May 11, 2011:
"Kathleen, I don't know if you will get this e-mail or not or if you will read it personally. My husband and I are thinking seriously about moving to Panama. I lived there many years ago when I was about 21-years-old. Wow, that seems like so long ago. My, the years do pass quickly.
"Now, we are on the verge of retirement. However, we've done things a little upside-down. We married later in life and, in 2009, went to Ukraine to adopt our wonderful twin girls. They are now 14-years-old.
"We have been realtors here in Seattle for 15 years now. I used to work with builders and did very well. Losing 28 townhomes and single family homes in 2009, the year we adopted our girls, was a shocker for us. Further, the real estate market is not really turning around. We don't see any change coming for the good. Foreclosures and REO's can sell, but it's slow even there.
"Being so close to retirement and not wanting to run through what we have left, we are thinking about hastening a change in our lives. As I said, we are researching Panama, where, hopefully, we can live on less and finish raising our girls. We believe we would need to earn some income, at least for a while, to supplement our retirement finances.
"I am very concerned about the financial and economic situation in the United States. I think our standard of living is declining and that there are hard times advancing quickly upon us.
"Do you have any suggestions or encouragements about moving that you could give to us? We are considering coming down for the conference you're now planning for August."
--Summer J., United States
That's the best advice I could give--come down to see the country for yourself in August. It's the only way to make a decision about what might make sense for you.
I'd say that you could reduce your family's cost of living here in Panama City (where you'd need to base yourself for your daughters' education). As I point out in today's essay, though, I can't say that for sure or by what margin. I can promise you, though, that you'll be able to elevate your standard of living (again, as I explain in today's essay). Our 11-year-old son Jackson is thriving here.
I hope to meet you in August.
***
"Kathleen, I'm a retiree, living in Panama like you, in Veraguas, since 1990, and very happy to be here. I have read many of your articles about Panama, and in many aspects I do agree with you. However, there is one detail, perhaps without intention, that you have failed to mention and that is the chaotic traffic conditions in Panama City that presently can only be described as unbearable and worsening. For the sake of fairness, this is something that I feel should be informed to future residents of this country. Really, this is something people should be told about, don't you agree?"
"I congratulate for your articles, and do encourage you to continue to be part of the ongoing development of my (and your) adopted country. I'm originally from Puerto Rico, ex-U.S. Army serviceman."
--Luis C., Panama
Indeed, we agree. Horrific and worsening, as you say.
This is the main reason Martinelli is pushing ahead with his plan for a new city Metro.Continue Reading:
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We drove down avenida Balboa, beyond the central zone of the modern city, turned left, and passed a brightly painted Chinese-style arch that seemed very much out of place in this Latino barrio.
But what lay beyond the Asian arch was perhaps more surprising: A treasure trove of historic structures left behind by the Spanish, the French, and the Americans who'd hung their hats in this part of the world over the preceding few centuries.
Like the arch, everything in this zone was crumbling, peeling, cracking, and fading. The gutters were thick with litter, and small barefooted children ran back and forth across the narrow brick-paved roadways in all directions.
From the open windows, Latin music blared. In the open doorways, women lounged and rocked, chatting and tending to their near-naked babies.
Some buildings couldn't quite be described using that word. They were more piles of rubble than actual structures...
But if you looked beyond the litter and the rubber, beyond the crumbling plaster and the peeling paint...you saw something very special, something that exists in only a limited number of places around the world: Block after block of classic colonial-style buildings with shuttered windows, balconies on every level overlooking the street, ornate iron work and turned wood, and facades of the kind you see more often in the pages of coffee-table books than you do in real life.
This was Casco Viejo, that my friend introduced me to all those years ago. As soon as we'd turned the corner past the Chinese arch and into the barrio, I urged him to find a place to park so we could get out and have a closer look. I wandered up and down the streets that day with delight. I like old buildings the way some women like new shoes. For me, this was better than a shopping spree at Saks Fifth Avenue.
