Damon il Nomad

The differences between citizenship, residency, and tax residency – and how Global Nomads can optimise their tax planning

For people who never live anywhere other than their home country, life is more simple. Not necessarily better, but definitely more simple in terms of citizenship, residency, and taxes. Those who never leave pay tax to the country where they live, and they live in the country where they were born. The country of their citizenship, the country of their residency, and the country of their tax residency, are all the same country.

Most people in this situation are blissfully unaware that they actually have a choice about these things – a choice that could save them a huge amount of money over their lifetime, and massively increase the opportunities available to them.

Unfortunately, some of the people who do leave their home country – either permanently, or temporarily – are also blissfully unaware that they also have this choice. If you are, or want to be, a global nomad – make sure you know and understand the information in this article, because it could have a huge impact on your wealth – and therefore have a huge impact on your life.

Why? Because for many people – particularly professionals from “developed” countries – tax is their single biggest expense. If you’re trying to optimise your finances, reducing your biggest expense is going to have a much bigger impact than reducing one of your smaller expenses – and crucially, it’s not that difficult to do.

Additionally, if you’re one of the global nomads who is already in a position where you currently don’t need to pay taxes, we will cover why you may still benefit from officially becoming a tax resident somewhere.

How taxation works globally

You may or may not be surprised to learn this: Many things work differently in other parts of the world than they do in your home town.

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.

In this article, we’re specifically talking about Income Tax – because that is usually the biggest expense for most working professionals.

The four different income tax “systems”

Whilst every country has a unique set of tax rules and rates, they can all be categorised into one of four different “types” of tax system – and the type of system used usually has a much bigger long-term impact on your finances than the actual rate charged. This is because:

a) The actual tax rates in any given country can, and frequently do, change – whereas the type of tax system used rarely (or never) changes

b) You cannot (usually) choose which taxes in any given country apply to you, but you can choose which country to become a tax resident of

c) The differences between the different systems are huge

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.

There are only two countries in the entire planet which choose to have this type of onerous taxation system, from which there is no freedom to escape for its citizens:

1) A tiny impoverished country called Eritrea, just across the Red Sea from Yemen, which has a reputation for being one of the world’s most repressive states and is almost perpetually at war; and

2) A large rich country called the USA, sandwiched between Canada and Mexico, which has a reputation for being one of the world’s most… ok so you already know about the USA.

If you are a citizen of either of these countries, even if you live elsewhere and earn money elsewhere, you must file a tax return and pay whatever rate the government has written into their tax laws. If it’s not paid, both countries can (and do) block non-payers from travelling internationally by cancelling their passports, and then lock them up in a jail.

For citizens of these two countries, the only way to escape this type of taxation is to revoke the citizenship (which in practical terms, means becoming a citizen of somewhere else first).

Type 2: Residency-based taxation

This means: You pay income tax in the country where you live.

This is by far the most common tax system – in total, out of 234 different tax jurisdictions (note that not all of these are “countries” in their own right), 172 of them have residency-based taxation for everyone who lives there, regardless of nationality.

If you are resident in one of these countries, you have to pay tax on all your income, from anywhere in the world. The tax rates vary, but the system is the same – you pay tax on all your global income, to the government of the country where you live.

There are still some technicalities to be aware of – different countries have different ways of assessing whether you are a resident or not.

In many cases, this is simply about how long you have been in that country during any particular tax year – the most common is 180/365 days, meaning that if you spend 180 or more days in that country throughout the year, you are considered a resident – even if you don’t officially have residency there, and can’t even open a bank account as a “tourist”.

For others, having a residency permit is a requirement in order to be considered resident for tax purposes – without being an official resident with all the documentation that goes with it, you can’t even get a tax number, and therefore can’t pay tax (and do not owe any, even if you spend most of the year there).

Some countries take into account various other things when assessing whether you are considered a resident or not – and therefore whether you owe any taxes or not – such as whether you have “substantial ties” to that country (or not), or whether you are a tax resident elsewhere (or not).

Other residency-based taxation countries have quirky rules which can either help or hinder your efforts to legally reduce your tax bill – for example Thailand has an unique rule which states that if the income was earned more than one year before it was sent to Thailand, it’s not taxable.

Various other technicalities and exclusions can come into play in some circumstances, but for the most part, what you earn globally is taxed at the same rate as all the non-nomads living and earning in the same jurisdiction.

Type 3: Territory-based taxation

This means: You only pay tax on what you earn in that jurisdiction.

If there is one major thing which is almost always relevant to the taxation of global nomads, it’s this – the treatment of “foreign-earned income”.

Of the 234 different tax jurisdictions, 39 of them only tax you on what you earned inside that country – meaning that income you earn from outside that country is not taxed at all – fully legally, if you are a resident of one of these countries.

