What is tax optimization
Tax optimization is understood to mean measures that reduce the taxes an individual or a company pays. This frees up money for business development and other needs.
One of the goals of tax planning is to minimize tax liabilities, and this can be achieved by an individual moving to another country or opening a company abroad. Although taxes are high in the United States, Britain and in most countries in the European Union, some countries offer preferential treatment to investors to attract them by reducing their tax burden.
In Portugal, income tax is calculated on a progressive scale. Tax residents in the country earning more than €80,882 per annum are charged at a rate of 48%. However, for new tax residents, the Non-Habitual Resident program is applied, which allows tax on income earned in Portugal to be paid at a rate of 20% and in some cases it allows investors not to pay tax on their world-wide income outside Portugal.
We do not recommend or discuss any of the illegal or criminal ways of reducing taxes: for example, by splitting a company into several legal entities or money laundering through fictitious transactions. This can result in administrative and criminal liability for tax evasion, and those convicted can be sentenced to prison and prevented from holding public positions or even being company directors.
In this article, we consider only legal methods of tax optimization: choosing a special tax regime, opening a company abroad and changing the country of tax residence.
How to legally optimize taxation
Check your counterparties. If the counterparty has been involved in fraud or tax evasion, the costs of transactions with them may not be taken into account when calculating the tax base. In this case, the company will have to pay more taxes than if the costs had been deducted.
Engage in charity work. In many countries, individuals and companies are entitled to tax breaks when they donate money to charity. For example, in Russia, individuals can receive a tax deduction of up to 25% of their annual income, and companies can deduct up to 1% of their revenues from their tax base.
Change the country of tax residence. Sometimes moving your tax residence to another country can help reduce the tax burden. For example, Antigua and Barbuda has no income tax and international business companies (IBCs) are exempt from taxes on global income for 50 years.
To become a tax resident of a country, you usually need to live there legally for at least 183 days a year. However, there are exceptions: for example, in Cyprus, you can become a tax resident in 60 days, while investors with a Maltese residence permit do not have to live in the country at all.
Choose a favorable tax regime. In some countries, tax residents can choose how to pay taxes on certain types of income. In Malta, property owners pay tax on rental income at a progressive rate of up to 35% or use a special tax scheme at a flat rate of 15%.
When moving to Greece, Portugal or Cyprus, foreigners can minimize their taxes through special tax regimes.
Take advantage of benefits and deductions. They allow you to reduce the tax base and part of the tax paid is refunded.
Taxes in the Caribbean
Antigua and Barbuda, Grenada, Dominica, St Lucia, and St Kitts and Nevis are Caribbean countries with citizenship by investment programs. Getting a second citizenship in any of these countries allows you to register a company there and become a tax resident in the selected country, which can often reduce your tax liabilities.
There are no inheritance or capital gains taxes in Caribbean countries, and in some of these countries, there is no income tax.
Taxes for individuals. There is no income tax in St Kitts and Nevis and Antigua and Barbuda. Elsewhere in the Caribbean, it is charged according to a progressive scale. Thresholds are calculated in Eastern Caribbean dollars (EC$). In September 2021, 1 EC$ was equal to $0.37.
The tax base can be different: in Dominica, tax residents pay tax on their world income, and non-residents pay tax on the income earned in Dominica.
Income tax in the Caribbean
|Country||Tax base and rate for residents||Tax base and rate for non-residents|
|Antigua and Barbuda||No tax is charged||No tax is charged|
|Grenada||Salary and business income earned in Grenada|
10% on first EC$ 24,000;
28% on higher income
|Salary and business income earned in Grenada|
10% on first EC$ 24,000;
28% on higher income
|Dominica||Income earned in Dominica and globally|
15% on income up to EC$ 20,000;
25% on income from EC$20,001 to 50,000;
35% on income from EC$50,001
|Income earned in Dominica|
15% on income up to EC$20,000;
25% on income from EC$20,001 to 50,000;
35% on income from EC$50,001
|St Kitts and Nevis||Tax not charged||Tax not charged|
|St Lucia||No income tax is charge on income earned in St Lucia up to EC$ 18,400|
10% on income from EC$18,401 up to EC$28,400;
15% on income from EC$28,401 to EC$38,400;
20% on income from EC$38,401 to EC$48,400;
30% on income from EC$48,401;
|Income earned in St Lucia|
10% on income up to EC$10,000;
15% on income from EC$10,001 to EC$20,000;
20% on income from EC$10,001 to EC$20,000;
30% on income from EC$30,001
In addition to income tax, residents pay real estate tax, tax on transfer of ownership when selling real estate, and stamp duty. Tax rates vary by country and situation.
In St Lucia, the real estate tax is 0.25% of the value for a residential property and 0.4% for a commercial property; in St Kitts and Nevis the rate ranges from 0.2 to 0.3%; in Grenada there is no stamp duty for individuals; and in Dominica the real estate tax is 2.5% for the seller and 4% for the buyer.
