How To Move To A Tax Haven

In my course of work, I am frequently asked a question that reveals just how much demystification is still needed in the world of living, investing and doing business overseas. It usually goes something like this:

What tax haven countries can Americans move to and get citizenship?

The core need behind a question like this is an individual's desire to legally reduce their taxes. A lot of moving parts come with such a complicated question, so let’s break it down.

First and foremost is the question of moving, which conjures up ideas of packing your belongings and relocating your entire life to one new location. The solution is much simpler — and slightly more complicated.

The simple solution for U.S. citizens is to use the Foreign Earned Income Exclusion, or FEIE, by spending at least 330 days outside of the U.S.

You can spend that time in as many countries as you like and still qualify for a tax exclusion of $105,900 on active personal income as of this year.

Not everyone enjoys the nomadic life. Some folks just want to pack up and move to one country where they don’t have to pay tax. This is where tax havens become more important.

It is best if where you live and where you incorporate your business are two different places. There are several reasons for this that are best understood by example, so let’s look at the difference between personal income versus corporate tax havens.

Personal Income Tax Havens

Three main types of tax havens exist where you can live full-time without being taxed by the local government.

Zero-tax countries, or countries with a personal income tax rate of zero, are what most people are referring to when they talk about tax havens. Many of them are unappealing as a place to live long-term, and the few that are appealing have strict entry requirements.

Territorial tax countries use a system of taxation that only taxes local-source income, or money earned from working within the country. Depending on how you earn and personally take your income, a territorial tax country could allow you to live tax-free.

Tax-exempt countries normally tax their residents, usually at very high rates, but create exemptions for qualifying individuals. These programs often have an expiration date.

For example, Portugal’s non-habitual residence tax scheme allows you to live tax-free in the country for a total of 10 years. Once the 10 years are up, you will be taxed at the same rates as everyone else in Portugal.

Corporate Tax Havens

If you want to pay zero corporate tax, you only have one option: incorporate your business in a corporate tax haven. In some cases, you cannot live in these countries due to the laws.

For example, a Hong Kong corporation will be taxed at a rate of 16.5% if you live there, but if you live somewhere else, your corporation will enjoy zero tax.

In other cases, you’ll have difficulty getting into the country, due to your age, nationality or the cost of entry. Even if you’re wealthy, a desirable but expensive tax haven like the Cayman Islands might be within your reach but may not be your best choice.

One way or another, there are downsides to personally living in most corporate tax havens. Thankfully, you can still incorporate your business in these countries and enjoy a zero-tax lifestyle somewhere else.

Balancing The Equation

Moving to a tax haven is less like picking a spot on the map and more like balancing a delicate equation. To fully eliminate your taxes, both parts of the equation must work together.

For instance, if you set up a Belize company and stay in the U.S., the Belize company setup is essentially worthless because you would still have to pay tax in the U.S. on everything your company earned as a CFC.

You must optimize both sides of the equation.

You can do this by finding a country to personally live in that meets one of the criteria we’ve discussed — zero tax, territorial tax or tax exemptions — and then setting your company up in a corporate tax haven.

For everyone except U.S. citizens, it usually is this simple. But U.S. citizens are not as lucky. This is where the final piece of the equation comes into play: citizenship.

The Citizenship Problem

The U.S. is, effectively, the only country in the world that taxes its citizens based on citizenship. The Foreign Earned Income Exclusion offers a slight reprieve, but for those who earn any passive income or make more than $105,900 a year, there is no way to avoid further taxation.

The only way out is to renounce your U.S. citizenship. Until it’s removed from the equation, you cannot legally eliminate your taxes. But before you can do that, you must obtain a second citizenship.

If you are willing to move around to avoid becoming a tax resident in any one country, you can get a second citizenship in one of dozens of countries, renounce your U.S. citizenship and then become a tax non-resident in your new home country.

If you don’t want the nomad life, you’ll need to get citizenship in a tax haven. Unfortunately, most zero-tax countries are not going to grant you citizenship. Some simply do not give citizenship to foreigners, others want a large check and others require you to live there for over a decade before you can become a citizen.

You might be able to find citizenship in a territorial tax country. Yet countries like Panama that offer citizenship on paper do not have a great track record of fulfilling that promise.

Other territorial tax countries like Nicaragua may not fit the tax haven description that you’re imagining.

None of these countries are going to grant citizenship right away, and you’ll be stuck paying taxes in the U.S. for at least another five years, if not six or seven considering the processing time to finalize your citizenship.

If you’re content paying taxes for a few more years while you wait, then you can move to a tax haven, structure your business to maximize tax benefits, wait the allotted time, claim your new citizenship and then renounce your U.S. citizenship.

If you do not want to wait, the best way to speed up the process is via citizenship by investment. These programs vary widely in terms of cost, location and desirability.

St. Kitts and Nevis has one of the fastest and best value programs. For a donation of $150,000, you can become a citizen of St. Kitts and Nevis in four to five months.

If you are in a hurry, you can pay an extra fee to get it in 60 days. This is one case where you could live, work and set up your business all in one country, because St. Kitts will not tax you or your business no matter where you live.

What If I Don’t Want to Renounce My Citizenship?

Finally, if you do not want to renounce your U.S. citizenship, you may be able to move to Puerto Rico and enjoy single-digit tax rates of about 4%. However, you must commit to spending most of your time in Puerto Rico.

It needs to be your bona fide home.

You won’t realize the savings immediately after moving there, but you will start the clock toward eliminating or reducing your taxes on both passive and active income. In that sense, Puerto Rico is a tax haven of sorts for Americans.

Puerto Rico’s Act 20 and 22 are for folks who want to remain a U.S. citizen but also pay very low tax rates without having to bother with everything else we’ve discussed. But it is only going to work for certain types of people: those with a bigger business they want to sell soon, crypto investors, hedge fund managers, big traders or anyone with large capital gains.

If you want to use Puerto Rico as a tax haven, you need to do proper planning.

Conclusion

The misconceptions surrounding what it means to move to a tax haven may lead to confusion and oversimplification of a decision that is quite complex. For U.S. citizens, especially, those who truly want the benefits of a tax-free life must sacrifice other things.

Where you live, where you incorporate your business, what citizenships you possess, where you qualify as a tax resident and many other factors all must be considered before you can legally and permanently eliminate your taxes. It is not a decision to take lightly or something that can be planned overnight.

If you really want tax freedom, you must do the work and invest in professionals who can help you determine exactly how to balance the equation and come out on top.

Andrew Henderson is the managing partner of Nomad Capitalist and a sought-after expert on global citizenship. After nearly a dozen years visiting and living in 100+ countries, Mr. Henderson has become an expert on the growing field of global citizenship.

He is the author of "Nomad Capitalist", a book discussing the concepts of global citizenship that anyone can apply. Mr. Henderson is unique in that unlike other consultants who merely sell products, he lives the lifestyle he preaches, having multiple passports, homes on three continents, and an international business.