Tax Residency & Offshore Tax Avoidance

I regularly receive inquiries from persons who claim not to be a tax payer in any particular country.


When I ask why or how this can be the most common answer I hear is “because I move around a lot”.


After a bit more probing it often becomes apparent that, whilst Fred/Mary Bloggs may not have paid tax anywhere in a long time on account of his/her “moving around”, he/she has not in fact escaped the tax clutches of his/her mother state?


How can that be so?


The starting point it this: If you are regarded at law to be tax resident 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 were considered non-tax resident if you spent less than half 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 etc) license in your mother country?
  • Do you keep current a golf/tennis/leisure club membership in your home country?
  • Do you regularly renew a driver’s license in your home country?
  • Do you have children at school in your home country?
  • Do you have a spouse/partner living full time in your home 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 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 no 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).


Note even if you have to remain tax resident in your mother country there are certain Offshore Corporate etc structures (eg a combination of an IBC and a Private Foundation) that may enable you to receive income tax free in the first instance and to invest that income potentially tax free.


How it works is the Private Offshore Foundation owns a Tax Free Offshore Company and the Tax Haven Company earns/invests the income. Down the line (eg for maximum asset protection):

  • The assets held by the Offshore Company might be transferred to (and/or dividends might be paid to) the Tax Haven Company’s shareholder ie the Private Foundation.
  • The Offshore Foundation could then pay a distribution/s to all or any of its beneficiaries (who would presumably include you/your family members).


I imagine you /your family members ie the beneficiaries of the Foundation would have to declare and pay taxes locally on any income or capital received from the Foundation. Having said that I know of a number of clients  who have set up one of these Combo structures and then years later shifted tax residence to a country that didn’t have income or capital gains tax (whereupon they promptly drew down the capital from/of the structure all of which was receipted/ banked tax free)!


If you do intend to become non tax resident (or set up a structure Offshore), before you commit to departing the country etc, I would absolutely urge you to seek advice from a senior Tax Lawyer in your mother country about what you need to do to become classified at law a non-tax resident etc.


Becoming non-tax resident has plenty going for it. But if you get your exit strategy wrong it could cost you dearly…


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