14 EIGHT WAYS TO SUNDAY
Citizens worldwide all face taxation from their own countries,
but unlike most other countries, the U.S. taxes the worldwide
income of U.S. citizens and resident aliens. This is the single
biggest obstacle when implementing tax strategies. You can avoid
this problem if you successfully renounce your U.S. citizenship. In
any event, your objective is to beat the tax octopus to minimize your
tax obligations and responsibilities regardless of where you are a
citizen. The challenge is to avoid the following eight ways in which
you could find yourself subject to taxes in other countries:
1. Residence
2. Domicile
3. Citizenship
4. Marital status
5. Income source
6. Location of assets
7. Timing
8. Status of beneficiaries
RESIDENCE
Many countries permit you to stay up to 182 days of the year without
being subject to their national income tax. At some point, every country
defines how many days constitute your being a resident for tax purposes.
When switching citizenships, it would be advantageous to
select a country like Dominica or Saint Kitts and Nevis where no income
tax is imposed on new citizens. You can still travel and live elsewhere
as desired, at which time you will want to consider the
residence criteria.
DOMICILE
Your domicile of origin is the country where you became a citizen at
your birth, as opposed to your residence, which is where you live. The
latter can f luctuate frequently, and for tax reasons is usually redetermined
annually. For tax purposes, the definition for domicile can
vary greatly between countries and affect your tax situation. Know before
you go what to expect in your intended country of arrival so you
can plan your tax strategy.
CITIZENSHIP
It is important to remember that as a U.S. citizen, it does not matter
where your residence is—you are subject to U.S. taxes on money
earned anywhere in the world. The only way out of this would be to renounce
your U.S. citizenship. But first, you had best have an alternative
citizenship in place or you will find yourself without a country
and in a strange and difficult legal quagmire. This happened to Garry
Davis in 1948, founder of World Service Authority, in Washington,
DC, and author of My Country Is the World (New York: G. P. Putnam’s
Sons, 1961). An American citizen can legally obtain dual citizenship
and a second passport. At one time, this act alone would automatically
cause you to lose your U.S. citizenship, but not any longer. Your tax
dollars are too important!
MARITAL STATUS
This can affect your tax situation and your ability to be a tax exile.
Likely, you and your spouse will need to be on the same page if you
want to successfully expatriate and implement some of these taxreduction
strategies. And, further, if your marriage took place in a
community property state or a foreign jurisdiction with community
property laws, or if you had a marital home in one of these places,
then your efforts to avoid taxes as an expatriate may be hindered and
require professional planning.
INCOME SOURCE
When considering living in another country, you should know how
that government taxes earned income. Governments usually levy taxes
based on the source of income, so there must be a source test to determine
what is taxable. One method is to tax all sources of income from
within the country no matter where the earner resides at the time. If
the recipient is a nonresident, then the government requires the payor
to withhold taxes and remit them directly to the tax-revenue folks.
Other countries determine whether the income was earned within the
country, and if so, tax accordingly, and then exempt foreign-source
income. This territorial method is common in tax haven countries.
LOCATION OF ASSETS
Assets can be taxed by virtue of their physical location rather than
where the owner resides or is a citizen. Be sure to locate assets in
friendly no-tax or low-tax jurisdictions. Often it is best to keep assets
in a favorable venue outside your own country of citizenship or residence
to avoid more than just taxation—such as lawsuits, creditors, or
confiscation. Sometimes it is wise to hold assets in a corporation or
trust and not in your own name. Certain assets such as real estate and
physical business operations are difficult or impossible to relocate,
but these can be owned by an offshore entity if everything makes
sense. Even so, these assets can still be easier to attack legally as they
pose a physical challenge to relocate. Assets such as securities, precious
metals, and personal effects are easily movable and can be relocated
at will. Ownership can be structured to your advantage and
valuables can be stored in secure bank vaults or private vaults in foreign
countries, or other safe places out of the grasp of others.
TIMING
As in the United States, taxes in virtually every venue worldwide are
based on established periods for which taxes are due and payable. It
may be that you can postpone receiving income until you make your
next move and thus are no longer subject to the tax. It is better still if
you can stay in no-tax haven countries and avoid taxes altogether.
Also, it can work to your advantage if you have several taxable foreign
entities with different tax deadlines. This could give you some
f lexibility among these countries. You may even deliberately divert
more income into one source than another, or from sources you control
to yourself, because of tax deadlines or a tax rate that is more advantageous
in one country over another.
STATUS OF BENEFICIARIES
At the time of death or when assets are distributed to your designated
beneficiaries, they will likely be subject to taxation regardless of
whether you expatriated or renounced your U.S. citizenship. This is
true if your beneficiaries are U.S. citizens, or the citizens of other
high-tax countries, because they will still be exposed to the taxes of
their own country. You can avoid this if family members renounced
their citizenship at the same time you did and thus are no longer taxpayers
of that country. Advance offshore estate planning can also reduce
or eliminate your heirs’ tax liability. Consult a competent
professional in this area as you execute your expatriating plans.
If you seek expert advise in areas such as legal, tax, investment,
and expatriating, many competent professionals can be found
throughout the pages of this book and by referring to the Offshore
Evaluation Service (OES) in Part Four and the Appendix.