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The Territorial Tax Myth

☎️ Book a call with Michael: https://calendly.com/michael-rosmer Today we are talking about a topic that I will call ‘’Territorial Tax Myth’’. People seem to have this thought that if you want to reduce your taxes the first thing you should do is to find a territorial tax country. This is almost universally wrong advice! Many tend to have a bad understanding of what territorial tax means and what local income means. Most countries in the world will tax you on your worldwide income, some countries have territorial tax. The idea of the territorial tax is that they tax only local income. So people think: my customers are abroad, my business is abroad, my employer is abroad, etc therefore I don’t have any local income. I can come to a territorial tax country and pay no tax. WRONG! This is not nearly straightforward and simple as many like to think. There are differences among territorial tax in different countries, and different types of income are viewed differently. If you’re doing work or running a business FROM a certain country, many countries will consider that as a local income. Hong Kong is one of the first countries that come to mind when talking about territorial taxes. They have what’s called ‘’the operations test’’ and they will tax the operations within Hong Kong. Many people have wrong assumptions around this type of taxation, and sometimes they unwillingly break the law due to misunderstanding of what territorial taxes actually mean. This is not good! The most common misconception that I hear a lot has to do with the location of customers. The location of your customers doesn’t determine where do you pay taxes! The second has to do with where the investments are. What if you have investments in stocks abroad? Stocks, as a form of income, are considered to be a resident where you are. Territorial tax country won’t let you not pay taxes on your capital gains. However, some countries don’t tax capital gains at all, and this is where the confusion tends to come from. How about interest income, royalties, dividends? When you have a territorial tax system, dividends from a foreign company will usually not be taxable. There are exceptions to this as well. When doing tax planning you shouldn’t be looking for countries with territorial tax systems. There is a whole set of parameters to look at: your sources of income, is it earned income, do you have a company, are you making any royalties income, dividends, capital gains, etc? Based on the type of income you have, you should reverse engineer and look for a country that will have a favorable tax for YOUR type of income. Who are we and what do we do? We are Offshore Citizen team. We help people become global: get a second passport, set up a second residency, pay less taxes, do banking abroad, etc. We have lots of interesting articles on different topics, we have relevant information up to date. Author: Michael Rosmer ☎️ Book a call with Michael: https://calendly.com/michael-rosmer