There are many different situations, as well as options, for tax optimization. We often think that tax optimisation only makes sense for rich people and big companies, but this simply isn’t true; practically anyone can do it.
Below you will find some examples of people we’ve advised and helped to optimize their taxes and situation. Of course, we’ve simplified the cases and, to protect the confidentiality of our clients, we’ve changed their names and have presented them in such a way that you cannot infer to whom they refer.
All the examples are real ones, well, all but one: let’s see if you can find out which one it is.
Situation: Martina earns her income with dropshipping, selling jewellery handmade in Africa on Shopify. She sells worldwide and has an increasing number of orders, almost too much for her to handle alone. Martina lives in Canada and does not want to move. She knows that the CFC rules and residence test complicate the process of setting up a business abroad. She also needs a PayPal account to run her business.
Solution: Martina founds a GBC1 company Mauritius, which pays 3% tax on its sales abroad. Thanks to the existing double taxation agreement, the credibility of the choice of jurisdiction from a business point of view, and the fact that she has hired a local employee to help her with the many orders, the Mauritian company is recognised by the authorities. Since she has an employee in the country, she hasn’t had any problems opening a local bank account and linking it to PayPal. Mauritius has good commercial banks with easy-to-open accounts that have even joined the IBAN system.
2. Amazon FBA
Situation: Guillermo is tied to Spain by his home and children but is determined to legally reduce the amount of tax he pays on profits with his Amazon FBA business. He makes a profit of 500,000 euros before tax, of which, between corporation tax, personal income tax and dividend tax, half is left on the table which he is willing to invest heavily in a solution that saves him as much as possible in tax.
Solution: Guillermo has set up a company in Bulgaria that taxes profits at 10%.He only withdraws essential money and leaves most of it in the company, from where he reinvests it. In the not-too-distant future, when his children are a little older, he might move to Cyprus to be able to receive all the money accumulated in his Bulgarian company.Meanwhile, to avoid problems with the Spanish tax agency, and for the company to be recognised in Bulgaria, he opens an office there and hires two local employees who pay their social security contributions in Bulgaria. In this way he not only pays less tax but can also expand his business to other markets.
3. Starting out cheap and simple with an LLC in Wyoming
Situation: Mike would like to live as a digital nomad; he really likes travelling. He only earns 1,000 dollars a month, but even so does not want to get caught up in the Australian tax system, no matter how little he’s taxed at first. Nor does he want to keep an account, charge VAT or have to pay an advisor or accountant. However, he needs to be able to issue invoices that his customers (who are companies) can recognise as tax-deductible.
Solution: Mike sets up an LLC in Wyoming for $150. With the LLC he has a billing address from which he can bill his customers. LLCs are tax transparent, such that you only pay tax if you are required to where you live. Since Mike has deregistered and doesn’t reside anywhere, as he is a perpetual traveller, he pays nothing in taxes. Unfortunately, he hasn’t been able to get a bank account for the LLC he’s registered, so he receives the money in a private PayPal account linked to an account he already had as a private individual. However, when he makes more money with his business he will register a Florida LLC with bank account, stripe and paypal.
4. Consultancy – UAE
Situation: Manuel is a Venezuelan consultant who has been tax resident in Portugal for a long time. He works with customers all round the world and doesn’t stop travelling, he’s doing very well.He refuses to pour more than half the money he earns into taxes and is looking for another country to transfer his residence to, but where he doesn’t have to spend much time. Of course, he wants to limit his responsibility should there be any problems and, since he only works with businesses, it’s essential that his bills can be recognised as tax-deductible.
Solution: Manuel eventually decides to set up his business in the UAE free zone. This gives a business that’s both globally recognised and tax free. The VAT introduced in 2018 only applies to one of his customers in Bahrain, one of the six Gulf states concerned. Since he’s set up his business in the United Arab Emirates. Manuel gets a residence visa there, so that he also remains tax free on a personal level. In order to maintain it, he only has to travel to the Emirates once every 183 days. Since Manuel regularly passes through Dubai, this isn’t a problem for him.
5. Pensioner in Paraguay
Situation: María is a Spanish pensioner with a small pension, not enough to live as she wants to in one of the big Spanish cities. The 50,000 euros she’s saved over her lifetime is steadily decreasing due to low interest rates and rising inflation. María thinks that Spain’s economic, social and political evolution is awful, and she wants to move to a different environment, if possible somewhere where it’s pleasant and warm all year round. She only speaks Spanish.
Solution: María decides to emigrate to Paraguay. For €2,000 and a bank deposit of nearly €4,000 she gets a permanent residence permit for life. There she can enjoy the warm climate. María transfers the €50,000 from her Spanish bank account and deposits it in a local cooperative bank account. This not only supports the local economy of her small town in the outskirts of Asunción, but also allows her to receive 15% interest per year. The €7,500 she receives every year for her pension allows her to live comfortably in Paraguay, since living costs there are a lot less.
