Given the world’s international taxation system, in some situations, individuals lose money by working. In other words, they would have higher annual income living abroad and not working compared to staying in their own country and working full-time.
How can this happen?
As already shown in “Legally Decreasing Taxation,” it is legally possible to decrease your income taxation to zero, if you are willing to move abroad. One basic way is to gain fiscal residency in a no-tax jurisdiction (like Monaco, Dubai, or the Bahamas) and drawing income from these places (for example, through stock and bond gains). The other option is to move to a territorial tax country (like Singapore, Hong Kong, or Costa Rica) and draw your income from a no-tax state.
Now, let’s suppose a situation in which one citizen from a major European country (or Brazilian or any residency-based taxation state) inherited 2 million in the form of real estate, jewelry, stock, bonds, etc. Stock markets around the world gave about 7% returns a year, adjusted for inflation, in the last 100 years (Jorda et al, 2017). Therefore, this person can have a 2 million*0.07 = 140 thousand annual income by simply buying a local total market ETF, on average. Assuming a 30% capital gains tax, this person would have to pay 42 thousand for their government in taxes a year. In other words, if this person makes less than 42 thousand through work (after taxes), they will have higher income if they choose not to work in a no-tax or territorial country, on average, than if they work full time in their country. That happens because their real salary will be smaller than the capital gains tax that they will have to pay to stay in the country to work.
It is important to highlight that the average annual salary (pre-tax) in rich countries is 46 686 dollars (OECD, 2019) and by diversifying your investments you can get more than 7% financial return a year. I am not counting inheritance taxes or wealth taxes, which often exist in residency-based taxation countries. Hence, this estimation is relatively conservative.
The calculation presented in this article can be used by many people, not only just individuals who inherited large amounts of money. This could include workers who saved a large amount of capital but lost their jobs and cannot get a well-paid position anymore or someone who became work disabled. Even sons or daughters of wealthy individuals who are now considering managing their family wealth or finding a wage-paying job may contemplate such a scenario. The situation discussed here assumes that by working in your home country, you become a fiscal resident of a residency-based taxation system.
General calculation formula:
Total Assets (Nominal Value) * Annual Financial Returns (%)*Capital Gains Tax (%) = Salary (After tax)
The example above would be: 2000000* 0.07* 0.3 = Salary (After Tax)
IF Total Assets (Nominal Value)*Annual Financial Returns (%)*Capital Gains =ns Tax (%) > Salary (After-tax)
Then you will be losing money to work because your real salary is smaller than the amount you will have to pay for the government in capital gains taxes.
IF Total Assets (Nominal Value) * Annual Financial Returns (%)*Capital Gains Tax (%) < Salary (After-tax)
Then you can still increase your income by working because your real salary is greater than the amount you will have to pay for the government in capital gain taxes.
How difficult is it to move your fiscal residency to a no-tax or territorial jurisdiction?
If you have a large amount of capital, it is not very complicated. Many governments are legally selling their visas and even passports for individuals willing to invest a high amount of capital in their countries. For example, you can buy a house in the value of 400 thousand dollars, get the citizenship/passport of the Caribbean country of St. Kitts and Nevis, and sell the property five years later (if interested). Once you have the citizenship/passport of St. Kitts and Nevis, it is fairly easy to get the local fiscal residency. Your hardest requirement will be to spend a few weeks per year on a Caribbean beach. St. Kitts and Nevis is not only a no-income-tax jurisdiction, but also it does not have an inheritance tax, wealth tax, capital acquisition tax, or capital duty. Therefore, you can legally avoid multiple types of taxation by having St. Kitts and Nevis as your fiscal residency. St. Kitts and Nevis is just an example. Many other countries facilitate fiscal residencies for wealthy individuals (see Buying Passports and Permanent Visas).
"If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand." - Milton Friedman, The 1976 Nobel Winner
"The power to tax involves the power to destroy." - John Marshall
- Jorda, Oscar, Katharina Knoll, Dmitry Kuvshinov, Mortiz Schularick, and Alan Taylor (2017). The Rate of Return on Everything, 1870–2015. Working Paper Series 2017-25, Federal Reserve Bank of San Francisco.
- OECD (2019). Average Wages. Data. https://data.oecd.org/earnwage/average-wages.htm
IMPORTANT: THERE IS NO ONE BEST TAX OR INVESTMENT STRATEGY. IT ALL DEPENDS ON YOUR GOALS, RESOURCES, AND CITIZENSHIP.
For example, are you willing to move abroad? If so, where? How long do want to stay in each place? What is your annual income? How much money are you willing to invest? Do you want short term gains or long-term investments? What is (are) the source(s) of your income? How much taxes do you pay annually? Do you want to decrease your tax duties or completely remove them? Do you feel like you want to pay some taxes even if you do not need to? What is your citizenship? Do you have multiple citizenships? Depending on each of these answers the best investment/tax strategy for you will differ. To see what option is best for you and to help with the implementation of the strategy feel free to reach out to us. You do not need to be rich to create a global investment portfolio. Most of the bank and brokerage accounts we open do not have minimum initial deposit or maintenance fees. Thus, you can invest as much as you want or even leave the accounts empty until you have enough capital or interest to invest abroad.