Those 39 countries include popular digital nomad destinations such as Bermuda, Costa Rica, Georgia, Malaysia, Panama, Paraguay, and Singapore… becoming an official resident of one (or more) of these 39 countries could save you a fortune.

If you’re a professional earning an above-average salary, the difference between paying income tax on your global income versus saving and investing that money could be millions of dollars between now and your retirement age.

There are still some variations between how different countries treat different types of income, and different countries take different views on what exactly constitutes “foreign-earned” versus “local-earned” income – some will prioritise where you physically were whilst doing the work, some look at where you got paid (where your bank account is), and others judge it based on where the company (or person) paying you is based.

Living 365 days per year in the same country whilst working for a foreign company may lead to your country of residence considering that your “income” is actually sourced locally, if you’re always there – but other countries won’t.

If you’re regularly travelling, or spending a lot of time outside your official “country of residence”, most (or perhaps even all?) territorial-taxation countries will not require you to pay tax on any income which is earned in (or from) a different country, even if you are not a tax-payer in that different country.

This system is particularly beneficial for global nomads who live (physically, or nominally) in a territory-based-taxation country, whilst earning money from a residency-based-taxation country – because then neither country requires any income tax to be paid.

If you are a resident tax-payer in a relatively high tax country, moving to a country with a territory-based tax system could effectively double your net monthly income…

Type 4: No taxation

This means: You do not need to pay any income tax at all, fully legally

Fairly obviously, this is the most inexpensive and easiest option! Of the 234 different tax jurisdictions globally, 19 of them simply dont charge any income tax at all. This is the same for citizens of these countries, and foreign-national residents alike.

These 19 countries include some popular digital nomad destinations such as the UAE (Dubai, Abu Dhabi etc), Bahamas, and Saint Kitts & Nevis. Many of the no-income-tax jurisdictions are in the Caribbean or the Middle East, alongside some from Europe, Africa, and the Pacific Ocean.

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. Big win.

The first steps to optimising your taxes as a global nomad

Optimising your tax planning as a global nomad is a huge topic, and one which is too large to cover in one article. So, look out for more articles on this subject over the coming weeks and months, on DestinyForNomads.com and in our newsletters.

Similarly, whilst moving your tax residency to another country isn’t particularly difficult, it’s not something that can be done overnight – it needs to be done properly, otherwise it doesn’t work.

You’re going to have to learn what to do, gather all the documents you need (and accumulate a lot of stamps on them), travel there, follow all the procedures there, and retain an ongoing connection to that country, for it to be, and stay, valid and therefore beneficial to you.

It’s a bit like becoming a global nomad in the first place – it’s not particularly difficult, but if it was super-easy then everyone would be doing it already, and they’re not. Despite there being millions of global nomads worldwide, there are still even more people who say “I’d love to live that lifestyle” and yet don’t do it for whatever reason.

Legally optimising taxes is similar. There are millions (or billions?) of people who say “I’d love to pay lower taxes”, and yet they don’t bother to learn about how to actually achieve that. Us global nomads have already proven (to ourselves) that we can figure out how to achieve the things we want to achieve, by actually changing our lives to live as global nomads, so don’t let a current lack of knowledge, or fear, or any other temporary state of mind get in the way of arranging your life – or tax planning – in the way that suits you best.

It’s worth remembering that whilst you may be a frequently-moving global nomad now (or in the near future), and you may stay like that for the rest of your life, there may come a time when you decide to settle somewhere, or even return to live in your home country. It makes sense to organise your tax planning in a way which is robust enough to still be of benefit to you in future, even if your future life is vastly different to your current life.

Also, it’s worth remembering that if you do want to settle down somewhere – or obtain a residency permit somewhere, or open a bank account somewhere – you’re not going to be dealing with a fellow global nomad who understands the nuances of international taxation systems. You’re going to be dealing with a permanently locally-based, relatively low-ranking employee armed with a checklist, who may want to see your most recent tax return from whichever country you said you currently live in.

They are unlikely to be impressed with a long speech about how you don’t owe any taxes to anyone because you live in AirBnB’s and work from a laptop. It might be easier to simply hand them a recent tax return from a country which doesn’t charge you a lot of tax, or a residency ID from a country which doesn’t require tax returns at all.

It might seem dull and boring, but the first steps to optimising your taxes as a global nomad are to check the tax rules for your current country of tax residency – or if you’re not paying income tax, check what the rules are for the last place you were a tax resident.

Unfortunately, you may discover that simply not living there currently isn’t enough for the tax authorities to consider you as a non-tax-resident, particularly if you still have assets there (i.e. property, or even a bank account), or if you haven’t officially become a tax resident somewhere else.

It is a lot harder to get rid of a tax residency than it is to obtain one!

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Damon il Nomad