Business-savvy digital nomads and perpetual travellers are seeing the advantages of incorporating an offshore company in a foreign country. These individuals have a unique set of circumstances which allow for greater freedom of movement and an enhanced ability to establish a company in the jurisdiction of their choosing.
In this article, we explore the reasons why digital nomads should consider conducting their online business through the medium of an offshore company. We will also discuss the practical steps of how to reduce taxes with an offshore company and the factors to consider when deciding where to incorporate an offshore company.
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There are many reasons why it makes sense for digital nomads to form an offshore company. The fact that digital nomads tend to conduct the majority of their work and business activities online means they are not restricted to a specific physical location and are thus better positioned to take advantage of a non-local structure.
Many digital nomads and perpetual travellers are confused about their tax situation – who they owe taxes to, how to declare them, and how much they should be paying.
Unfortunately, saying that you live nowhere is not enough to escape tax liability. If you earn an income and don’t declare it you are setting yourself up for a lot of headaches down the road.
Creating an overseas business plan will allow you to tackle any problems that may come up in the future in regards to your tax liability.
The number one advantage of having a proper offshore company structure is that it can enable you to greatly reduce or completely avoid paying taxes on the income you earn.
It is important to note that this is not as simple as it might sound and not every individual is able to benefit as it will depend upon your tax obligations of the country where you live. Those who stand the most are individuals who live in a country that has territorial based taxation and does not tax worldwide profits. Unfortunately, if you are American you are out of luck (unless you move abroad and renounce your passport).
Simply taking the first step of conducting your online business activities through a Limited Liability Company (LLC) or other similar legal entity can ensure a certain degree of asset protection. This is because you will no longer be held personally liable for the debts and obligations which belong to the company.
Incorporating this kind of entity in a favourable offshore jurisdiction can maximise its asset protection and privacy advantages. Many financial centres have laws that help to protect the identity and assets of corporate structures.
Forming a company in a foreign jurisdiction opens up new doors of opportunity in terms of regional trade, access to new investment markets that would not otherwise be accessible if you had a local company.
Some offshore financial centres make it possible for foreigners and nomads to incorporate a company easily with minimal red tape. Auditing, financial reporting and capital requirements are low. After the initial registration fee, the only costs associated with the structure is yearly governmental fees which are usually 100-200 USD.
Many jurisdictions require an offshore company in order to set up a bank account. Some of the more popular offshore centres such as Singapore, Belize St Lucia offer greater stability, better banking policies as well as interest returns, and banking secrecy laws.
It is definitely possible for digital nomads to successfully reduce or eliminate their tax burdens with the right company structure.
That being said, it is not as easy as many might have you believe. There are a few important steps you will need to follow.
In this article, we outline the basic process and steps you need to take, but it is important to understand that there are many factors and complexities which can’t all be examined in detail.
For that reason, you should hire the services of a professional financial advisor who has experience in these matters to help you personally tailor a plan which will work for your situation. You should also do comprehensive research and consider all variables to find the best structure which will work for you.
The first step is to incorporate a company in an offshore jurisdiction.
The process of forming a company varies depending upon your needs, the business type and the jurisdiction chosen. It can often be done remotely and again depending upon where you are incorporating it can be simple. However, due to many changes in the offshore sector former British Territories such as the Cayman Islands and the BVI require a lot more time, effort and documents.
After you have successfully registered your corporate structure, you will need to open a corporate account. This is most commonly done in the same country in which the company was formed, but not always have to be the case.
In some jurisdictions it is a requirement to have an offshore company in the country to maintain your account. In contrast with forming a company, opening a bank account can require more documents, an in-person visit, as well as AML and KYC requirements and often require banking and professional references.
Opening an offshore account is becoming increasingly difficult as banks are wary to open an account for individuals without proper documents. This is where it may become difficult if you are trying to become a nomadic entrepreneur. Having residency is important if you are looking to open up a foreign account. Due to the Common Reporting Standard banks want to know where you live and where are paying taxes.
Without having a legal residency you will find it very difficult to open an account.
This final step is often overlooked, and where many digital nomads fall short in their plans to reduce taxes through an offshore company. The important thing to understand is that you and your company are separate legal entities and are taxed as such.
It is great to have an offshore company in a foreign country that has no corporate taxes, but if you remain a tax resident of a country that has high-income tax rates, the moment you transfer the profits of your business into your own name (whether via dividends, a salary etc.) they will be tax liable.
