Hopefully, you’re fully aware that there is a difference between citizenship (nationality), residence, and tax residence – if you’re not, check out this article.
In this article below, we’ll be covering what a tax residence is, what it means for your finances (both now and in the future), and how you, as a globally-mobile person, can optimise your tax affairs to save yourself a ton of money, achieve financial independence more quickly, and at the same time, get all the various documents which make it easier for you to “prove” things to all the non-nomads you’ll need things from in banks, embassies, immigration departments, etc.
We’ll also let you know where some of our team has chosen, after extensive research and analysis, and why – and how you can also get your tax residency there, if you want to.
What is a tax residence?
At its most basic level, a tax residence is simply anywhere that you’re required to pay taxes. In the vast majority of cases, you can become a tax resident of somewhere without doing anything – simply by spending a certain amount of time in a country (often 6 months or more in any tax year – often the same as a calendar year, but not always), you can then find yourself as a tax resident, which then gives the government of that country the right to demand taxes from you.
Needless to say, it’s very unwise to accidentally become a tax resident of somewhere – particularly somewhere with high taxes, and/or ruthless tax collectors – and it’s also just as unwise to subject yourself to higher taxes than are necessary, by doing nothing about optimising your tax residency. Getting yourself a good tax residency is something that you can do proactively.
If you’re not sure where your tax residency is, and you’ve done nothing to change it previously, then your tax residency is highly likely to be either your country of citizenship, or your country of residence, if you’ve become an official resident of somewhere else (regardless of whether that’s temporary or permanent residence).
And if you’re a global nomad reading this thinking “I don’t need to pay taxes to my home country because I’m not spending a lot of time there, so I don’t need a new tax residency”, then whilst you are correct (if you’re from one of most countries – there are some notable exceptions), you’re not optimising your finances, because:
(a) You are not getting any long-term benefits of tax planning, because you’re not doing any tax planning
(b) Your status is perpetually temporary – as soon as you change your lifestyle (i.e. stop nomad-ing), your tax status changes, which could be expensive
(c) You are highly likely to have some problems with someone, somewhere, sometime, when you need to prove things such as your income, tax returns, residency status etc, in order to get something such as a visa, residency permit, loan/credit card/mortgage, or just to get the tax authorities somewhere to stop hassling you for money
(d) As a global nomad you have some opportunities which are not available to “non-nomads”, which can have a positive impact on your finances for the rest of your life, even if you’re only “nomad-ing” temporarily; if you don’t take these opportunities, you’re not optimising your finances
What do you get with a GOOD tax residence?
Muchas cosas! Here’s a selection:
(a) A tax bill which is either really low, or zero, fully legally
(b) A fiscal track record which can impact your credit rating and eligibility for visas/residency permits from other countries in future
(c) The full set of documents you’ll be asked for by various people in positions of authority (the ones you need to stamp or sign documents for you, such as banks, immigration departments, embassies, etc) – things like “a tax return”
(d) The legal right to continue your tax residency in a favourable tax jurisdiction, even if you don’t live there, and even if you go to live somewhere else with less-than-favourable tax rates
(e) A tax residency status which can be legally passed down to your children, saving them a fortune in taxes over their lifetime
(f) Lots more money, because you’ve just eliminated one of your biggest expenses. For a medium-high earner in “western” countries, switching tax residency can effectively be the equivalent of getting a 100% pay rise overnight – or more! Over time, this extra money can drastically change your life for the better…
Where to start when planning your tax residence
Hopefully you already know this: Many things work differently in other parts of the world than they do in your home country.
And we’re not just talking tax rates here. Even the whole premise of what is taxable (or not), or what can be deducted (or not), and what the requirements are for someone to be considered a tax resident (or not), varies massively between countries – sometimes even between different regions in the same country.
Additionally, there are many different types of taxes: Income tax, capital gains tax, inheritance tax, property tax, sales tax, import tax… as well as a plethora of tariffs, fees, charges, duties, and levies. Tax of some kind is unavoidable. But it can certainly be managed, optimised, and reduced, and global nomads in particular have some excellent opportunities.
