have? Let us know in the comments or get a head start and follow our dedicated LIP Finances account on Twitter? (it’s protected for now but request to follow & we’ll let you in!)
One thing to note, is that, even with dual citizenship, a US citizen still must pay taxes on any world-wide income earned. If you set up a foreign company, and it pays you a salary, you have to pay taxes on that. There is an exclusion for the first $90K of earned income, but there are residency requirements that come with that, as well as limits on how much time you can spend in the US each year. You basically have to renounce your US citizenship if you don’t want to be on the hook for US taxes.
Thanks Marion for the eye-opening post. This subject really requires a lot of hand-holding so I’m already looking forward to the next post.
Hi Lea, Here is a specific question I am trying to deal with it. I am taking four months to go live in Asia, and start some projects while over there. I am a resident of MA. That state requires health insurance – I plan on buying a travel insurance plan – and cannot find anywhere if this meets the MA standards….I would hate to have to have useless medical insurance while I am not living there.
@Anda:
Even renouncing your citizenship won’t get you off the hook. The IRS still lays clam to your income taxes for 10 years afterward.
Thanks all for the comments – we’re busy working on the Tax & Finance guide right now so will make sure we’ve covered any questions.