What to Keep in Mind About CRS and Tax Residency

Nomads u​sing offshore strategies to mitigate tax liability is great idea, but equally important is CRS compliance.

October 24, 2022

B​y: Bobby Casey, Managing Director GWP

You see me talk a lot about the tax benefits of offshore banking and offshore corporate structuring. It cannot be overstated that you really need to know how to set things up properly in order to safely and legally take advantage of these programs.

Folks who have talked to me know what I always say about offshore residencies. It can be two of these three things: Quick, Easy, or Cheap.

If it’s Quick and Easy, it ain’t Cheap. If it’s Easy and Cheap, it ain’t Quick. If it’s Quick and Cheap, it ain’t Easy.

T​his same thing applies to any aspect of trying to set up a life offshore. There’s more to it than the headlines. It’s important people are clear on the implications, and deliberate with their filings.

N​o one works hard to fail. If you’re going to go through the effort of building a successful business and go through the added effort of inverting offshore, then set yourself up for further success by being tax compliant.

D​o not take for granted that tax compliance is just about how you file. Some jurisdictions, for example, have limits on how long you must be in their borders, or outside their borders to qualify for their tax benefit programs. They likewise have requirements on the revenue stream you or your business receive. For example, is your revenue dividends or shared profits or wages?

Obviously, trying to find the most business-friendly tax regime is a high priority. Contrary to what pop culture suggests, you can’t just “identify” as a Maltese business and “identify” your earnings as dividends. That’s not how any of this works.

I​f you’ve ever applied for a bank account, the one thing they all ask for is an address. This isn’t just to know where to send the mail. This is to know which jurisdictional laws apply to you.

A very simple example might be someone from the United States. Let’s take Jane. She’s living out of her RV and only stays in one place for about a month or so. She works for a company and receives a regular direct deposit.

T​he bank will need to have an address for residency, as will her employer. Her employer needs to know which state she resides in to deduct the applicable taxes and provide the appropriate insurance. In Jane’s case, she chose South Dakota as her tax residence because that jurisdiction doesn’t require her to be there to claim residency, and they have no individual state income taxes. Every five years she has to go back for 1 day, to renew her driver license.

I​t gets a bit more complicated with international corporate structures, but the principle is the same.

Common Reporting Standards

Common Reporting Standards (CRS) are regulations on banks which require their account holders to declare their tax residency. This framework began nearly six years ago, and currently has 116 participating national signatories.

CRS is predicated on the “success” of the Foreign Account Tax Compliance Act (FATCA) out of the United States. It allows for bilateral exchange of information between banks and national authorities to detect and deter tax evasion.

I​f you are opening an individual account or a corporate account, you need to have a tax home. If you don’t declare one, the country you are applying to will claim you, and that could be a costly error which voids all your tax saving efforts.

In most European countries, tax residency kicks in with citizens who spend 183 days or more per year in their country.

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. FATCA compliance is a considerable driver behind many Americans seeking new or second citizenship in other countries.

Tax Residency Options

T​he options are varied throughout the world, and depending on your financial interests or goals, some countries might suit you better than others. Below are a few feature considerations for deciding tax residency.

Property: In countries like Panama, having a permanent home is enough to qualify for tax residence, even if you are not physically there. This might be appealing if you are already spending time in Latin America, or see a benefit to holding real estate in Panama. This is not exclusive to Panama, but the geographic location is a major factor.

Strong Ties: You may want to keep your short-list of tax residency countries limited to places where you have the strongest ties. This includes the maintenance of investments, bank accounts, real estate, and/or corporations. In some residency audits, they will review your credit card statements for where charges were made, where bills were sent, or where the bank account is that pays those bills. They might even go so far as to look at ATM withdrawal patterns.

Non-Domicile Status: This is commonly found amongst island economies. These programs are designed to attract wealthy individuals and families from abroad. They incorporate a flat-fee tax obligation on income generated outside the country.

Obligations and arrangements vary from country to country, with rules on minimum stays, or on the size and type of income covered. This makes these programs attractive for gifts and inheritances.

Cyprus, for example, foregoes all remittance-based taxation and does not impose taxes on any dividends from abroad. Prior to their bank collapse, Cyprus was home to the accounts of many Russian oligarchs. Another popular program from a non-tax-haven or popular jurisdiction is Italy, which sets a flat rate of 100,000 euros per person per year for income earned outside Italy.

Wherever you decide to take up tax residency, talk it over with a professional. Learn about the different advantages (and disadvantages) of the jurisdictions you’re considering. Go into this, eyes-wide-open to your compliance obligations, but enjoy the peace of mind in the tax benefits you wanted to help achieve your goals.

Click here to get a copy of our Offshore Banking Report, or here to become a member of our Insider program where you are eligible for free consultations, deep discounts on corporate and trust services, plus a wealth of information on internationalizing your business, wealth and life.