A couple of facts that won’t come as a surprise: (i) governments of countries outside the United States need money to operate and (ii) several such governments have decided to raise money through an income tax. So, in addition to understanding the US tax aspects of living outside the US, Americans who live or invest abroad should also look into the non-US tax implications of their activities.
So let’s dive right in, starting at the top:
Afghanistan imposes income tax on the worldwide income of its residents at graduated rates starting at 0% on income up to AFN5,000 per month and topping out at 20% on income above AFN100,000 per month. A resident is defined as anyone who . . .
Wait a minute. I just glanced at a globe and a clock and my to-do list. An actual country-country guide is obviously not going to work. Instead, a discussion of the general features of most non-US tax systems will have to suffice.
Actually, you can avoid this whole issue by moving to a country that doesn’t have an income tax. Here’s a short list of some of the most livable of such countries: the Bahamas, Bermuda, Monaco, Andorra, and the United Arab Emirates (along with many other countries in the Middle East).
Similarly, many countries have special tax regimes applicable to certain types of immigrants. Here in Belize, participants in the Qualified Retiree Program (which only requires participants to be 45 years old) are not subject to Belize tax on their non-Belize income.
Location, Location, Location
US citizens are subject to tax in the US on their worldwide income, no matter where the income is earned, where the money is paid, whether payment is even made in money, which bank the money is kept in, etc. etc. etc. Just about every other country, on the other hand, only imposes tax on residents of that country.
The term “resident” can be tricky, and of course requires an analysis of the laws of each particular country. However, in general, a person is typically treated as a resident only if they are physically present in the country for at least 183 days during any tax year (which may not be a calendar year).
So, the first line of defense against being subject to tax in a non-U.S. jurisdiction is to simply not qualify as a resident there—become a digital nomad and hop from coffee shop to coffee shop, running a business on your laptop. Several of my clients run multi-million dollar businesses pretty much exactly like this.
The Size of the Net
If you do become a resident, the next question is how much of your income can be taxed by your new home country. Many countries essentially use the US system for residents—once you’re a resident, you’re subject to that country’s tax on all of your income, even if it’s from sources outside of that country. Other countries use a territorial system—residents are only subject to tax on income that arises from the local country.
Now, under both systems, “income” and “arises from” can be tricky concepts. If you live in Spain and own a hotel, your income obviously arises from Spain and will be subject to Spanish tax. But what if you live in Spain and operate an Amazon FBA business that sells primarily to Americans through a wholly owned Belize corporation?
Are the company’s profits subject to Spanish tax? What about salary or dividends you receive from the company? These are the sorts of questions on which specific advice from a local country tax advisor is necessary—different countries reach different results on these questions.
Considerations for Investors
If you live in the US and are just investing offshore, non-US income tax systems come up in a couple of different ways.
First, you’ll want to make sure to invest through a corporation organized in a no-tax jurisdiction. Many countries (such as Belize) offer corporations for just this purpose—no local tax is imposed on income earned by these types of companies.
Second, if your non-US investment involves on-the-ground assets (e.g., you own a condo or a piece of agricultural land), then you should generally expect to pay local tax on such income. Again, specific advice from a local tax advisor is necessary here to make sure you’re taking advantage of any available tax benefits.
US Tax Aspects of Paying Non-US Tax
The possibility of exposure to non-US income tax and the amount of such tax obviously both play into the US tax aspects of structuring a non-US investment or a business held by a US expat.
For example, for an investor with on-the-ground assets, the amount of non-US tax and the investor’s plans for the funds generated by the investment both play into whether the investment vehicle should be a corporation or a pass-through entity for US tax purposes (which is generally a matter of election). (This assumes the investment is even taxable at all—you could also hold it through an offshore IRA so the proceeds escape US tax entirely if structured correctly.)
Additionally, for an expat who owns a business, the interplay of US and non-US income tax factors can have complicated effects on where to incorporate the business and how to treat amounts paid by such corporation to the owner.
As always, there’s no substitute for specific advice for your particular situation from a qualified US tax advisor (and a non-US tax advisor as well in certain circumstances). Get in touch if you’d like some help.
Ready to become an expert on this stuff? Click here to take the US Tax Masterclass for Americans Abroad (absolutely free).