The four different income tax “systems”, and which ones are best for global nomads
There are four types of tax “system”, and every country/jurisdiction falls into one of these four categories:
Type 1 – Citizenship-based taxation:
This means: You owe taxes on your income to the country of your citizenship, regardless of where you earn it, regardless of where you choose to live, forever.
Only two countries have this type of tax system – Eritrea, and the USA. Sorry guys.
Type 2 – Residency-based taxation
This means: You pay income tax in the country where you live, on all your income, regardless of where you earned it.
This is the most common tax system – 172 out of 234 tax jurisdictions do it this way.
Type 3 – Territory-based taxation
This means: You only pay tax on what you earn in that jurisdiction; what you earn in other jurisdictions is therefore tax-free.
Global nomads are more likely than any other demographic to have “foreign earned income”, and therefore tax systems like this are as good as fully tax-free jurisdictions for global nomads. There are 39 out of 234 tax jurisdictions which offer this system.
Type 4 – No taxation
This means: You do not need to pay any income tax at all, fully legally
Regardless of where your income is sourced – from inside or outside the country – if you become a resident of one of these countries, your income tax bill drops to zero. In total, 19 out of 234 tax jurisdictions have this tax system.
And the best for global nomads is…
Obviously it’s either Type 3 or Type 4, because that’s where you’ll save the most money, but there are more things to consider than just the tax system – not least because even though two countries may be in the same tax system group, there may still be huge differences between them.
How to pick a good tax residency as a global nomad
Here are some questions for a global nomad to consider when assessing a country as a place to be a tax resident, or not:
(1) What things are taxed there, i.e. income, capital gains, etc
(2) What are the headline tax rates for the country; what will it seemingly cost me
(3) What deductibles are there; what will it actually cost me
(4) What will it cost me to obtain the tax residency, how long will it take, how easy is it to obtain
(5) Will I lose the tax residency if I don’t live there for a specified amount of time each year
(6) Is it a country which has a strong track record of NOT regularly changing things related to taxation
(7) Does it come with any other benefits (such as the right to live/work/travel/study without a visa, for unlimited periods of time, in that country and/or other countries, or “free” government-provided services that I value more highly than the cost of tax)
(8) Is it somewhere I would actually enjoy spending time in regularly, and/or is it a country I want to “support”
(9) What other opportunities open up to me as a result of having official residency in this country, which can help me achieve other life goals
(10) Are there better tax residency options available to me
Consider the non-tax-related impact of your tax planning
As the questions above will lead you to discover, picking the optimal strategy for you and your family is not quite as straightforward as picking the nearest zero-tax country (or jurisdiction).
For example, whilst you may want to live in Monaco, maybe you can’t actually afford it, even with a 0% tax rate. Maybe the brutal murder of a journalist inside an embassy is enough to put you off Saudi Arabia, despite the 0% tax rate there. Perhaps perpetual civil war in Somalia is something you’d rather avoid, even with a 0% tax rate.
Conversely, if you really want to live in a particular place, it may well be worth simply paying high taxes to live there, if that’s what makes you happy. Ultimately we’re all unique, and what is optimal for someone else, might not be optimal for you.
Why we think Paraguay is the best tax residency for a lot of global nomads
Yes, some of our team are now in Paraguay (did you guess it from the picture above?), and are happy to report that it’s a beautiful country, with really friendly people!