There are many different strategies which people have used to avoid paying high-income taxes on.
Individuals have used companies as a means of redistributing profits offshore and where they can be reinvested, using tax deferral schemes, loan distribution, offshore captive, contractual payments, deductions etc. However, these can be difficult to implement and may be impossible depending upon your circumstances.
The downside of using tax avoidance methods is that they can be costly to set up, and require more rigorous oversight, management, and a carefully structured plan to make sure your avoidance does not turn into tax evasion.
Similarly, unless you have a substantial sum, multiple seven figures, it doesn't make much sense to go through those lengths. For most people who have five to six-figure incomes who work online is to find a tax residency where you can use as a base.
Becoming a resident a tax resident of a country with little or no income taxes which may not need to be more than having an apartment, a visa, an account or a piece of land. Each country has its own residency requirements
In doing this, you can either:
This makes the most sense if you are considering becoming a digital nomad for the long haul. Why? Because having a base enables you to escape the tax-trap which can easily come for those who try to become residents of nowhere.
The tax trap is when you are continually moving from place to place without a taxable residence. Residency is important for tax purposes and for banking.
If you are looking to accept payments from customers online you need to have a legitimate bank account in a country and institution that is reputable else you are likely to find that you are going to be shut out by corresponding banks.
Similarly, it is becoming increasingly difficult to open up a bank account outside of the country where you live unless you can prove that you reside somewhere. Needing to prove that you exist and live somewhere doesn't mean that you need to actually live in one place for 183 days a year.
There are many different ways you can set this up. You can purchase a property in a no-tax country, get a second passport through investment, get a permanent residency in nomad friendly countries like Estonia or Panama's residency permit by forming a company and putting some money in the bank.
Other factors you will need to consider are:
It is also important to understand your home country’s policies towards tax residence. For example, those from the US would find it extremely difficult to avoid paying taxes by establishing a second tax residency, because the US taxes its citizens on all worldwide income, regardless of where they actually live.
Many other countries in Europe, for example, have substance requirements that determine residency which can be proved through possessions, time in a place, assets in a bank, relationships, club memberships, school participation etc.
The only two ways to get around this are:
As you can see, this final step in the process is arguably the most important yet also the most difficult as there are many moving parts and variables that are diccicult to pin down.
Unfortunately, without establishing a proper tax residency in the right foreign country, your offshore company will not be effective in significantly reducing your tax burden.
That is why we suggest a one-on-one offshore consultation to be sure you have your ducks in a row.
Keep in mind that the country where your business is based has an impact on how investors, customers, and lenders perceive your business. This might be more important for specific types of businesses or people. If you are simply working as a common freelancer or have a small affiliate marketing site, it probably doesn’t matter much where your company is based. For those where reputation is important, then more sophisticated jurisdictions such as Singapore or Hong Kong might be more well suited.
Before giving you a list of some of the best countries that we have found and use to setup online businesses for our clients, its important to note that this list is neither exclusive nor will it work for every person and every business.
Why is that? You may ask.
The reason is that since 2010 there has been a lot of changes. Introduction of FATCA and CRS to start, along with CFC laws and DTA has made global taxation laws much more complex.
For those of you hearing these acronyms for the first time:
These are a rather complex system of rules and regulations that should be properly understood before implementing your nomad scheme. Depending upon where you live, your passport, and where your business is located will determine how each of these laws influence your offshore structure.
Now on to our list of countries you can incorporate.
Some of the most popular jurisdictions for digital nomads and perpetual travellers to incorporate an offshore company include:
We have written about this in more detail in the Best Places to Form an Online Business.
Because of the continuing difficulty of opening up an overseas bank account which gets even more complicated when trying to find appropriate payment gateways to take customer payment details we have been using more onshore jurisdictions and establish non-resident LLCs and use Paypal or Stripe which makes things much simpler, gives you immediate legitimacy and does not cost a fortune. We often set up multi-jurisdictional structures which use two companies whereby payments can be held in one while the other can be used to take payments. These days we recommend countries like:
You can also find more information here on some of the best offshore companies.
And go here for a greater list of offshore jurisdictions.
As always, it is best to do your own thorough research and enlist the guidance of a professional to help you in choosing the best jurisdiction and setting up your offshore company in the right way.
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