This article will speak about ways you can legally pay fewer taxes and some good tax practices in general.
Whilst this article does not represent formal tax or any other kind of advice and the facts might change in the future, I have done my best to look at some of the best legal structures available.
If you are looking to invest in tax-efficient structures, including those mentioned in this article, contact me on this page, email me (firstname.lastname@example.org), or use the WhatsApp function below.
- Take advantage of any onshore tax reduction services
For non-expats, there are many onshore, tax-advantageous, investments you can take advantage of.
Let’s take the UK and US as two examples. If you live in the UK, you can invest in a tax-efficient ISA account. The current ISA limit is 20,000 Pounds a year.
That is just short of a million pounds over a 45-47 year career, assuming the limit keeps rising with inflation.
Whilst most people can’t afford to invest the maximum, the rules are an advantage for people who can invest smaller amounts as well.
An ISA isn’t ideal for everybody, however. You can’t, for one thing, continue to legally invest in ISAs when you move overseas.
That often means that future British expats, and non-British people living in the UK, should carefully consider their options.
When it comes to US-persons, there is a myriad of investment opportunities in the onshore market.
As an example, I currently have an investment opportunity available to the US market, which allows you to reduce your taxes by allowing you to offset against your ordinary income.
2. Invest in a third country as an expat
For the vast majority of nationalities, one of the reasons to become an expat is to save more money.
That is either because the salary on offer is higher or the income tax is lower. However, what few expats understand is that your time overseas is a chance to invest in a tax-efficient way as well.
If you send money back home as an expat, you usually can’t take advantage of onshore, tax-efficient, schemes like ISAs.
What is more, an increasing number of countries are having “ties tests” to determine whether people are really expats.
The days of the “183-day rule” being applicable are long game in many countries. Simply spending less than 183 days in the country isn’t always enough to be classified as a non-resident.
These days, if you retain too many ties to your home country, you can be deemed to be a tax resident even though you have left.
Depending on the country, a tie can be a business back home, a property, additional pension contributions, or many other things.
In comparison, if you invest in portable third-country investments (meaning in tax-efficient jurisdictions which aren’t based in your country of residency or nationality) as an expat, you can often legally pay much fewer capital gains taxes.
Exceptions exist to this rule, such as for Americans, and we will return to this later on in the article.
For many, expat life comes and goes. Many then think about repatriation. In this case, for South Africa, Australian and especially UK expats, there are some tax advantages to having a life insurance policy.
In other words, if you return to the UK with a life insurance policy, even if the policy is completely tied to investments like ETFs, you can legally pay less when you sell the assets, due to an anomaly within the rules.
4. Change your residency to some territorial tax countries
Many people know that you can often legally pay 0% in income taxes if you move to places like the United Arab Emirates, Saudi Arabia, Monaco, and the numerous low-tax countries.
That is unless you are American, Eritrean, or any other country which taxes based on citizenship.
What few know, however, is that about a quarter of the world’s jurisdictions apply a territorial rule when it comes to taxation.
This includes places like Singapore, Hong Kong, Malaysia, and Thailand, alongside many countries in Latin America.
In human terms, such tax jurisdictions only tax activities undertaken in that country. In other words, if you live in Singapore and have a job through a Singaporean employer, you are taxed. Likewise, you are taxed on local property and stocks.
However, if you live in Singapore on overseas sourced income, you don’t usually need to pay income taxes, or most other forms of tax.
As the official Singaporean Government advice states “Generally, overseas income received in Singapore by you is not taxable and need not be declared in your Income Tax Return. This includes overseas income paid into a Singapore bank account”
Now of course, you do still need to get a visa to live in such countries, either through marriage, investment, or setting up a company.
In places like Singapore, that won’t come cheap, but Malaysia and a few other countries have much cheaper programs on offer, which can allow you to pay 0% on your overseas income.
Some countries are also in the middle. For example, South Korea isn’t a territorial tax country. South Korea citizens pay tax on their overseas income.
However, foreign nationals who live in South Korea, aren’t taxed on overseas sourced income if they haven’t been tax-resident in the country for five of the last ten years, provided the income isn’t being paid by a Korean entity and isn’t being remitted into the country.
Be careful about corporate tax residency though. A certain percenatage of territorial tax countries do consider your overseas income to be local revenue if you have a home office in the country.
That is one reason why seeking formal tax advice can be worth it.
5. Change your citizenship
For Americans, Eritreans, and some other nationalities, you can’t simply change your residency and legally pay fewer taxes.
Take Americans as an expat. The Foreign Earned Income Exclusion is now $107,600. That means that if you live in a 0% tax country (or some territorial tax countries), you would have to pay taxes to the US Government if you earn say $150,000.
The only way around this is to change both your residency and citizenship, which a record number of Americans are doing due to FATCA.
6. Sell less
Most of this article has focused on paying fewer taxes on income and capital gains. However, there are some simple tips you can utilize to pay fewer taxes on your portfolio.
For one thing, simply selling positions less frequently can save you a fortune on capital gains taxes. Market timing doesn’t just cost you in terms of investment returns, it can also land you with a big tax bill.
7. Finally…get things checked
Let’s face it, nobody likes paying accountants and lawyers, especially because this is money out of pocket and can’t be taken out of the gross investment returns.
Yet if you are high-net-worth or somebody who has a very specific financial situation, like you are an expat with numerous citizenships and multiple residencies, then that $500-$1,500 is money well spent.
It also gives you peace of mind. All strategies need to be legal. I personally hired an accounting and tax firm when I last changed my residency, even though I checked their very comprehensive (and free) online country guides.
That is because I wanted to check the specifics of my situation, and I wasn’t 100% sure of all of the key points.
Some of my clients have received outside advice as well, and it is something I encourage, to back up any guidance I might give you because I am not a tax advisor.
With that being said, not everybody needs formal tax advice. If you are an expat who has 100k invested, and a relatively simple residency situation, spending 1k a year on tax advice is overkill.
There is also the negative aspect that some tax advisors can make the mistake of being overly cautious with investment advice.
They aren’t investment advisers, in the same way, a wealth management firm isn’t a tax advisory service, so you shouldn’t pay attention to any investment advice they offer.
As a reminder, contact me on this page if you want to implement some of these ideas.
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Adam is an internationally recognised author on financial matters, with over 286.2 million answers views on Quora.com and a widely sold book on Amazon