Banks around the world are reporting their account holders’ information to their official or default tax residences.

May 21, 2019

By: Bobby Casey, Managing Director GWP

Digital nomads and location independent entrepreneurs often struggle with tax compliance in their home country. Countless penalties and fees for not filing their taxes correctly (or at all) build up over the years, leading to financial and legal trouble.

So, what can the average digital nomad do to manage or get around the complex tax policies of their home country?

Tax obligations differ from place to place and can be very complicated. For example, typically there are a limited number of days per year you can stay within a country’s borders before you are considered taxable there.

Digital nomads often seek tax residency in countries with low-tax regimes.  There are quite a few to pick from, such as up-and-coming parts of Central America, South America, and even underappreciated parts of former-U.S.S.R. Eastern Europe. However, there are new rules that come with switching tax residency.

The new Common Reporting Standard (CRS) imposed on banks requires account holders to declare their tax residency. The CRS framework began in 2017 and currently involves 97 countries.  It allows for the automatic exchange of information between banks and national authorities to detect and deter tax evasion. The initiative was based on the success of the Foreign Account Tax Compliance Act (FATCA) of the U.S.

Since the consequences for failing to report your taxes correctly are potentially severe, it’s best all location independent entrepreneurs to learn how they can establish tax residency in another country.

GWP Insiders is designed to help and connect you with professionals who know how to navigate these waters.

The Dynamics of Tax Residency

There are many reasons to change residency besides lowering tax obligations. Pursuing an opportunity in a new country, protecting privacy, or just seeking a better quality of life could also factor into the decision. Changing residency is a complicated and dynamic process.

Expert advice is highly recommended so you know all the options and how to pursue them legally and effectively.

When considering residency in another country, understanding their rules surrounding “tax residency” is crucial. It determines where you are obligated to pay your taxes.

Legally, never staying in one place long enough to qualify for residency doesn’t necessarily mean you aren’t responsible for paying taxes anywhere.  Convincing tax authorities otherwise is difficult.

Unless you prove you are tax compliant in another country, in which you have an agreement with their tax authorities, banks default to you being taxable in your country of citizenship.

Some digital nomads mistakenly believe wherever they call “home” will likewise be considered such by their original country’s government. They need to make sure their own definition of “tax resident” lines up with the one used by their local tax authorities.

In most European countries, “residential taxation” applies to citizens who spend 183 days or more per year in their country. This creates a tax obligation on global income.

Some countries, including Singapore, Panama, and Malaysia, introduced territorial regime taxation, which excludes taxation of income earned outside the country.

The United States is the most aggressive country in the world when it comes to personhood-based taxation, enforcing taxes on its people no matter where they live or work. These FATCA requirements are a major part of the reason why Americans are so desperate to acquire new citizenship and move their assets elsewhere.

Tax Residency Options

In many nations, having a permanent home is enough to qualify for tax residence, even if you are not physically there. In Panama, for example, permanent resident status qualifies you automatically for tax residence.

Digital nomads might consider obtaining tax residency in the country to which they have the strongest ties.  This includes the maintenance of investments, bank accounts, real estate, and/or corporations.

In residency audits, state auditors may review credit card statement – where charges were incurred, bills were sent, and the location of the checking account used to pay those bills. They may even look for a pattern of ATM cash withdrawals.

Many island economies offer something similar to a non-domicile status.  Such programs aim to attract wealthy individuals and families from abroad. These programs usually incorporate a flat-fee obligation, which imposes tax on income generated outside the country.

Different programs offer different arrangements, with rules on minimum stays, or on the size and type of income covered. This makes these programs attractive for gifts and inheritances.

The benefit of these residency programs is you can relocate your tax home to a stable jurisdiction you trust.

Cyprus, for example, foregoes all remittance-based taxation and does not impose taxes on any dividends from abroad. Among the most prominent programs from a non-tax-haven or popular jurisdiction is Italy’s, which sets a flat rate of 100,000 euros per person per year for income earned outside Italy.

By selecting the right jurisdiction for your needs, you enjoy the privileges of doing business tax-free.

Each country’s rules about establishing and maintaining tax residency differ, as do their reporting requirements and other tax liabilities. There is no silver bullet. It depends on lifestyle, income, and goals.

If you are interested in investigating your options and are looking to establish yourself in another country GWP Insiders is for you!

GWP Insiders is full of information, programs, and strategies designed to internationalize your life, give you location independence, all while protecting your wealth and assets.  Click here now to sign up for GWP Insiders!