Business taxes. Most often, investors register international business companies, or IBCs, in the Caribbean. It is mandatory for IBCs to have an office or a licensed representative in the country.
A company becomes tax resident in a country if it is incorporated there or its operations are carried out in that country. In most Caribbean states, companies pay income tax on their global income and VAT.
Taxes payable for companies tax resident in the Caribbean
|Country||Income tax:tax base and rate||VAT|
|Antigua and Barbuda||Global Income|
25% of net profit
IBCs are exempt from tax on income, dividends and royalties from foreign sources for the first 50 years after their formation
|From 0 to 15%|
28% of net income
|0 to 20%|
|Dominica||25% of net income earned world-wide||0 to 15%|
|St Kitts and Nevis||33% of net income earned world-wide||0 to 15 %|
|St Lucia||30% of income earned in St Lucia||0 to 12.5%|
If an investor transfers a business to a country where he becomes a tax resident himself, the company will not withhold tax on dividends.
Dividend payments to non-residents are tax-free only in St Lucia. In other countries, dividend payments to non-residents are taxed 15 to 25%.
How to legally reduce tax liabilities by over 60%
Kirill received Dominica citizenship by investment in 2020. A year later, he decided to transfer his business there and become a tax resident of the country. Kirill’s tax consultants calculated that in Dominica he would pay just one-third of the taxes he had been paying in his country of origin.
We helped Kirill become a tax resident in Dominica. The paperwork took two weeks to complete. Kirill and his spouse are happy to fulfill the requirement of living on the island for 183 days in a year: they love the warm climate, beaches and unspoilt nature. They are going to spend the money freed up on the education of their grandchildren and on medical treatment.
Taxes in Vanuatu
Vanuatu has no income, capital gains or inheritance tax. At the same time, none of our clients at Immigrant Invest have moved there in order to optimize taxes. Usually investors have used the opportunity to register their companies there.
Foreign investors set up International Business Companies (IBCs) in Vanuatu. They are not allowed to work there, only abroad. In Vanuatu they are also not allowed to offer their services, sell shares to local residents or buy real estate.
The company must have an office or representative in the country, a director and at least one shareholder. The company does not need to keep records.
During the first 20 years from the date of registration, international companies are not taxed on profit or income, capital gains, inheritance or gifts. When registering a company, a registration fee of $150 is paid. Instead of taxes, an international company pays an annual fee of $300.
The shareholders in IBCs do not pay tax in Vanuatu on income derived from the company's activities.
Vanuatu citizenship for freedom to travel internationally and company registration
Narong is a political blogger who had to seek asylum in Germany, where he was granted a temporary residence permit: he and his family had lived there constantly under the threat of deportation, they could also not leave Germany or register a company in the country.
We helped Narong and his family obtain Vanuatu citizenship. Narong registered a company in the country and was able to hire staff to work on his broadcasting channel. For the next 20 years, his company will not pay taxes in Vanuatu, just an annual fee of $300.
Taxes in European countries
Taxes are quite high in the European Union: for example, in Portugal the income tax rate can reach 48%. However, there are various ways of reducing tax liabilities: for example, transferring a company to Portugal, exercising your right for a tax deduction, or obtaining a preferential tax status.
Malta. Income tax in Malta is levied on a progressive scale. The rate ranges from 0 to 35%. Tax residents benefit from a tax deduction of up to €9,905, depending on the income and marital status of the taxpayer.
Companies in Malta pay corporate tax at a rate of 35%. Part of the tax paid by the company can be refunded to shareholders:
- 100% if the holding company owns a share in a foreign company and belongs to the Participating Holding category;
- 6/7 if the company is trading;
- 5/7 if the company profits from royalties and interest;
- 2/3 if the company receives income from another country with which Malta has an agreement on avoidance of double taxation.
VAT in Malta is 18%, one of the lowest rates in the European Union; only Luxembourg and Switzerland have lower VAT rates in Europe.
To become a tax resident in Malta, you need to reside in the country for at least 183 days a year. However, an exception is made for holders of residence permits in return for investment. They immediately become tax residents and do not need to live in Malta, as long as they do not spend 183 days a year in any other country.
Investors with a Maltese residence pay taxes under a special tax regime:
- 15% on income earned abroad and transferred to Malta;
- 35% on income earned in Malta.
They pay income tax of at least €15,000 per annum on income transferred to Malta. Those who do not pay this minimum amount are not allowed to extend their residence permit. There is no tax charged on income earned abroad that has not been transferred to Malta.
Portugal allows new tax residents to obtain the Non-Habitual Resident (NHR) status, which is issued for 10 years.
The preferential tax regime allows you to pay income tax as a highly qualified professional in Portugal at a rate of 20%. Without concessions, the tax rate is calculated on a progressive scale up to 48%.
Another opportunity appeared on 1 April, 2020: it allows paying tax on a pension received from another country at a rate of 10%. If there is a double taxation treaty between Portugal and the country of the source of the pension income, no tax is charged.