The better I got to know Casco Viejo, or The Casco, as locals refer to it, over the years, the more infatuated I became. This region of Panama City is quite separate from the rest of the capital, out on a small peninsula in the Bay of Panama. Almost any street in The Casco eventually leads to the sea.
Along the way, these centuries-old roadways paved with brick take you past those glorious colonial structures, and, as well, a well-laid-out series of plazas, each with its own church. Casco Viejo boasts eight historic churches in all, including Iglesia Felipe Neri, the oldest in the city, dating to 1688.
This is one part of Panama City built for walking, which is something else I appreciate about it. This ancient quarter is laid out like a classic European city, on a grid around those welcoming plazas with their shady trees.
Back then, on my first visit, it took considerable imagination to see the potential beneath the grime and the garbage. Most of the one-, two-, and three-hundred-year-old buildings were, at the time, crowded with a dozen or more inhabitants each, some legal, most not, some paying a pittance in rent thanks to a scheme something like rent control in central Manhattan. Many of the Casco's occupants at the time, though, were squatters, meaning that, before the buildings of this historic zone could be rejuvenated, its population had to be moved out.
Fast forward to today, about a dozen years later, and the squatters are mostly gone, some moved to affordable housing provided by the Panama government. A good number of the old houses have been rehabbed, in most cases with tender loving care and attention to original detail, some converted to private homes, others to apartments, office buildings, art galleries, shops...
Today there are restaurants with sidewalk tables, open-air cafes on the corners, and trendy bars with live music. Today, the Casco is increasingly the place to go on a Friday or a Saturday night if you're young and looking for fun.
That said, if you didn't see Casco Viejo years ago, and you see it today for the first time, you might wonder what I'm on about. Trendy? Romantic? Charming? "This place is little better than a ghetto!" you might exclaim...
The gutters are still strewn with litter (though nothing like a decade ago). Children still run barefooted in all directions. Women still lounge in the open doorways gossiping with their neighbors and nursing their newborns. The stray dogs are here and the blaring boomboxes, all the elements of a real barrio.
This is a neighborhood in transition, and many in the Casco are keen not only to renovate the old colonial structures to their original glory, but to do so while preserving the cozy Panamanian community that has existed for decades among them.
The Casco is, for me, both the most colorful, historic, and romantic section of Panama City and, as well, the most authentically Panamanian.
People typically love it or hate it. You should come have a look and make up your own mind.
Meantime, we feature a complete report on life in modern-day Casco Viejo in this month's issue of my Panama Letter, subscribers' e-mailboxes this week.
Kathleen Peddicord
P.S. What else this week?
- "I'm spending a month wandering through southeastern Europe with my Scandinavian friend Ivan and my Texan friend Vinnie," writes Intrepid Correspondent Paul Terhorst.
"When I was small, this part of the world was closed to us, behind the Iron Curtain. All that changed in 1989 when the Berlin Wall fell. The region started on a new path. I'm here now, interested to see how things are coming along.
"From my view through the window of the day train from Bulgaria to Romania, the answer seemed to be: not very well. The Bulgarian countryside offered abandoned factories, houses, office buildings, and food processing plants. We saw few cars on the road, few cars parked in the villages. Everywhere was desolation and ghost towns.
"Then, all of a sudden, the countryside changed..."
- "Put it on your list," says Intrepid Correspondent Paul Terhorst. "You owe it to yourself to travel to Odessa, Ukraine, a first-rate historic city on the Black Sea.
"For the past few weeks I've been traveling around southeastern Europe with friends Ivan from Scandinavia and Vinnie from Texas. We started in the Balkans: Bulgaria, Romania, and Moldova. Now we're farther east, in the Ukraine, and Odessa is our first stop.
"Think of Odessa and the Ukraine as Russia Light. Odessa has been part of Russia for over 200 years, since Catherine the Great annexed it. A huge painting of Catherine hangs in the local museum's main room.
"In the 19th century, Odessa was the Empire's fourth-largest city, after Moscow, St. Petersburg, and Warsaw. Stalin hosted the famous Yalta conference nearby in 1945. Most people here speak Russian rather than Ukrainian.
