Methods of tax optimisation
Tax optimisation is a complex of measures that allow a person or a company to reduce the tax burden to have more money left for business development and other needs. Optimisation methods can be illegal and legal.
Illegal optimisation involves tax evasion. For example, an entrepreneur can cash out through fictitious transactions to increase expenses in the reporting. Another common way is to split up a large company into smaller ones to get tax incentives for small and medium-sized businesses.
Illegal tax optimisation schemes lead to prosecution ranging from a fine to a prison term.
Legal ways to optimise taxes can significantly reduce the burden. They include the following:
- Becoming a tax resident of a country with low or zero tax rates.
- Registration of a company in a country with a low tax burden on business.
- Choosing the most favourable tax regime.
- Using benefits, deductions and other opportunities the country's legislation provides.
Many states offer preferential tax regimes for individuals and businesses, and, in some countries, for example, in the UAE, there is no income tax at all. Investors can obtain second citizenship or a residence permit to reduce the tax burden for themselves and their businesses.
How to change the country of tax residence
A tax resident is a person who pays taxes at the rates for residents of a particular state.
There is a general rule in many states that one must spend at least 183 days a year in the country to become a tax resident. An ordinary tourist visa isn’t suitable for this purpose as one needs a status allowing to live in the country for a long time, which is a residence permit or citizenship.
Some countries allow a foreigner to become a tax resident faster. For example, one can do it after 60 days of residence in Cyprus. But they still need a residence permit. Residents are prohibited from spending more than 183 days a year in any other country. To maintain tax residence, they must conduct business or work and have a permanent address in Cyprus.
If the conditions for tax residency aren’t met, the person is considered a non-resident. They usually pay taxes in a country only if they earn income or own property there.
Obtaining a passport or a residence permit doesn’t affect tax residence. Both documents only allow you to fulfil the mandatory condition to reside in the country.
Stories of investors who managed to reduce their tax burden
Legal tax optimisation is one of the goals of investors who turn to Immigrant Invest. Here we would like to share our case studies about the clients who managed to reduce the tax burden with a second passport or a residence permit.
Becoming a Dominica tax resident and saving about $10,000 on taxes. Levon obtained Dominica citizenship in 2020. He transferred his business to the Caribbean a year later and changed his tax residence. We helped the investor to become a tax resident of Dominica and not pay income tax on dividends from his company's shares.
Starting a business and getting a beneficial tax status. Ayzere wanted to move to Europe with her family and open a psychological centre in the new country of residence. To achieve this goal, the family got Portugal Golden Visas. After relocation Ayzere became eligible for the Golden Visa tax benefits. For example, she can become a Non-Habutial Resident, which makes it possible to pay a flat income tax for 10 years.
Registering a company in a country without tax on global income. Narong is a political blogger who has been granted asylum in Germany. Refugee status limited the investor’s ability to move around the world and do business. Vanuatu citizenship solved the problem. After obtaining the passport, Narong registered a company in Vanuatu. The country has no tax on profits and capital gains for international business companies if the income is from abroad.
Summary on tax optimisation with a second passport
- There are legal and illegal ways to optimise taxes. Punishment for using illegal schemes ranges from a fine to imprisonment.
- Changing the tax jurisdiction for yourself and your business or using special regimes and tax incentives are among the legal tax minimisation methods.
- To become a tax resident of another state, you will need a status that allows you to live in the chosen country, namely, a residence permit or citizenship.
Frequently Asked Questions
That depends on the passports you hold. Some countries signed double taxation avoidance treaties that exempt dual citizens from paying taxes in both countries.
For example, the Caribbean countries like Antigua and Barbuda and Saint Kitts and Nevis are tax havens. For example, there are no income taxes in these states. Residents and citizens of the Caribbean countries also don’t need to pay taxes on dividends, interest and royalties except for St Lucians.
The UAE can also be called a tax haven.
There is no income tax for residents and citizens of the UAE. Corporate tax for companies will be introduced only in June 2023 and will apply to companies that have annual profit of $102,100. Dividends and capital gains are also not taxed.
If a company is registered in the Free Zone the owner doesn’t pay the corporate tax, VAT and customs duties for up to 50 years after the company’s registration.
Some countries that allow dual citizenship have double taxation avoidance treaties. If both countries of your citizenship signed them you don’t need to pay taxes to both of the states.