30 October 2020

Pay Zero Income Tax: The Legal Way

The report on Donald Trump’s tax return published a few weeks ago in the New York Times, triggered significant outrage in the American community. Although most successful companies (e.g. Google, Amazon, Netflix, Starbucks) have long used offshore strategies to lower their taxes, many people still associate tax reduction with illegal activities and money laundering.

Here in Offshore Circle, we want to not only get you out of this misconception, but also to guide you on how to effectively and legally reduce taxes.

Before we go any further, let’s define the tax obligations imposed on all citizens.
Firstly, there is the personal tax, which is based on the place where you live. Secondly, a business tax – determined by the place where your business is located.

Both of these taxes are strictly defined by your country’s tax system.

1. Understand your country’s tax system

Tax systems between countries differ significantly. To find out how to minimize your income tax, you first need to understand the tax system you are subject to. We can distinguish between: Residential, Territorial, Worldwide and Zero Tax Systems.

  • The Residential Tax System is the most common in the EU, Canada, Japan, Australia and other developed countries. In simple terms, this system is based on the place where one lives. For example, if you are a German resident, you pay taxes in Germany (even if the income is generated somewhere else) because you have the strongest ties to that country.
  • The Territorial Tax System, present in countries such as Panama and Singapore, is much more investor-friendly and only imposes tax on income generated within the territory of the jurisdiction.
  • Accessibility and ease of use in the digital age: You probably won’t be in the country where your bank is located very often (if ever), so find out beforehand how well the online system banking works. Certainly, you do not want to be in a situation where several phone calls are required to perform a basic transaction. The more valuable the online banking is, the easier it will be to access and manage your finances.
  • The Worldwide Tax System is mainly ‘enjoyed’ by Americans and imposes a tax on income generated both within and outside the country. Moreover, the system requires that a person who no longer lives in the territory of the country still pays taxes and files a tax return.
  • The Zero Tax System, as the name implies, doesn’t tax any type of income whatsoever. The most popular jurisdictions with no income tax are: The Bahamas, Cayman Islands, Monaco and United Arab Emirates.

Now that everyone should be able to determine their tax obligations, we can move on to the next stage.

2. Find the way to legally reduce your taxes:

Let us assume that you are a citizen of a country with either a Residential or Worldwide Tax System. If you belong to the first group, below you will find advice on how to lower your taxes and possibly reduce them to zero. If you happen to be a US citizen, have a look at this article: Learn how to live tax free as an American

Step 1. Remove connections to your country

In the past it was enough to spend more than 180 days a year outside of the country of residence to no longer be considered a taxable resident. Nowadays, it requires a little more commitment and effort; one cannot simply send a letter stating that this place is not home anymore. You will need to make certain that you have minimal connections to your country: sell your car, close bank accounts, sell or rent your apartment etc.

Step 2: Become a tax resident in a low or zero-tax country

Compared to the first step, which involves leaving your current life, this one is relatively easy.

Firstly, you need to find a place where you want to live. One can choose between countries with low or zero taxation.
Each country has different regulations; some offer tax residence to individuals that spend a specific time domestically. Other jurisdictions have a number of requirements, such as demonstrating that you have an economic connection to the country.

Step 3: Transfer or open your business in the chosen jurisdiction

If your goal is to pay zero income tax, you need to incorporate in a jurisdiction known as a Tax Haven. Places like St. Kitts and Nevis, Cayman Island, Bahamas, Hong Kong and Belize to name a few, offer 0% corporate tax structures.

It may sound easy, but like we have explained in this article, one shouldn’t just choose an aleatory location; it is very important to adjust your goals and actions to the jurisdiction where you want to incorporate. Some places like Hong Kong allow opening a company and enable zero taxation only for investors who live and operate outside the country. Others, like Seychelles or Belize are beautiful holiday destinations, but do not offer a high standard of living.

Therefore it is important to seek professional advice from someone who knows the offshore world and can assist you with creating the best scenario for you.

Written by Magdalena Wczesna.

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