"So, for practical purposes, we're in Russia. From a traveler's point of view, Ukraine makes more sense than Russia itself...
- "I could live in Odessa," writes Intrepid Correspondent Paul Terhorst, picking up where he left off yesterday, "and maybe someday we will. First, I'd arrange an exploratory trip for Vicki and me. Remember, Americans and many others can enter Ukraine without a visa, for up to three months.
"If we manage to set up shop here, short or long term, I'd have to learn the alphabet. Learning the alphabet should be much easier than learning the language, and at least I could read menus, road signs, bottle labels, and the like.
"Come to Odessa sooner rather than later, before costs go up..."
- The world's top retirement havens? Nine countries stand out right now as offering particular opportunity to the would-be expat, retiree, or investor overseas. Read more here and here.
Also This Week...from Resident Global Real Estate Investing Expert Lief Simon:
Invest in real estate and get a second passport. That's the straightforward premise behind the economic citizenship program that the two-island nation of St. Kitts and Nevis has put together.
Of course, for most people who might consider this, the investment return is secondary to the citizenship and the passport. With a St. Kitts passport, you can travel visa-free to more than 100 countries and territories (according to http://www.visahq.com/). For reference, a U.S. passport is good for travel to more than 130 countries; a British passport gets you access to almost 140.
It doesn't allow visa-free travel to the United States, for example, but it does mean visa-free entry to the U.K. and Canada.
In other words, in the scheme of things, a St. Kitts passport is a pretty good passport to have.
It's also a relatively very straightforward passport to obtain, as I explained. All you have to do is to buy a piece of real estate in a designated development on either St. Kitts or Nevis for a minimum investment of US$350,000.
Surprise, surprise, many of these designated developments have real estate offerings priced right at US$350,000. Qualifying properties are listed on a website here.
On top of this, you'll have about 20% in closing costs, including taxes and fees, meaning you're looking at a total cost of about US$400,000 for the real estate purchase.
Plus you'll have the registration fees...US$35,000 for the primary applicant and US$15,000 for your spouse and another US$15,000 for any child you want to bundle with the application. And don't forget the legal fees, US$25,000 for a family, US$20,000 for a single.
The piece of real estate you purchase can be rented out. However, realistically, at best, you're going to see a net yield of maybe 3% a year. Under the stipulations of the program, you can't resell the property until at least five years after the date of your new citizenship. And, if and when you do resell, you can't do so to another person seeking economic citizenship, meaning you're selling on the local market.
I'd expect that, after holding for five years, you might break even on the purchase price.
I explain all this to make the point that this isn't a real estate investment. This isn't about the yield or the capital appreciation...but the passport.
In today's world, the truth is, if you don't qualify for a second passport through ancestry (in Ireland, say), then your options for obtaining one are limited and come down to acquisition through residency or acquisition through investment. Those passports you acquire as a result of legal residency take many years to progress. Those you acquire through investment are typically, like this option from St. Kitts and Nevis, expensive.
But perhaps not ridiculously so. If you don't want to invest years (typically five) in the pursuit of a passport through residency, then an investment of, say, all told, US$450,000 in a piece of real estate on St. Kitts or Nevis seems a reasonable option to me. The economic citizenship program offered currently by Montenegro, for example, requires an investment in an operating business. That's a bigger risk, I'd say, than the purchase of a piece of island property. And the required investment amount is greater (500,000 euro).
Why would you want a second passport in the first place?
Diversification.
With a second passport, you have more options. You have a second "home" to return to should things take a turn for the worse wherever elsewhere you're residing. You have an escape hatch of sorts.
Again, though, the economic citizenship program in St. Kitts isn't your only second-citizenship option. And holding a second passport is but one part of an overall diversification strategy.
As these opportunities become ever more important in the current global climate, I've worked with my publisher (also my wife) Kathleen Peddicord to plan for the launch of a new e-letter service. This new service will come directly from me, weekly to start. It'll be a gloves-off, straight-shooting exploration, through firsthand stories, experiences, and discoveries, of your best current opportunities for diversifying your investments, your assets, your business holdings, and your life.