Paraguay is a “type 3” country in terms of taxation, i.e. one which has a territorial tax system, and it has really low tax rates. But behind the headline rates, there are many other features and benefits – of the tax system generally, and more widely in terms of the residency:
(1) Headline tax rate: 10% on domestic income, and 0% on foreign income. This means that for global nomads who do not currently have Paraguay-sourced income, the tax rate on their global income is 0%
(2) Deductibles: Unlike pretty much everywhere else on the planet, Paraguay allows you to deduct all sales taxes you’ve paid, from your income tax bill. This applies to everything, which means that even the tax on a restaurant bill or your supermarket shopping can be deducted from your income tax bill. Example: You earn $100 in Paraguay, and owe $10 tax… AND you spend $100 in a restaurant, $10 of which is tax… you therefore owe no tax, because you’ve already paid what you owed. This is basically the same as it works for companies in most countries, except it’s for individuals here also
(3) To get the tax residency, you need to become a resident and get an ID card. Once you have this, you can freely travel, live, work, and/or study, without needing a visa or being subject to a time-limit, in any Mercosur country (which is basically every South American country except French Guiana). It’s very similar to the EU/Schengen zone in Europe (with some small technical differences)
(4) The whole process can be completed for approximately $1,000 (if you do everything yourself, speak/read/write good Spanish, and are not in a hurry), or $1,500-$2,000 if you get a good (and inexpensive) lawyer to do it for you (beware of scams and unreasonably high prices, you don’t need to pay more than this), and can be completed in just a few weeks
(5) You can keep the residency and the tax residency even if you’re not living there full time – once your residency is permanent, you just need to visit the country once every 3 years to keep it valid and active
(6) Tax rates, and tax laws, are not frequently changed
(7) The whole country – the citizens, the government, and the business community – are very welcoming to foreigners of all nationalities. Many Paraguayans have a parent or grandparent who is/was non-Paraguayan
(8) Foreign land ownership is fully allowed, land prices are among the cheapest in the world, and there are very few planning laws – if you own land, you can pretty much build whatever you like in terms of the design or size, it just needs to conform to building regulations in terms of safety
(9) There is a lot of space – for reference, the country is more than three times the size of England, yet the total population is less than half of the population of the London metropolitan area
(10) Prices for many things are very low, such as electricity, water, meat, cheese, wine, beer. Paraguay is the world’s largest exporter of electricity, it’s all produced by hydropower (clean, renewable, sustainable), and nobody here is indirectly funding Putin’s war every time they turn the lights on at home
(11) The population is young (roughly 75% are under 40 years old), and happy (based on things like Gallup’s Positive Experience Index, as well as our team’s empirical experiences here)
(12) Politics here is stable, and many Paraguayans delight in “all political parties here being basically the same” – unlike other countries in the Americas (both North and South) which seemingly lurch from extreme right to extreme left (or vice versa), with all the economic and social upheaval that entails (along with ever-changing tax regulations)
How to get tax residency in Paraguay
At some point in the relatively near future, we’ll do a full post on this, but for now, here are the key points:
Documents you’ll need:
(a) Copy of your birth certificate, Apostilled by the issuing country
(b) Clean criminal record check from either your country of nationality or the country where you’ve been a legal resident for the past 5 years or more, Apostilled by the issuing country.
(c) Other documents depending on your status – i.e. marriage certificate, proof of residency in a country you’re not a citizen of, etc. Basically, whatever you’re stating as true in your application, you need to prove it with an Apostilled document.
Entering the country
You need to be here to complete the residency process, so you need to enter the country. Some countries don’t need a visa, some do. Either way, you’ll need to make sure that you get a stamp in your passport when you enter (some nationalities don’t technically need a passport stamp to enter, but you need to get one to complete the residency process).
The process itself
There are several parts to the process, and you can do them in a few weeks over one trip, or you can make multiple trips to Paraguay each time one component part is complete if you prefer.
You’ll need to complete various tasks, such as have your photo taken, get your fingerprints taken, have Interpol confirm you’re not wanted by them, sign some documents, etc.
All of this is massively easier and quicker if you have a good lawyer who knows the process well – and of course it helps if they know the people who need to stamp and sign your residency application too, so it doesn’t spend too long sitting on someone’s desk waiting to be done, at each point in the process.
Our team has met many people who have done the full process themselves, and many people who have hired a good lawyer, and some people who have hired a less-than-good “legal assistant”. Our advice, based on what we’ve done, seen, and heard: Get a good lawyer. It’s much easier, much quicker, and isn’t that much more expensive (if you choose well).
Based on conversations we’ve had, doing it yourself is going to cost around $1,000 in total (just on official fees and other documentation-related expenses) and take several months, whereas hiring a good lawyer will end up costing between $1,400 to $6,000 in total, and end up taking just a few weeks.
