Why You Need a Second Tax Residency in a Tax Haven
- Last updated on . Written by Offshore Protection.
What is a Tax Residency?
The concept of tax residency is to become a resident of a country that has little or no taxation on foreign worldwide profits that effectively allows you to eliminate your taxation requirements.
To move from a non-resident status to a residential status is different from country to country with some countries like Argentina, Uruguay or Costa Rica make it quite easy to get a resident permit whereas many European countries like Austria, Germany and Switzerland make it very difficult.
Table of Contents:
- What is a Tax Residency?
- What's the Difference Between a Tax Residency Second Residency
- Tax Residency Test
- What is the Difference Between Permanent Residency and Citizenship?
- What is Residency by Investment?
- What are the benefits of permanent residency?
- Permanent Residency by Investment Requirements
- Second Residency Options
What's the Difference Between a Tax Residency Second Residency
The difference between a second residency and a tax residency is that while a second residency gives you the legal rights to physically live in a country or territory, a tax residency is a place where you legally reside and are obligated to pay taxes.
The point of having a second residency is to give yourself a back-up plan so that you have another country where you are legally allowed to live. While that might be an appealing in an of itself, it is very different than establishing a tax residency.
If you are a resident in a high taxed jurisdiction you are liable to pay taxes based upon your income generated.
Choosing a second country where you are able to establish tax residency is important in order to transfer your tax obligations from your home country. In order to transfer your obligation, you must declare to your former country of residency that you are now liable to taxation in a different country.
The most common test whether or not you qualify to become a tax resident was often determined by the number of days you spend living in that particular country in a year. In the past, it was a common rule that if you lived more than 183 days per year in any one place then you were considered tax liable.
However, the rules have changed and it has unfortunately become a lot more complicated. While it is different for each country, many high tax jurisdictions especially those that seek to keep their resident tax liable, have created a multifaceted residency test to determine your liability in order to make it more difficult to leave.
This test was made to determine whether or not a resident had a substantial connection with his/her country.
A “substantial connection” is a term that can be widely used and arbitrarily applied. It is used to determine whether or not an individual has a connection with their home country through:
- A house or permanent place of residence in a country
- Conducting any business affairs or investments
- Having any family spouse or parents living in the country
- Owning any physical belongings within the country
- Holding any local bank accounts
- Apart of any unions, clubs or memberships
Severing these ties with your home country may be the only way to move tax obligations to another country as being considered a tax resident is about the long-lasting relations that you have with the territory.
While tax residency may not be the only option in order to effectively reduce your tax burden is the most comprehensive.
Some popular offshore tax residencies that offer low or no tax residency opportunities are Andorra, Portugal and The Cayman Islands. Each of the countries offers individuals the opportunity to establish some form of residency through their programs that gives you the benefit of not having to pay any taxes on foreign-sourced income.
Permanent residency means that you are legally allowed to reside in a country on a permanent basis, without being a full citizen. Being a permanent resident often confers many of the same benefits as being a citizen, such as access to employment, education, and health care in the host country, as well as potential tax benefits. However, you are not officially a full citizen and, as such, will not receive a passport.
Temporary residence is usually the first step toward becoming a permanent residence. Temporary residence gives you the right to live in a country for a limited period, which is renewed every 1 – 2 years. After a time of continuous temporary residence, you would be eligible for permanent residency. Thereafter, permanent residence status can ultimately lead to citizenship by naturalisation if you have lived in the country for a specified number of years and meet the requirements for citizenship.
What is Residency by Investment?
You might have come across many of the well-known citizenship by investment programs, also known as economic citizenship. Some of the best economic citizenship programs can be found in the Caribbean nations, as well as some in Europe and other parts of the world. These offer a fast-track to full citizenship in exchange for sizeable investments and/or donations in the host country. Many don’t even require that the applicant lives in the country to be eligible.
Residency by investment follows a similar principle. Only, instead of obtaining full citizenship, you are awarded permanent residency in exchange for your investment. As was mentioned, this can be just as beneficial as full citizenship, depending upon your specific requirements. For someone who’s home country does not allow dual citizenship and who does not wish to renounce their citizenship, a permanent residency in another country might even be the preferred option.
Furthermore, permanent residency can often lead to full citizenship if that is desired. Therefore, it can be an ideal means to ultimately obtain citizenship in one of the countries which offer residency by investment, but do not offer direct citizenship by investment.
What are the benefits of permanent residency?
