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Tax Residency For Offshore Strategies: Understanding Its Importance For Businesses

Understanding Its Importance For Businesses
Suppose you're a nonresident of the United States and are considering filing or amending a U.S. federal tax return. In that case, it's important to understand the concept of U.S. tax "residency" to avoid making an accidental mistake that could jeopardize your ability to file and receive an appropriate refund for your taxes paid (or owed). While the second residency is widely considered part of an offshore strategy, tax residency is also a prominent way to save tax money from your business.

In the past few years, multi-millionaires and businesses have shifted to offshore strategies to avoid paying heavy taxes in the U.S. This is why more and more people, investors and millionaires are looking to get a second residency from other countries. However, getting residency or citizenship from other countries doesn't always come easy; or cheap in the case of citizenship through investment. You need to make heavy investments and wait too long to get your second residency.

However, tax residency is a better alternative for businesses looking for an easy and fast way around. With your tax residency, you legally become eligible to pay taxes on that land. There are a lot of tax advantages that come from your tax residency. You can use your residence country's tax system to lower your taxes in other countries. The taxation system for businesses here in the U.S. is quite heavy, which will leave your purse exhausted for sure. But this is where tax residency comes into the picture.

If you have a residency permit in a country, it doesn't simply mean that you are also a tax resident there. Additionally, some countries allow you to be a citizen without being a tax resident in the first place. Some countries have a provision that prevents you from being a tax resident for the first few years of your citizenship. Every nation has its criteria, which you have to underpass to become a tax resident there.

For example, you have to be an employee in a company for at least a year before becoming a tax resident in the country. The tax residency time frame is different for every country.

What Is Tax Residency?​

Tax residency is simply the status of being legally required to pay taxes where you reside. For example, it's how people are legally required to pay taxes on their worldwide income and worldwide income earned from a business in which they are actively running and where they are established as either a sole trader or an independent contractor.

However, playing tax residency does not mean that you live there permanently too. It means that you have a tax residence there, as any other citizen of that country would have such status in their own country. You have to have a permanent residence in the country where you are a tax resident.

Tax residency doesn't necessarily mean staying in the country legally or being economically active there. It means that you have a tax liability towards that particular country and therefore need to file tax returns with them and usually pay taxes on your worldwide income there.

The main thing is that with your tax residence abroad when you file your U.S. tax return, any income sourced from outside of the U.S. will be taxed at a reduced rate as if it were earned outside of the U.S.

Creating Your Tax Residency​

There are a variety of ways that you can create your tax residency in another country. You can take certain steps to have a tax residency, such as owning property in that country, becoming a citizen of that country or getting a permanent resident visa. The exact steps and how to create your tax residency vary from country to country, so do your research before moving forward.

Also, remember that if you're moving overseas for real estate investing purposes, then it's likely that you will be doing this for many years, as residency is not granted instantly. As we all know now, the number of people preparing their offshore strategies has also increased significantly. Now investing in foreign real estate has become easier and more convenient than ever. This is why people are now planning to invest in such assets with their offshore strategies.

If you already have assets worldwide, your next step is to consider where your principal residence will be. For example, suppose you own real estate in the United States and have a residency permit (not citizenship) in Singapore. In that case, Singapore is likely to be your tax residence (at least for U.S. tax purposes). However, remember that not all countries allow dual tax residency. The big countries usually don't allow it, but some smaller nations allow it.

Why Choose Tax Residency For Your Business?​

The appeal of tax residency for businesses is mainly about having a low tax rate on your foreign-sourced income. There is more to it than that. By making your business tax resident in a particular country, you will get many tax advantages. These advantages include:

Get Special Tax Incentives and Grants
Most countries offer special tax incentives and grants to businesses incorporated in their jurisdictions. The incentives can come in the form of nil or reduced levels of corporate taxes or even tax-free status on income derived from certain activities. There is so much to explore by getting a tax residency for yourself.

Determine the Most Suitable Entity Type
To minimize your taxes, you need to understand what type of entity best suits your business. By selecting a corporate structure such as an LLC, S-Corp or C-Corp, you can select the type of taxation applied to your business. In addition, tax holidays are commonplace in some countries and can sometimes be extended beyond the first three-year period that residents normally receive.

Reduce Your U.S. Tax Liability
Some countries do not have a tax treaty with the U.S., which means that residents receive no benefits from being tax residents of that country. However, by becoming a tax resident in a country with such a treaty, you can reduce your U.S. tax liability on foreign-sourced income (especially true if you plan to operate overseas).