Generally speaking, the good lawyers charge a fixed fee, which includes all (or sometimes most) of the official expenses and documentation-related costs. The only difference between the more expensive good lawyers and the less expensive good lawyers seems to be the price…
If you would like to get residency and tax residency in Paraguay and want to use the same lawyers our team hired (and can happily recommend – they were great, and very quick, and among the lowest cost of the ones we assessed), just send an email to hola@DestinyForNomads.com and we’ll put you in contact with them.
It will cost $1,450 per person all-in, plus potentially some minor additional expenses depending on your personal situation (i.e. if you have an unusually high number of documents which need to be officially translated etc). Our team needed to pay an extra $20, as a point of reference…
What you end up with
First, you get the residency card. This is your official “allowed to live in Paraguay” document.
When you have that, you can apply for your ID card (cedula).
When you have the ID card, you can then get your tax number (and therefore your tax residency), as well as other things such as driving licenses, or open bank account, get a phone contract, set up a company, etc etc.
Note: Beware of law firms selling just the residency, who will then charge extra to get the ID card, and then extra to get the tax residency, etc.
Once you have your tax number, you can then start submitting tax returns – even if it’s a zero tax return, i.e. you’re reporting that you don’t have any domestically-sourced income and therefore don’t owe any tax that month (or year) – then you have a tax return that you can show to anyone who asks, in any other country, which is completed correctly and legally, and doesn’t require you to pay any tax, because legally you don’t owe any tax.
This is much easier than trying to explain to an official elsewhere in the world why you’re officially a resident of somewhere and yet haven’t paid any taxes, despite claiming to earn enough money to qualify for a visa, or residency, or credit facility, etc…
Why you need all this to change your tax residency
Generally speaking, it’s a lot easier to obtain a tax residency than it is to get rid of a tax residency!
For most countries, whilst they will accept that you don’t owe taxes in a given year if you’re not in the country for most of the year, that’s just a temporary, situational thing – they still consider you “domiciled” there for tax purposes, and that’s what you need to change to make it a permanent benefit.
And to make it a permanent change, you need to show your current/old country of tax residency that you’ve moved your tax residency to a new country.
It is not enough to simply not be in that old/current country – you need to be somewhere else, legally, to show that you’ve moved, rather than just temporarily absent.
That’s why you need all these documents – to legally and provably move your tax domicile out of your current high-tax country, and into a low-tax one.
And whilst you can still be a tax resident of other countries at the same time – if you spend enough time there, you will be a tax resident whether you intend it or not – the difference is that your “default” tax residency reverts to the place you are a legal resident, and the place where you can prove it.
If you remain a legal resident in a low tax country – and can prove it with documentation – then you, and your descendants, will have the opportunity to pay low (or no) taxes on your global income, on an ongoing basis.
Even if you’re only temporarily nomad-ing, take the opportunity to optimise your finances! You can massively reduce your tax bill, this year, and every year for the rest of your life, just by living in Paraguay for a while and completing the legal process to become a tax resident here. And if you visit, you may just love it and want to have a base here…
Find out more
If you’re interested in obtaining tax residency in Paraguay and want to check it out in person, we’ll be sponsoring an event here in Asuncion in March 2023 in collaboration with some local businesses, covering the following:
The residency process
The tax system
Investing in Paraguay
Setting up a company
Local schools (including international schools)
What it’s like living in Paraguay as a foreigner
Local knowledge to help you make the most of your time in Asuncion
…and everything else relevant to either moving to Paraguay, or having a fiscal residence here.
We’ll be bringing together local experts, local expats, global nomads who already have a base or fiscal residence here, local businesses and services providers, staff from the large companies/banks/schools you may want to work with at some point, and nomads from around the world to meet and network in one of the top hotels in Asuncion, for a full day of conference-style information sharing and in-person networking, fully catered and ending with an open bar social reception.
If you’re interested in attending, or want further details, send an email to hola@DestinyForNomads.com and we’ll provide all the information. Hope to see you there!