A lot of people aspire to become a Digital Nomad. Who doesn’t want to live in a beautiful place and travel the world while working? However, a lot of Digital Nomads are overwhelmed with their tax situations – if you aren’t careful you can run into a lot of trouble with the tax authorities in your home countries and big fines could await you on your return back home. However, there’s also a lot of play-ground available to easily and legally avoid taxes.
It is possible for Digital Nomads to be completely free and not owing anything to any tax authority. Contrary to popular belief it doesn’t cost much to get started, but doing certain things right from the beginning can save you countless hours of time and money in the long run.
Here is a guide in 3 steps on how to avoid paying taxes anywhere.
ESTABLISH RESIDENCY OUTSIDE OF YOUR HOME COUNTRY
Establishing residency somewhere else than your home country can be very beneficial if you choose a country that applies no taxes to its residents or a territorial tax country.
There are around 20 countries in the world that currently don’t have income taxes. Most of those countries are small islands such as the Bahamas and the Cayman Islands however, there are also other countries such as Somalia and Western Sahara.
Then there are also territorial tax countries who only tax income earned within their borders. These countries are particularly appealing for Digital Nomads because if they are a resident of a territorial tax country, but earn their money outside its border, they can avoid being taxed on their income.
There are around 35 countries that apply territorial taxes to their residences. This includes some beautiful locations such as Panama, Costa Rica, Singapore and Hong Kong.
However, for certain Digital Nomads establishing residency outside of their home country can be quite challenging especially if you are from countries like the UK, Australia, Canada and the US.
Therefore, obtaining a second residency can be an important step for Digital Nomads. There are several places around the world where obtaining permanent residency is fairly easy.
One of the most important things to keep in mind is that establishing residency outside of your home country needs to be legitimate and will best include things such as: renting an apartment, getting a driver’s license, joining a social club and buying assets.
SETTING UP AN OFFSHORE COMPANY
Too many times I witness Digital Nomads earning money in their personal name or even using a company in their home country. Please, please, please start making money in a company and preferably in an offshore company.
Benefits of using a company structure include that company tax rates are usually lower than the basic rate of income tax. Further, by having a company you will be able to reduce the company’s taxable profit by claiming legitimate expenses. If you run an online business, you can reasonably claim internet usage, computer and telephone costs against tax.
The confusing part for a lot of Digital Nomads is that there is a distinction between you and your company regarding taxes. Your company is a completely different entity from you. The income that is generated in your company belongs to the company and can’t be used for your personal affair. Therefore, the company will, depending on the country of incorporation, need to pay taxes related to its own income.
It should be noted that it is possible that your company pays taxes in a different jurisdiction than you. For example, you might live in the Philippines and have your offshore company in Hong Kong.
It’s only further down the track that you’ll be able to get some money out of your company bank account and into your personal one which can be done through numerous different ways such as paying yourself dividends or a salary. As soon as you’ll start earning some money as an individual, you will be responsible for declaring it for tax purposes. However, the company may be liable for paying some extra taxes when it gives money to an employee, founder or third party.
I always recommend working with an accountant. It removes all the burden of working out what you’re meant to be filing and when, and an accountant will be able to guide you as to what expenses you can and can’t claim.
The most important thing is to always keep good record keeping. This doesn’t have to be difficult and in fact, there are several tools and apps that help you with this. It can be as easy as to take pictures of your invoices, scan or email all your receipts to yourself. This will help you at the end of the year when you’ll have everything you need ready to fill out your tax return or just send a spreadsheet to your accountant.
OPEN UP AN OFFSHORE BANK ACCOUNT
After having set up an offshore company you should also hold an offshore bank account. An offshore bank account is a bank account that is located in a different jurisdiction to the one you are currently living in. When you have an international business it is best to hold foreign currencies in offshore banks and profit from better currency exchange rates than a conventional bank account would offer.
Offshore bank accounts are a trustworthy tool that protects your savings and allows you to diversify your savings in solid international banks that have sufficient equity and capital reserves to face a financial crisis.
Further, offshore bank accounts open doors to investment opportunities not available in your country, higher deposit interest rates, avoidance of capital controls and gives high-risk merchants the possibility to open merchant accounts, such as those involved in cryptocurrencies, gambling, pornography or pharma products.
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NOTICE: The content of this article is not to be considered as a legal opinion or tax advice. Wanderers Wealth does not hold itself out as a legal or tax advisor. If you want to receive a legal opinion or tax advice on the matter in this article please contact us directly and we will refer you to a legal practitioner.