Reduce The Margin of Error For Your Tax Filing
Incorporating or establishing your business as an LLC, C-Corp or S-Corp in an offshore jurisdiction may subject you to double taxation. However, you can reduce this chance of error by having a Form 8832 (or any other applicable treaty) from the IRS. The IRS will not double tax your foreign-sourced income if you have the form.

Diversify Your Holdings
Suppose your business is related to real estate or has assets related to physical assets such as vehicles, aircraft, and equipment. It can be very risky to have all your assets and holdings in the same country over a long period.
Establishing an offshore entity that receives certain income streams protects these assets from being attached by domestic creditors where you are a tax resident.

The Definition of Residency
Residency determines whether the laws that apply to you are the same as those that apply to U.S. citizens and residents for tax, estate, gift, and consumption tax purposes. U.S. citizens and residents are generally subject to U.S. tax on their worldwide income. Nonresidents are generally subject to U.S. tax only on their U.S.-source income. In some cases, they may also be taxed on a limited amount of their foreign-source income remitted into the United States (under the Foreign Earned Income Exclusion).

The term "United States" means the United States of America, its possessions and territories, any State of the United States and the District of Columbia. The term "U.S. person" means any of the following: U.S. citizens; U.S. resident aliens (green card holders); and individuals born in Puerto Rico, the U.S. Virgin Islands, Guam, or other U.S. possessions or territories (regardless of where they reside).

What Makes You A Tax Resident?​

To be considered a tax resident in any country, you must pass a three-part test. The three requirements that make you a tax resident are:

Physical Presence Test
This test determines whether you are physically present in the country long enough to become considered as having tax residency there. Generally, this is determined by spending 183 days or more over 18 months.

Intent Test
Your residency status will depend on your "intentions" while in the foreign country or whether you have the "intentions" of returning to the United States after visiting a foreign country.

Tax Home Test
Your residency status will depend on whether you maintain a permanent place of abode in the foreign country, such as a home or an apartment, in which case you will be considered a tax resident. However, if you maintain no permanent abode and use the country only as a "tax address" (or to hold assets), you will not be considered a tax resident of that country.

Taxation Laws of A Country
The United States has treaties with many countries allowing residents to avoid being taxed by both countries on foreign income. By getting tax residency in another country, you are likely to become subject to the same tax laws that apply to its residents. However, in some cases, a legal tax residence in another country will not put you in the same tax situation as its residents. To see if this is the case for you, it is important to consult with an expert on international taxation law.

In the eyes of the IRS, residency can be either "domiciliary" or "non-domiciliary". For example, suppose a U.S. citizen leaves the United States and establishes legal residence elsewhere. In that case, they are usually still treated as a non-domiciled resident until they have been abroad for more than ten years. In most cases, you will become a non-domiciled resident after living outside of the United States for over six months and less than two years.

List Of Countries With Low Tax Rates​

Unlike the U.S. and other nations, where the tax rates are sky-high, many countries allow you to save significant tax amounts. The world is quite large, and you can find many potential options for yourself. Here's a list of countries that are known around the globe for their low taxation strategies on foreign income:

1. Singapore
Singapore has its law providing taxation at progressive rates of 33%, 17% and 10%. However, the 10% rate does not apply to capital gains unless the funds are used for "investment purposes" by an individual – at least 50% of whose income derives from such purpose. This means that a small amount of investment income may escape tax.

2. Andorra
Andorra levies two forms of income tax. A 10% tax is applied to a worldwide income, including capital gains. A progressive scale is used for individuals residing in Andorra. There is no wealth or inheritance tax in Andorra. This could be the tax paradise you are after and save your hard-earned profits.

3. Georgia
Foreigners who are tax residents in Georgia are taxed at a flat rate of 15%. If the taxpayer leaves Georgia and becomes a resident in another country, he or she will not be taxable on any income earned before departure.

4. Hungary
Individuals living in Hungary benefit from a generous tax exemption for certain capital gains. There is no wealth or inheritance tax. Other forms of income are taxed at progressive rates between 16% and 16%.

5. Indonesia
Indonesia provides a tax exemption for foreign nationals subject to residency requirements that may be difficult to satisfy. Foreign residents can choose to be treated as either residents or nonresidents for income tax purposes, depending on their activities in Indonesia.

6. Portugal
Portugal provides a tax exemption for foreign nationals who meet certain residence requirements and opt to be treated as a resident for tax purposes. All forms of income are taxed at progressive rates between 22% and a maximum of 48%.

7. Czech Republic
The Czech Republic provides an exemption for foreign nationals who meet certain ownership requirements and opt to be treated as a resident for tax purposes. All forms of income are taxed at progressive rates between 15% and a maximum of 35%.