I'll be covering global investment options from real estate to currencies, commodities, and precious metals...residency and citizenship...taxation and tax havens...privacy and structures...and every other opportunity for global diversification my contacts, resources, and I can uncover.
First issue out later this month. Kathleen will have more information for you next week.
Read more...
April 14, 2011:
"Kathleen, how can I set up an overseas Internet business that I can operate from the United States, with all the (presumed) income accumulating overseas? Then I could have a bolt hole retreat if needed, and a retirement option without obvious connections to my U.S. finances, taxes, etc. (maybe).
"Your comments and suggestions are respected."
--Gerry O., United States
In fact, you can't manage a business from the United States and see any tax advantage as you suggest. What you're describing is the definition of tax fraud.
You'd need either to move out of the United States to wherever you'd like to start your business...or you'd need to set up your business in some other jurisdiction and find someone there who would manage it for you, completely offshore.
***
"Kathleen, my husband and I receive your daily e-mails, and I saw your post today on Facebook about the "Train Is On The Way" regarding tax havens.
"We've spoken to our financial advisor about this, and we are confused by what you're saying. We're of course interested in maximizing our investments, but we're not interested in skirting our tax responsibility. Can you clarify what you're implying?
"P.S. My husband gave me your book on retiring overseas as a gift. Good read so far!"
--Ken & Laura R., United States
Moving assets offshore has nothing to do with taxes. Organized properly, moving assets and setting up offshore structures to protect them is a tax-neutral event for U.S. citizens (no tax savings but no additional tax either).
As a U.S. citizen, you can take advantage of certain tax benefits by living and working overseas and setting up offshore operating companies, but that's not skirting responsibility. Your tax "responsibility" is to follow the rules laid down by the IRS. If, while following those rules, you can also minimize and/or defer your tax liability, that's not only legal, it's being responsible with your personal finances.
Primarily what I'm recommending is less about taxation and more to do with protecting and maximizing both your assets and your lifestyle through diversification (of type, of currency, of market, etc.).
An American's opportunities for accomplishing these things, for, bottom line, managing his financial affairs as best as he (or she) sees fit, are becoming ever-more-restricted.
I'm not suggesting anything illegal or even unpatriotic. Benjamin Franklin and Thomas Jefferson likely would agree.Continue Reading:
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Most countries are relatively tax-friendly when it comes to retirees. That is to say, a foreign resident's pension or Social Security income is often not taxed locally. Remember, though, that, if you're an American, you could owe tax in the United States on your retirement pension income; that tax obligation must always be considered as separate from and in addition to any local tax burden in your new jurisdiction.
In other words, if you're an American retired to Panama, while you'll owe no tax on your pension income in Panama, you could owe tax on it in the United States.
The fundamental point, though, is that, if this is the only income you'll have as a retiree overseas, then tax planning isn't an issue for you. For you, one jurisdiction is as tax-efficient as another.
Things get more complicated when you have passive (investment) or earned (wages or business, including self-employment) income to report. The first thing to understand when considering your tax burden as a retiree overseas is that tax rules vary greatly jurisdiction to jurisdiction and, as well, depending on your nationality, your residency status, what kind of income you're earning, and where that income is sourced.
Unfortunately, however, one more time, as an American abroad, no matter where you go, you'll always carry your U.S. tax obligation. As long as you hold a blue passport with an eagle on the cover (or, in fact, a U.S. green card), you must file a U.S. tax return every year. This is not to say you will necessarily owe tax. As we discussed yesterday, careful planning often can reduce or even eliminate your U.S. tax on earned income.
Still, the filing requirement remains.
Some countries tax foreign residents on what's called a "remittance basis," meaning they expect their share of any money you bring (remit) into the country. This can work to your advantage if you earn your money outside the country and are able to live on little. In this case, you could earn millions of dollars a year, from either passive or earned income, but, as long as you kept most of your millions outside the jurisdiction where you're residing, you wouldn't owe any tax on it locally.
