I have connected with thousands of interesting people thanks to Freedom Surfer. Some of them well informed about taxation, most not. A common trend I noticed was that some “myths” came up regularly. Often, those myths were even treated as fact despite no evidence backing them up. In this article, I cover 10 popular ones.
Myth one – Tax resident of nowhere
There is some truth to this myth in the sense that it is possible, in some rare circumstances, to become a tax resident of nowhere. For most people, however, there is simply no practical way to achieve this mythical status. Leaving your home country to travel perpetually will almost never result in you becoming a tax resident of nowhere. Even statelessness will not help you. This is due in large part to the way that taxation law works in most countries (you usually have to pay taxes where you live). In recent years, new tax treaties (CRS for example) have also been making it nearly impossible to fly under the radar.
Myth two – Tax residency with no substance
There is a surprisingly large number of people who think that establishing and maintaining a tax residency is as simple as becoming the legal resident of a country. It is not. As stated above, you usually have to pay taxes where you live. There are some ways around this (domicile-based tax residency + constant travel for example) but they are not practical for most people. A certain number of days usually have to be spent in the country of tax residency every year in order to maintain the status.
Myth three – Anonymity
There used to be ways to register and run offshore businesses with full anonymity. Not anymore. Anyone claiming otherwise is either poorly informed or trying to deceive you. The reason for this is that while it is still possible to register an offshore company anonymously, it has become impossible to bank anonymously. Try running a company without a bank account or without making any financial transactions electronically. Even the use of a nominee will not protect you here as banks are required to identify the ultimate beneficiary owners and any person of significant control for every company they open an account for.
Myth four – Tax-free Hong Kong companies
It is technically possible to run a Hong Kong company tax-free if said company has no HK-sourced income. That said, such a company will struggle to obtain a tax residency certificate and is thus likely to be considered non-resident of Hong Kong for taxation purposes. Whether this will become a problem depends on where the owners live and what type of activities the business is engaged in. In most cases, this is not an enviable situation and is one of the main reasons why Hong Kong is not a suitable jurisdiction for most location independent businesses.
Myth five – Tax-free holding companies
Setting up an offshore holding company and running it tax-free used to be fairly easy. Not anymore. In their fight against tax base erosion, most governments have implemented rules commonly known as controlled foreign company rules (CFC rules) which specifically target the use of offshore companies as holding entities. It is still possible to run a tax-free holding company but it requires careful planning and expert assistance.
Myth six – Transfer pricing
Transfer pricing is not a myth in and of itself and can be very useful in some circumstances. The myth is that it can be used to siphon all profits from an onshore company to an offshore company without raising any eyebrows. The main reason why this strategy does not work is that most countries use the arm’s length principle which states that the amount charged by one related company to another for a given product or service must be the same as if the companies were not related. In effect, this means that you cannot arbitrarily decide what the amount charged by the offshore company to the onshore company should be. It has to be the product’s / service’s fair market value.
Myth seven – Territorial taxation equals no taxation
This is a tricky one. In most cases, a tax resident of a territorial taxation country will not be taxed on foreign-sourced income if properly structured. There are cases, however, when such income will be taxed or should be taxed. For example, some territorial taxation countries tax foreign-sourced income if it is remitted during the same tax year it was earned in. Sometimes, it is also essential to pay some taxes to qualify as a tax resident. A famous example of this is Hong Kong where some taxes must be paid in order to successfully apply for a tax residency certificate.
Myth eight – High tax country equals high tax burden
This could not be further from the truth. A high tax country does not equal a high tax burden, it simply equals the need for a more complex tax avoidance strategy. In some cases, it is even possible to live entirely tax-free even in countries such as the United States, Canada, the UK and Australia.
Myth nine – Pass-through entities for non-residents (LLC, LP, LLP)
I have received countless emails asking me about the tax implications of registering a pass-through entity abroad. In most cases, the answer is that the pass-through properties only apply locally and that the entity will be deemed a non-resident corporation for taxation purposes in other countries (making it a similar to an IBC).
Myth ten – The need to file a tax return
In most countries, there is no need to file a personal tax return if no taxes are owed or if your income is under the tax-free threshold. That said, you may still want to file a tax return if you qualify for a rebate or if you are expecting a refund.