Tax on dividends, interest, royalties, capital gains and rental income received abroad does not have to be paid at all, on the condition that the country making the payment is not considered an offshore jurisdiction and it has a tax agreement with Portugal.
Greece also offers incentives to foreign investors. They can pay tax on their global income at a fixed rate. Without these concessions, tax is paid on a progressive scale up to 44%.
The concessional tax on global income is €100,000 per annum. If the family members of the investor also elect to pay a flat tax, they need to pay €20,000 per person.
To take advantage of these benefits, you need to become a tax resident in Greece. However, the investor cannot benefit from this concession if they had been a tax resident of the country for more than one of the previous eight years.
Investing €500,000 in the country’s economy is another condition for obtaining benefits. However, investors who have received a residence permit in Greece by investment are eligible for these benefits without having to invest €500,000.
Cyprus. Tax benefits can be received by residents not domiciled in the country. The country of domicile is the country where an individual has their permanent legal residence. Domicile can be acquired at birth, but may change in the course of a person’s life.
Non-domiciled residents are considered to be those individuals who have lived in Cyprus for less than 17 of the last 20 and were not born in this country. They do not pay tax in Cyprus on their global income, dividends, interest, and capital gains from the sale of securities and corporate rights.
You can become a tax resident in Cyprus by living in the country for at least 60 days. You also need to buy or rent real estate in the country and either run a business or work in Cyprus. At the same time, you cannot spend more than 183 days a year in any other country.
How to avoid paying taxes in two countries at the same time
Countries sign double taxation treaties (DTTs) that allow residents of the participating countries to avoid paying the full tax amount twice: in the country where the income is received and in the country of tax residence.
An investor, a tax resident of Russia, bought real estate in Malta and rented it out. If a DTT had not been concluded between the countries, they would have paid a tax of 15% on rental income in Malta and 13% in Russia. As a result of the DTT, they only need to pay 15% in Malta.
If a DTT between two countries does not exist, then taxes must be paid in both countries. For example, the Caribbean countries and Vanuatu do not have DTTs with Russia. If a Russian investor becomes a tax resident of a Caribbean country, but does not transfer their business there, they will have to pay the full tax on their income in both countries.
How to legally live in a country in order to become a tax resident there
In order to live permanently in another state, you need to obtain a residence permit, permanent residence or citizenship there. In some countries, they can be obtained by investment.
Where can an investor get a residence permit, permanent residence or citizenship
|Country, status, investment amount and processing time||Opportunities for optimizing taxation|
Antigua and Barbuda
St Kitts and Nevis
|Move to the country that issued the passport and become a tax resident there|
Register a company in the selected country: in some cases this allows you not to pay tax on the company's global income
| Vanuatu citizenship|
|Register a company in Vanuatu and pay an annual fee of $300 for 20 years instead of taxes|
| Portuguese residence permit|
|Move to Portugal and receive the preferential NHR tax status in order to pay taxes at reduced rates|
| Greek residence permit|
|Move to Greece, become a tax resident and pay a flat tax on your global income|
| Cyprus permanent residence|
|Move to Cyprus and become a non-domicile tax resident in order not to pay tax on your global income, dividends, interest and capital gains|
| Maltese permanent residence|
|Move to Malta and become a tax resident there|
Register a company in Malta and 100% of the corporate tax paid is refunded
| Maltese citizenship for exceptional services to the country|
1 year as a resident
|Move to Malta or another EU country and become a tax resident there|
Register a company in any EU country
You can become a tax resident in return for real estate investments in these countries in order to reduce your tax liabilities. This option is offered in the residence permit or citizenship by investment program of each of these countries except Vanuatu. Although Vanuatu has announced that it will also offer the option of buying real estate as part of its residence permit and citizenship program, the amount of investment required has not yet been announced.
Buying a property is an investment that allows the initial amount to be returned at a later date to the investor. The minimum period that a property has to be held in the ownership of the investor depends on the conditions of the program: for example, in the Caribbean, this period ranges from three to seven years, while in Portugal, it is at least five years.
Frequently asked questions
Yes. It can be done by making donations to charity, changing the country of tax residence, registering a company abroad or choosing a favorable tax regime. These are all examples of legal ways of optimizing taxes.
A residence permit, permanent residence or citizenship of another country allows you to register a company there. You can also move there to become a tax resident of another country and take advantage of the favorable tax rates and special tax schemes offered there. For example, residents of some Caribbean countries do not pay income tax.
No. Usually a person pays taxes in the country of tax residence, where they live and work permanently. If an investor who is a tax resident of one country receives income from another country, they may be obliged to pay tax in both these countries at the same time. Double taxation treaties between countries allow individuals not to pay taxes in full in both countries.
No. You do not need to move to register a company abroad. However, you have to move to the country selected as your new country of tax residence. Residence permits and citizenship by investment usually do not require moving to another country. The investor can enjoy the benefits of a residence permit or a second citizenship without necessarily changing their place of residence.