Again, as an American, you'd still have a tax obligation to Uncle Sam, but that's a separate matter. To the tax collector of the country where you're living, you'd owe tax only on the money you brought into that country each year to cover your living expenses.
Some countries tax foreign residents only on income earned locally. In this case, you could not only earn millions outside the country, you could even bring your millions into the country to spend as you like (theoretically speaking). As long as you didn't earn the money locally, the local tax collector would have no claim. This is as good as it gets from a tax-planning point of view.
Four key jurisdictions where this is the case are Panama, Belize, Uruguay, and Malaysia. As a foreign resident in any of these jurisdictions, you won't pay taxes on your pension income. In addition, in these four countries, neither will you pay income tax on any income from outside the country, be it passive or earned. If you have an investment account in the United States that earns you US$10,000 a year in interest, you'll pay no tax on that income to these countries' tax collectors.
Thinking through the implications further, the approach to taxation in these countries means that, working as a consultant in one of them, with clients outside the country, you could pay zero local tax.
A German fellow I met several years ago had set himself up in Kuala Lumpur, Malaysia. He was an engineering consultant whose clients were various companies in the Middle East. All his income was earned outside Malaysia, meaning he was liable for no income tax in the country. As he was German, living outside Germany, neither did he owe income tax in that country. He was living and working completely income tax-free.
As a retiree overseas, your tax issues can be very straightforward; still, income tax, of course, is not the only tax you'll have to contend with. Another important tax to consider as an expat is import duty for your household goods and personal belongings. Most countries allow you to bring your used household goods into the country with you duty-free when you take up residence, and some allow you to bring new goods and a car tax-free, as well. Again, the four jurisdictions I'm highlighting here come out tops in this regard. Belize, Malaysia, Panama, and Uruguay all allow you to bring new and used belongings and a car with you when you relocate with a retiree visa.
Tax-friendly Pick #1: Belize
Research Belize tax rates, and you'll find that they're high (at least after you hit a certain level of income)...for Belizean citizens living in the country. Don't be confused. Tax rates in a country for citizens of that country apply only to citizens of that country. Unless you acquire a Belize passport, these rules don't apply to you.
As a non-Belizean living in Belize, you're taxed only on income earned in Belize. Therefore, as a foreign resident in this country, you have a local tax liability only if you run a business or take a job. Two other critical taxes to consider when choosing a retirement jurisdiction are capital gains and inheritance taxes. Belize imposes neither.
Furthermore, as I've explained, as a resident retiree in Belize, you're welcome to import personal belongings, household goods, a car, and even an airplane tax-free.
Tax-friendly Pick #2: Panama
Panama doesn't differentiate between citizens and non-citizens for income tax purposes. As a resident, Panamanian or not, you pay taxes only on income derived directly from within Panama. This means that, as a resident in this country, you owe zero tax on any income (pension, earned, or passive) from outside Panama.
Panama has a top marginal tax bracket of 30% for income earned in Panama. Businesses pay a flat tax of 30% on net profits. Capital gains are taxed at 10% (again, this applies only to gains realized in Panama).
Tax-friendly Pick #3: Uruguay
I am pleased to be able to report that Uruguay also taxes residents only on income generated in the country. This point has been much discussed and debated among Uruguayan legislators over the past year. However, the final verdict is in just this month...and this country will continue to tax foreign residents only on income generated in the country at least for the first five years of residency.
Individual income generated in Uruguay is taxed at rates starting at 10% up to a top marginal rate of 25%. That is to say, while income earned in Uruguay is taxed, it is taxed at a relatively low rate.
One downside to Uruguay is that the country imposes a wealth tax on all assets within Uruguay. This is something to be aware of if you decide to invest in property in this country. The wealth tax rate is low, starting at .7% and topping out at 2.5%. Exemptions apply, so the total actual tax should be minimal unless you buy an expensive piece of real estate. Individuals pay a 12% tax on capital gains in the country.
Tax-friendly Pick #4: Malaysia
As a resident, you are taxed only on income derived from within Malaysia, meaning that even income you remit to Malaysia is not taxed as long as it was earned outside the country. Income earned in Malaysia is taxed at marginal rates from 0% to 27%. The country imposes no wealth tax and no property tax. Capital gains are taxed on a sliding scale that is reduced to zero after you've held a piece of real estate for five years or longer.
