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Expat Taxes And The Implications - You Could End Up Paying Significantly More Than You Need To

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Expat Taxes
Life for the average expat can be challenging enough, what with acclimatising to a new culture, overcoming language barriers, dealing with foreign bureaucracies, worrying if your money is safe in the local bank, fretting about whether the kids will settle into their new school – the list could go on for quite some length.

However, there is one very important factor that we haven’t mentioned – and one which could bring even the most savvy expat into a cold sweat at the mere thought of - and that is the dreaded ‘t’ word. Yes, you’ve guessed it, tax. Continue...



Countries With Specific Expat Tax Regimes:

An individual is subject to a residence test in determining if he or she is Australian resident for tax purposes.

In Denmark personal tax rates are notoriously high, with a further levy for social insurance contributions.

In Denmark personal tax rates are notoriously high, with a further levy for social insurance contributions.

Given the importance of the offshore sector to Gibraltar's economy, but with its very limited local labour pool...

In Ireland, the taxation of individuals is based on a mixture of the concepts of residence and domicile.

In Luxembourg the taxation of individuals is based entirely on the concept of residence, regardless of nationality.

It is necessary to consider both domicile and residence to establish the exact tax situation of individuals in Malta.

The Netherlands
The Dutch income tax law does not define the term 'resident' and therefore resident or non-resident status is decided on a case by case basis.

The United Kingdom
An individual is deemed to be tax resident when he or she spends a total of more than 183 days of the tax year in the UK;

The United States
Generally speaking, the US is not an attractive location for resident expatriate executives seeking to limit taxation.

Continued from top....

Tax implications - if you are not careful you could:
If you are, for example, working for a multinational company and are posted for a stint working in one of your employer’s regional offices or foreign subsidiaries, there is a fair chance that much of the administrative hassle, such as registering with the local tax authority, will be sorted out for you.

Even so, it does of course pay to be aware of the tax implications of working in your destination country: if you are not careful you could end up paying significantly more than you need to, and could also add to your tax liabilities back home.

Generally speaking, one becomes ‘tax resident’ in a country after having spent more than six months there in any one year. During this period, you would typically only owe tax to the host country on any income that you had earned there, as opposed to your worldwide income.

It is usually the case that a stay of more than six months in a country means that you become tax resident, and will therefore pay tax on the same basis as other taxpayers who live there permanently.

However, there are a number of other factors which may come into play which could greatly affect your liability to tax. For example, some countries use a ‘territorial’ system of taxation, meaning that you would still only pay tax on income earned within the country’s borders.

Unfortunately, territorial tax systems are relatively few and far between these days, with governments keen to grab a slice of an increasingly globalised economy.

So, when you do become tax resident it is much more likely that you would have to pay tax on your worldwide income. This however may give rise to a situation where your host country and the place from where you have expatriated may both have a claim to tax the same piece of income, so the existence of a double taxation avoidance treaty between the two countries, by which you can receive a credit in one country for tax paid in the other, is important if you intend to stick around in your new home for any length of time.

Expatriates originating from certain countries face additional complications, however, and we’re talking those which employ the concept of ‘domicile’ as well as ‘residence’ when working out who must pay what and where.

Domicile is a notion unique to the English-speaking common law jurisdictions, the United Kingdom being a notable example. In the UK, domicile attaches to a person's original home country, and cannot be changed unless the person moves their whole life, family and base to another country, with the intention of remaining there permanently.

Few 'visiting' residents will therefore have a UK domicile, but Brits have to just about completely sever ties with the UK in order to rid themselves of UK domicile, and even then HM Revenue and Customs is unlikely to be totally convinced! Americans find themselves in an even more horrible situation, in that they are taxable by the US no matter where they are on the planet, unless they take the rather drastic step of renouncing their citizenship altogether.

London UKLondon UK

Aware of the tax implications:

If you run your own business, perhaps as an adviser or consultant, meaning that you spend time working in one or more foreign country for extended periods then it is obviously all the more crucial that you are aware of the tax implications of this.

Working in a country which taxes worldwide income and then returning home to another world-wide tax regime could ultimately be very bad for your financial health and you risk having a fair chunk of that income you worked so hard to accumulate wrenched away by one tax authority or another. Therefore, it is not just sensible to structure your financial affairs appropriately so that you are not unnecessarily over-taxed, it is essential.

One option to consider if you are a globe-trotting career expat is to form an offshore company, the interpolation of which can sometimes distance you from your income sufficiently to avoid taxation.

A holding company for example can be used to hold investment portfolios, and is useful in providing enhanced privacy. If the income of a holding company is used to make further investments, it may be that you won't be taxed on it even when you return to a high-tax domicile.

Another possibility is to form a personal service company which may allow you to contract to supply your services regardless of residence, and let the fees earned accumulate in a low-tax country while you work for a low salary in the country where you are taxed.

In some countries there are plenty of rules to prevent this; but not in all, by any means. And while the world of ‘offshore’ often attracts negative headlines these days, we should stress that sensible tax planning and tax minimisation is still legal in most countries as long as you play by the rules.

Overstepping these boundaries, which, admittedly, are sometimes blurred, is not advisable, for wilful tax evasion is very likely to get you into a lot of trouble. Again this is a complex area and the route you take will depend very much on your personal circumstances, so there is not room in this feature to explore every possible avenue. Sound, independent financial advice is a must, therefore.

The same considerations about tax apply to those who are intending to live abroad permanently for lifestyle reasons, or retire to a place in the sun - otherwise, you could find that your dream of owning a vineyard in Australia or an idyllic small-holding in Provence could well turn into a nightmare!

Expat Retirement


Problems with Pensions:
For retirees especially, (and indeed, anyone working abroad for an extended period of time), the perennial problem of pensions can also be a real headache.

Although pension investment is usually tax-privileged in high-tax countries, as an expat, you face additional problems, namely that while non-resident, you will probably not be able to continue taking advantage of the tax incentives 'at home', even if you want to retire there.

If you are employed by a company in your home country (and are part of an in-house pension scheme), and you are moving abroad to work for that same company, then in some countries you may be able to continue contributing to that plan; in the UK for instance you can continue to contribute for a maximum of 10 years, but in many other countries the regime is nowhere near as permissive.

If you are moving abroad to work for a company with no ties to your home country, then you may be allowed to join their local pension scheme. Only in a few cases will you be able to transfer the pension rights back to your country of residence when you return, unless you continue to work for the same company; and usually the terms of transfer are highly unattractive.

If however you are going abroad for an extended period, and especially if there is a good chance that you will retire to some other part of the world, there may be an argument for transferring your home pension assets offshore straightaway, even though that may (probably will) entail a tax penalty if your contributions have been tax-privileged.

Other options to consider include: a designated pension or retirement scheme, which usually accepts payment in a wider range of currencies, and generally require less maintenance on your part; or the ‘DIY’ approach which will allow you to build a more diverse portfolio made up of different types of investment, allowing more flexibility but with greater risk. Again, this is a highly complex area, and there is no space here for an extended examination of expat pension options.

It is often the case though, that governments, particularly in countries which have very high rates of personal income tax, have legislated special expat regimes in order to attract workers with particular skills or senior management experience, which will minimise exposure to tax to some extent.

Brief descriptions of some of some of these special expat tax regimes are provided below, along with the general tax and residency rules in some other popular destinations for international assignees and other classes of expat.

Information for reading purposes only. Consult your tax professional for advice.