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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Oct. 26, 2010
"Kathleen, I am a member and am obviously seeking to relocate in retirement. I have read your e-mails, including the recent ones on Panama. I know that you are offering the complete conference package on Panama at a very good discount right now.
"I have had a look before on Panama on the Internet. I know what you say about the validity of what you read in the Internet...
"Still, my research has raised questions for me, and, before I order your Panama conference kit, I would appreciate answers to two questions in particular.
1) The humidity seems very high in Panama. Does this cause problems for people?
2) Your article says 'Panama's pensionado program of special benefits for foreign retirees is the Gold Standard. As a foreign resident, you can pay zero local tax.'
"Yet everything I read on the web seems to show Panama as being far from a tax haven.
"I would appreciate your comments on both points."
--Bert H., United States
The humidity is high on the coasts and especially in Panama City...but not so much in the mountains. There could be some health concerns aggravated by constant high humidity. Otherwise, I wouldn't say it causes a problem for anyone...just makes you feel really uncomfortable sometimes.
The response to your second question is more straightforward: Without question, Panama is a tax haven. As a resident you pay taxes only on income earned in Panama. If you set up a Panama corporation for an international business and operate the business outside Panama, you pay no corporate income taxes in this country.
Tax rates in Panama aren't super low for income, but the capital gains tax rate is only 10%.
Bottom line, you can live in Panama tax-free if your income is from outside the country. In addition, the profits of your Panama corporation can be tax-free in Panama if the company is operating outside the country.Continue Reading
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Oct. 18, 2010
"Kathleen, perhaps you could check out usa2me.com for your snail mail forwarding. We have been using them for almost four years now and have been satisfied.
"Just another suggestion for you to check out."
-- Ed R., Panama
***
"Kathleen, I am retired U.S. Navy living in Costa Rica. Here the U.S. dollar has lost about 14% of its purchasing power in the last year, plus prices keep going up. It is costing me over US$400 more per month to live here than it did a year ago.
"I'm looking to move.
"One of Costa Rica's good points is that income from outside the country is not taxed here. What other countries offer that?"
--Marcus C., Costa Rica
Most countries tax you on your worldwide income if you are a legal resident. Top "tax haven" jurisdictions that don't tax residents on income from outside the country include Panama, Belize, Uruguay, and the Dominican Republic.
As an aside, Chile, a country we're currently investigating more closely, does not tax foreign pensions and does not tax other income from outside Chile for the first three years of your foreign residency.
P.S. We've written recently about the cost-of-living in Costa Rica here.Continue Reading:
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Dear Live and Invest Overseas Reader,
The foreign-earned-income exclusion...foreign tax credits...investment rental write-offs...deductible travel expense...
The talk in our offices these days is all to do with taxes.
As we’re American citizens living abroad (that is, Americans legally resident elsewhere), our taxes needn't be postmarked by April 15. We have an additional 60 days (until June 15) to get our returns to Uncle Sam each year.
Nevertheless, Lief applied for a six-month extension for our U.S. tax filing this year. We weren't the only non-resident Americans to ask for a little extra time to get our returns to the IRS. Not only Lief, but friend and international tax attorney Chris Rusch, who shares office space with us here in Panama City, have been frantically filling out IRS forms for the past two weeks, Lief for us personally and Chris for his far-flung clients who, like us, are now up against their final filing deadlines.
Lief reports that our returns are nearly finalized...with two days to spare. And he offers these tips for other Americans abroad keen to keep compliant but eager, as well, to pay no more in U.S. tax each year than absolutely necessary...
This is our list of six things we wish someone had told us about international tax planning and asset protection before we set off on our living and investing overseas adventures 13 years ago:
First, maybe you don't need to do anything. Asset protection isn't an issue until you've got assets enough to warrant the investment of time and money to figure out how to protect them.
In some jurisdictions, for example, yes, you're wise to hold property in a local or an offshore corporation...but not all. Before you do anything, make sure you understand why you're doing it and the real benefit.
Second, whatever you do, it shouldn't cost you tens of thousands of dollars. OK, maybe if you're Bill Gates or Warren Buffet, a big investment in managing your tax and asset issues is warranted. For you and me, it's not.
Third, the foreign-earned-income exclusion may be the beginning and the end of the tax planning you require. My young marketing manager Harry, for example, is sitting pretty from a tax point of view...and he got to this point without spending a single dollar on tax advice. As a American citizen living and working abroad who qualifies for the foreign-earned-income exclusion, his first US$91,400 (that’s the 2009 figure; it’s US$91,500 for 2010) of earned income is tax-free in the States, which means that, for the foreseeable future, Harry's annual tax bill to Uncle Sam will be exactly zero.
Fourth, when it comes to purchasing and holding real estate overseas, remember these two things: First, the jurisdiction is the key; second, as a result, no attorney in your home country is going to be able to help you figure out what to do. You need a local attorney, experienced at working with foreign buyers, to help you determine how to purchase and how to hold (in a local corporation, in a foreign corporation, in your own name, in a trust, etc.).
Fifth, when it comes to dealing with the tax issues in any new jurisdiction where you take up residence, the key is to research, plan, and take action before taking up residence. Certain options for mitigating your local tax bill can be taken off the table once you've taken a local address. Again, you need local legal advice.
Sixth, you can avoid any local tax issues by being only part-time resident. The particulars differ jurisdiction to jurisdiction, but, generally, spend fewer than six months in a place, and you can't be considered full-time resident for tax purposes.
There are exceptions, so, again, get advice.
That's where a guy like Chris Rusch comes in.
First, Chris doesn't over-complicate. He simplifies. He takes the most straightforward approach, issue by issue.
Second, Chris doesn't bill by the hour or the page (as most all other international tax attorneys I know do). You explain to him what you want to do. He lets you know if, in fact, what you think you want to do makes any sense. Maybe you don't need to do anything...
But, if you do, Chris quotes you a flat fee for the project. You can send him as many e-mails as you like, ask him as many questions as you want. You'll at least have a shot at understanding what, exactly, you're doing, first, because you won't be paying by the hour for the effort and, second, because Chris won't be over-complicating the effort in the first place.
In nearly 25 years covering this beat...and 13 years of filing tax returns as an American abroad...I've met no other tax advisor who compares.
In other words, Chris is the next best thing to an international tax-savvy husband. And, if I didn't have Lief, Chris'd be the guy I'd turn to for help.
Kathleen Peddicord
P.S. We'll take up this discussion of how to address your tax issues as an expat or a retiree abroad, be you American or not, during our upcoming Emergency Offshore Summit, scheduled for Dec. 2-3 in Panama City.
Of course, Chris Rusch, our favorite international tax expert, will be on hand, chief among the team of experts we're convening for this timely event. Full details of the program we're planning are here.Continue Reading:
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