In a previous article we looked at how Contractors can potentially minimize tax through Offshore Incorporation.
This article revisits the specific situation of expat workers ie persons working abroad, away from their home country, temporarily on a contract basis.
A compelling reason of itself to incorporate Offshore as an overseas contractor is to avoid being called on by your home Authorities to pay tax at home. You see, as an expat worker unless you’ve taken certain legal steps to become non-resident for tax purposes in your home country almost certainly you would still be liable to declare your contracting income in, and pay tax on that income in, your country of origin (see below which explains in details what resident for tax purposes means/is) .
In fact, if you are living in a country which does NOT have a Double Taxation Avoidance Treaty with your home country you could even be liable for double tax ie liable to pay tax on your income where you work and liable to pay tax again on that income in your country of origin. All such scenarios can potentially be avoided if you set up a tax-free IBC to act as your contracting entity.
The last thing you want to see happen when you return home is to be presented with a letter from your home tax authorities asking you to pay tax on the money that you earned whilst abroad. Such a scenario can be avoided with advance planning.
What is “Resident for Tax Purposes”?
We are often asked by individuals where (ie in what country/s) am I liable to pay tax?
The starting point is this: If you are regarded at law to be tax resident (ie resident for tax purposes) in a particular country you are liable to pay tax there on your (usually, worldwide) income.
The concept of tax residency however (ie what it takes to be classified as non-tax resident) varies from country to country. Depending on where you originate from you may pass the non-tax resident test of one country but fail the same test had you originated from the country next door.
Let me explain….
The most well-known tax residency test is in fact the oldest ie the days spent at home test. Historically, in most countries (USA excepted – see below), you would be considered non-tax resident for a particular tax year if you have spent less than half of that the year inside your “home” or mother country.
Over the years, and particularly with the proliferation of “fly in-fly out” jobs (seen most prevalently in the oil/mining industries) a number of countries (in particular the more developed countries) have brought into play a multifaceted tax residency test. In other words notwithstanding that you might spend less than half the year on the ground in your mother country if you have a “substantial connection” with your mother country you may still be classified as tax resident of/in that country.
So what constitutes “substantial connection”?
In considering whether you still have a “substantial connection” to your mother country a number of factors are looked at including:
- Do you retain a residency/home in your mother country?
- Do you own any personalty in your mother country (eg a car/furniture/home contents/boat/leisure toys etc etc)?
- Do you have a bank account in your mother country?
- Do you have investments or business interests in your mother country?
- Do you retain a professional or trade license (eg Lawyer/Plumber/Doctor/Teacher/Nurse/Engineer/Architect/Builder/Dentist license etc) in your mother country?
- Do you keep current a golf/tennis/leisure club membership in your mother country?
- Do you regularly renew a driver’s license in your mother country?
- Do you have children at school in your mother country?
- Do you have a spouse/partner living full time in your mother country?
- Etc etc etc
Chances are, as a minimum, what you will need to do in order to become non-tax resident in your mother country is:
(a) Sell your home/residence in your mother country (or cancel any lease you might have over residential premises there)
(b) Sell any business you own on the ground in the mother country
(c) Sell all personalty owned/held in your mother country
(d) Hand in (and do not renew) any professional/trade license you may have in your mother country
(e) Close down any bank/investment accounts you might have in your mother country
(f) Write to your local IRS/Tax Office and advise that you have departed the country permanently and filed your last tax return.
For USA citizens however a unique situation applies. Generally speaking if you are a US citizen you are required to declare worldwide income in and pay tax in America regardless of (a) whether you spend less than half the year there and (b) whether you have any substantial connection with the USA. (For Americans the only way to be classified as “non tax-resident” of the US is to hand in your passport and denounce your citizenship then do all the above things and leave the country indefinitely).
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