8. Hong Kong
It has a comprehensive tax system with consumption taxes, and income taxes levied on the net income of individuals and companies. In addition, individuals and companies are liable to a progressive rate structure of up to 15 per cent.

9. Portugal and Non-Habitual Residence
If one chooses to be treated as a resident under the Portuguese tax laws, the individual will generally be subject to a flat tax of 20 per cent on his or her worldwide income and capital gains. However, include in your calculations an individual may potentially benefit from non-habitual residence status, which allows a flat tax rate of just 10 per cent on capital gains and qualifying income.

10. Malta
The Maltese tax law provides for a flat-rate tax of 15 per cent on all types of income, and a lump sum of 25 per cent on capital gains, with no tax being applicable on those below the minimum wage. The Malta Income Tax Act also provides that nonresidents are not taxed in Malta, provided they are residents in other E.U. countries.

It is better if you have reliable information with field experts in no time. Then, make the most out of the knowledge they have so you can escape paying heavy taxes imposed by authorities in your home country or any other country you visit frequently.

Advantages of Tax Residency For Your Business​

There are many advantages of tax residency. For example, it can protect you from being taxed on your global income. However, it is important to note that when you obtain tax residence status in another country, it doesn't mean you get access to whole citizenship facilities. In addition, the country granting residency is under no obligation to treat you as a resident for other purposes such as social security or taxation of your local income or local capital gains.

This can help if you consider storing assets in a foreign jurisdiction with no wealth or estate tax. It will be easier to keep your information private since there is no reporting requirement for such assets. Here's a quick peek at some of the commonly known advantages of tax residency for your business:

Tax Freedom
When you become a resident of another country, the tax laws of that country become your "home" tax laws, and as such, you are free to choose whether or not you wish to follow them. You may even permanently choose to avoid paying tax in your home jurisdiction. Just target countries where you find an easy and low tax system than the U.S., and you will be saving a huge chunk of tax money in no time.

Increased Leverage
If you have substantial assets in multiple countries, moving them to one jurisdiction can result in financial leverage loss because it may be difficult or cost-prohibitive (i.e., expensive) for you to sell such assets without paying transfer taxes and possibly other fees imposed on foreign sales. Many countries impose taxes on all capital gains – both realized and unrealized, and may also impose withholding tax on all transfers of value, particularly if you are selling appreciated assets.

Tax Efficiency
By having residency in the country where the entity is organized, the foreign tax burden imposed on that entity's income can be reduced by applying certain foreign tax credit rules or treaty benefits. In addition to this, a nonresident corporation is also generally not subject to U.S. federal income tax on its worldwide income. With tax residency, you may also get a double-taxation exemption or other tax treaty benefits in the country where you have residency.

Reduced Taxes
In many countries like U.S., Japan and Germany, a foreign corporation can elect its status as a "controlled foreign corporation" (CFC). A CFC is entitled to deduct up to 100 per cent of its worldwide income from any U.S. taxes, including federal withholding tax, state franchise taxes and local payroll taxes paid by it on its employees. Moreover, it achieves an effective rate of "zero" federal income taxes on these activities through the strict application of the foreign tax credits rules that flow from such status.

In a nutshell, becoming an official resident of another country can be a commonly used strategy for increasing financial leverage. This is done by combining physical residence with citizenship or another status that will generally exempt you from capital gains taxes or substantially reduce your exposure to them.

Frequently Asked Questions​

• Are there any other conditions that would qualify me to have a Residency?
Yes, you should have been living in the country (or a state) where you are applying for residency. You must also provide information about your medical condition and work contacts in the country where you wish to be counted as a resident.
• Do I need to pay taxes in a foreign country?
No, not if the company is incorporated in that country, although if you are going to establish a permanent establishment (P.E.) there (and not just work there), then tax residence is required.
• What is a Double Tax Residency?
Double Tax Residency, therefore, means that a certain person or entity has been recognized as a Resident in two jurisdictions and therefore needs to pay taxes to both governments. This can be done through the two countries' Double Tax Treaties (DTTs). This means that one Government will allow the other Government to collect taxes from nonresidents on behalf of its citizens.

Final Words​

Residency permits you to conduct business without tax on your income and capital gains. You are not required to pay U.S. income taxes on your worldwide income and certain capital gains. The main motive of getting tax residency is to get over those heavy tac rates. You can also get tax residency from multiple nations like your second residency.
In many countries like U.S., Japan and Germany, a foreign corporation can elect its status as a "controlled foreign corporation" (CFC). A CFC is entitled to deduct up to 100 per cent
I was not aware of it was country specific. Now I understand my tax advisor! Thanks.

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