Kathleen Peddicord
P.S. These four jurisdictions will be among those featured and discussed in detail at this year's Emergency Offshore Summit taking place in Panama City Sept. 14-16. Top legal, tax, residency, and citizenship experts from the world's most interested and advantaged jurisdictions will be participating. Full details of the program we've put together for this important and timely event are here.
P.P.S. On this subject, you may be interested to know, if you haven't heard already, that the U.S. Government Accounting Office has issued a report this week suggesting consideration of a program whereby citizens who are delinquent in filing or paying their taxes should be denied passports.Specifically, the recommendation is that, "If Congress is interested in pursuing a policy of linking federal tax debt collection to passport issuance, it may consider taking steps to enable [the] State [Department] to screen and prevent individuals who owe federal taxes from receiving passports."
I find this a frightening development. What if you're current with your tax filings but a little behind in your installment payments to the IRS? What if you have an outstanding tax bill in dispute? It could be that you'd be denied the renewal of your passport.
In this current age, things like second passports, offshore bank accounts, foreign assets, and a structure to protect them are fast becoming more important than ever. I am not a Chicken Little, but I am paying attention. It has never been more important to diversify your life and your financial future than it is right now.Continue Reading:
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March 14, 2011:
"Kathleen, as a subscriber for over a year now, I have to say that I really enjoy your information. My dream retirement place would be France, but I'm afraid it is just out of the question for someone living on Social Security alone.
"I was just reading your article about the cost of real estate in Paris. How much money do these people in France make? I just checked on the Internet, and the median household income in the United States in 2009 (from census) was just under US$50,000 per year.
"The average real estate cost you mentioned was about 7,000 euro per square meter. That is approximately 9 square feet. A very small house in the United States would be 900 square feet. When converted to dollars, that is about US$980,000 worth of space. By the time you add all the purchasing fees that you talk about, that would mean that one is looking at more than a million dollars. Even if they lived in an apartment half that size, it would be half a million.
"A majority of Americans cannot afford a home that costs that much. A household income would need to be equivalent to about US$100,000 per year to afford that.
"My point is, where do all the poor people live? Every city needs the normal guy who waits on tables, works in the shops, drives the buses, etc. How do all the normal people afford to live in Paris?"
--Doug H., Houston, Texas (where the median priced house is US$170,000)
To clarify, 1 square meter is 10.76 square feet. It may seem a small difference to the 9 square feet you reference, but it amounts to 20% more area for the price.
Nevertheless, yes, apartments in Paris are expensive, which is why many French people rent. It's the same in New York or any other big city. Renting a small apartment is cheaper than buying for most people.
When the French do buy, they don't buy "starter" with the intention to trade up every few years, as Americans typically do. This is not only because of the cost of real estate, but also because of the cost of trading real estate. Transfer taxes are high in France.
On the plus side, capital gains taxes on real estate disappear over 15 years, further incentivizing long-term property holds. As a result, most people rent and save until they can afford the house or apartment they expect to spend the rest of their lives in.
Regarding median salary, note that a countrywide statistic for this is very misleading. The household income of a taxi driver in New York City would likely be higher than that of a bank manager in Des Moines. You have to consider income not only country to country, but also region to region and city to city.
Note, too, that property taxes are low in France, especially in Paris. Taxes on an apartment in Paris might run two-tenths of one percent (.2%) of the property value. The lowest property tax rates in the United States (Alabama and Louisiana) are about the same rate. The average in the U.S., though, is just over 1%, about five times as much.
The real point is that you have to compare overall cost of living with overall cost of living. Your monthly mortgage is but one part of your overall monthly nut. In Paris, for example, as in New York, you don't generally own a car as you can get around by Metro, bike, taxi, or foot. That's a big budget savings.
As we point out often, and as is the case most anywhere, your cost of living in France, including in Paris, can be very controllable.Continue Reading:
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