Following the academic literature, Moraya Consulting makes a major distinction between tax avoidance and tax evasion. Tax avoidance is the legal minimization or exemption from tax duties. In all articles, including this one, we talk about potential tax avoidances in your jurisdiction, i.e. legal tax reduction or removal. Tax evasion is the illegal version of tax avoidance. Some academic articles about tax evasion are cited in our Business Review for teaching purposes. However, we would like to make it clear that Moraya Consulting does not encourage or help anyone willing to evade taxation.
Is it possible to legally lower taxes? Yes, if you are willing to spend several months per year abroad, it may even be possible to pay no income tax legally. How would that be possible?
There are four kinds of international taxation in the world:
- No income taxation: It does not matter how much money one makes the government will never tax you on income. Monaco, UAE, the Cayman Islands and 17 places have this kind of taxation.
- Territorial-based Taxation: countries and territories that tax residents only on locally made income, Singapore, Paraguay, Hong Kong, and roughly 30 other places have this kind of taxation. If one has an income from another country, there will not be any local taxation. However, if one has a salary in Paraguay, for example, and and has fiscal residency in Paraguay, there will be taxes to be paid in this South American country.
- Residency-based Taxation: fiscal residents of these countries always pay tax, unless they have fiscal residency and work in a foreign country. The vast majority of the countries in the world have this type of taxation.
- Citizenship-based Taxation: Citizens will always pay tax, even they are living and working abroad (~have fiscal residency). The USA is the only major country that has this taxation system.
Note: This map should be used for illustrative purposes only. It is not 100% correct, but the vast majority of countries are correctly signed.
Therefore, given that you are not a US Citizen, the two simplest ways to legally pay 0% income tax are:
1 - Have your fiscal residency in a territory with no income tax (e.g. Monaco, Dubai, Bahamas) and have all your income coming from this place through investments, normal jobs, etc.
2 - Have a fiscal residency in a territorial taxation jurisdiction (e.g. Singapore, Hong Kong, Costa Rica, Panama) and have your income come from a 0% tax income country.
Example: Eduardo Saverin, the Facebook co-founder, who held double citizenship Brazilian-American, chose to renounce US citizenship and go live in Singapore. Brazil does not tax citizens working and living abroad and Singapore only tax residents for income made in Singapore. Therefore, if Eduardo has all his money invested in a no-income-tax jurisdiction, like Monaco, Dubai, or the Bahamas, he is possibly paying 0% tax, legally. Given the international taxation system of the world, in several situations individuals have higher annual income moving abroad and never working than working full-time in their home countries (see "Working to Lose Money").
Is it legal to move your fiscal residence in a low or zero tax country?
Yes, this is legal. Many of the world's' most famous people live in tax havens to avoid or decrease taxation legally, such as Roger Moore, Lewis Hamilton, Novak Djokovic, Bono, Ringo Starr, Bjorn Borg, Boris Becker, Caroline Wozniacki, Felipe Massa, Galvão Bueno, Eddie Irvine, David Coulthard, Nico Rosberg, Jenson Button, Olivier Beretta, Max Verstappen, Sergio Perez, Dame Shirley Bassey, David Nahmad and Ezra Nahmad, David Tomatis, Michael Peagram, James Caan, Tatiana Casiraghi, Lily Safra. More than 70% of the Fortune 500 companies use tax havens to legally decrease their taxes. Some famous examples are Apple, Nike, Google, Walmart, CitiGroup, Goldman Sachs.
Important: In the vast majority of the cases, the place where you live is your place of fiscal residency. However, this is not necessarily true. To understand this better and also to learn how you can become a fiscal resident of territorial taxation or tax-free state please visit "Buying Passports and Permanent Visas"
Source: Institute of Taxation and Economic Policy (ITEP)
"For all long-term investors, there is only one objective - maximum total real return after taxes." — John Templeton