There are numerous benefits of obtaining permanent residency in certain jurisdictions, including: increased mobility, access to a better quality of life, financial and personal security, business opportunities, and tax efficiency. Some of these advantages are especially appealing to high net worth individuals, but others can also benefit. However, the high cost of residency by investment programs generally makes them more suited to those with a high net worth. Here, we will explore in more detail why such individuals choose to invest in a permanent residency.
- Increased mobility
- A better quality of life
- Personal and financial security
- Business and investment opportunities
- Tax efficiency
- Residency for family members
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1. Increased mobility
Although you will not have direct access to a second passport with permanent residency, your freedom of movement can still be greatly enhanced. This is especially the case if you become a permanent resident of one of the European nations which allow unrestricted movement throughout Europe for residents, even without European citizenship. In fact, many of the best residency by investment programs are found in Europe.
In the case that your permanent residency eventually leads to full citizenship, you could then obtain an actual second passport which is stronger than your home country’s, and could therefore offer a much higher level of unrestricted movement throughout the globe.
2. A better quality of life
Many of the countries which offer residency by investment are also known for their high living standards. These countries typically have well-functioning societies, low crime rates, high education and healthcare standards, and increased employment opportunities. It makes sense to become a resident in a country which offers direct access to all these benefits.
3. Personal and financial security
Becoming a permanent resident of certain countries can offer much greater levels of both personal and financial security. Choosing a peaceful country with a stable economy and political system means you are much safer from violent crime, political upheavals, or economic collapse. Both you and your assets are therefore much safer.
Many such countries also have stronger asset protection and privacy laws, which means that your wealth be out of reach of greedy creditors from your home country, and out of view of the public eye.
4. Business and investment opportunities
Being a permanent resident opens new business and investment opportunities in the host country, as well as those countries which are closely connected and in which you are now able to freely travel to. Many of the residency by investment programs are offered by economic powerhouses with good opportunities for businessmen and investors alike.
5. Tax efficiency
Once you obtain permanent residency in a new country, you can usually also become an official tax resident of that country. This means your primary tax obligations would be to that country as opposed to your original home country. This can lead to much greater tax efficiency if the country in question offers favourable tax rates, as many of the jurisdictions do.
It is also important to check that there are proper Double Taxation Avoidance Treaties in place between the host country and your original home country so that you avoid paying double taxes. Citizens of the United States should bear in mind that the US requires you to pay taxes on all your worldwide income, regardless of its source. There are ways to avoid this (e.g. spending more than 330 days a year outside the US), or otherwise to obtain a second citizenship and renounce your US citizenship, as many have done.
6. Residency for family members
Usually residency by investment also extends to the direct family members of the main applicant. Therefore, one reason to invest in permanent residency is to open up opportunities for the rest of your family. For example, you might want your children to have access to some of the best schools and universities which are offered in the host country. Alternatively, you may have a family member in poor health who could benefit from the excellent healthcare available in your new country of residence.
Permanent Residency by Investment Requirements
Every country has its own set of requirements which need to be fulfilled to qualify for residency by investment. The minimum investment amount and the types of eligible investments also varies greatly from country to country. Some programs require the applicant to spend a minimum period in the host country or make a certain number of trips there.
The following requirements are common to all residency by investment programs:
- An investment must be made in a government-approved option. Examples include certain types of real estate, government bonds and/or an approved national economic fund.
- The legal source of the investment funds should be shown and verified.
- The applicant must show that they have a clean criminal record.
Second Residency Options
If the price tag of a second passport makes this not an option there are other ways to get a second passport, whether its through:
- A short term residency (available for most countries) leading to long term/permanent residency (if you satisfy requirements) which then allows you to apply for a second passport after several years (2-10 years); or
- A permanent residency (usually through a small investment proof of funds in a local bank account), whereby citizenship and a passport can be had in 3-5 years.
The cheapest way to get a second passport is through the Panama Friendly Nations Visa. An initial 5000 USD deposit into a local Panamanian bank will get you a permanent residency which is valid for 5 years. After that it is possible to apply for a citizenship and a second passport if you either start a company or invest 50,000 USD in real estate.
There are other special programs, for instance, if you are a citizen of a country that was once a former Spanish colony, you are granted the possibility of getting a Spanish passport if you move to Spain and live there for two years. This will cost you no more than living expenses, and small handling fees. However, you must start or own a local Spanish business.
Other Latin American Countries have residency programs that lead to full citizenship. Places like Brazil Argentina and Paraguay all have very attractive programs. Paraguay only requires a small deposit in the bank and after living in the country for more than 180 days a year for three years you can apply for a second passport.
Whatever your life situation having a second passport will open up many opportunities. There are many ways to get a second passport. How are you going to get your second citizenship?