6. Forex Trading
Situation: David is from the UK. He is dedicated to Forex trading and resides in Switzerland. He’s also started trading in cryptocurrency. In principle, in Switzerland you don’t pay capital gains tax as long as it is not considered income from trading activity. Professional traders do have to pay it and pay tax on income from profits. Since in David’s case he’s easily considered professionally engaged in trading, he’s looking for a new residence in the EU. It should be a place with a good climate and a good quality of life, as he wants to stay there long-term.
Solution: David becomes a non-dom resident in Cyprus. Although Forex profits are taxed in Cyprus at 12.5%, he chooses to trade through an offshore company free of tax and accounting, rather than privately. He decides to set up the offshore company in Hong Kong, because there he can do Forex trading and in cryptocurrency, largely without anyone regulating what it does. Being a non-dom in Cyprus, David is exempt from dividend tax without any type of withholding. Setting up and directing companies abroad isn’t a problem in Cyprus, at least if you’re a non-dom. The only thing David has had to do to get Cypriot residence was to prove he had €30,000 of liquid asset, although it would also have been worth proving that he had €2,500 in monthly income over the last 3 to 6 months. Since he’s going to spend over 6 months a year in Cyprus, he doesn’t have to apply for social security. David has taken out private health insurance for about 50 euros a month.
7. NHR Programme in Portugal
Situation: Alex is a freelance graphic designer residing in France. Most of his clients reside in France, Austria and the UK. His annual profits of €50,000 represent a large outlay in social security and income tax. Alex has a weakness for cannabis and doesn’t mind moving somewhere else, but it would have to be a country where he doesn’t have to worry about his penchant for cannabis. Alex is looking for a country to stay in and he doesn’t want to travel all the time. His customers are big companies and they’d need an invoiceto be recognisable as tax deductible without any problemsand that includes a VAT identification number.
Solution: Alex moves to Portugal, a country where drug use and possession have been decriminalised. He values the quality of life in a country he can easily emigrate to as an EU citizen. As a graphic designer, Alex falls under the professions included in the Portuguese NHR programme. This means he’ll be able to benefit from a fixed 20% tax on income from most countries, at least for the first 10 years as a resident in Portugal. Income from certain countries is completely tax-exempt, as is the case with income from the UK, for example.
8. Non-Dom in Italia for big fortunes
Situation: Christoph is a world-famous German football star and is considered one of the best players on earth. His salary is tens of millions, but in reality, he earns a lot more with his intellectual property rights abroad. He was recently convicted of tax evasion in Spain for continuing to apply the now abolished Beckham law, under which foreign income was exempt from taxation under certain conditions. Since the fans of his current club are always booing at him, he wouldn’t mind a change of scene.
Solution: Christoph transfers from his Spanish club to an Italian one after paying a record sum. His even higher salary is now taxed in Italy at a slightly lower rate than in Spain. However, his main concern was his income from his intellectual property, as well as no longer having problems with his fans. In Italy there has been a little-known non-dom scheme since 2016. Just as in the UK, Ireland or Malta, non-doms don’t pay tax on foreign income that isn’t brought into the country. Christoph pays the annual fixed fee of 100,000 euros so he can benefit from this scheme in Italy, a derisory sum compared to what he saves.
9. Finally free – home-schooler families
Situation: The Rodríguez family all-round the typical Spanish family, well, all except for the fact that they’ve decided they don’t want to send their children to school. They think the Spanish education system isn’t a good one, that only tries to brainwash children to think how the state wants them to. However, compulsory education laws in Spain prohibit them from giving their children the education they want to give them, and the news of a close family who do not send their children to school and to whom social workers are making life impossible has given the last push they needed to decide to flee Spain. They’ve decided they want to see the world, but that they also need a base, preferably somewhere with a lot of nature. The Rodríguez family have an online business and make money selling digital goods. They sell their products through the German provider Digistore24.com.
Solution: After weighing up the different options, the Rodriguez family opt for residence in Costa Rica, a popular destination amongst expat families who home-school their children. As well as having incredible nature, they can also get organic products, and it’s a safe place. Another advantage of Costa Rica over other options is the exemption of taxes on foreign income that they can easily meet immigration requirements. They only have to spend 3 months a year over a 3-year period in Costa Rica and deposit 30,000 dollars a year in a local bank account. After these 3 years the family will have a permanent residence permit for life and will no longer have to meet these requirements. As for the business, they set up an offshore company for some 1,600 dollars or so in San Vicente and open a company bank account in Costa Rica. They have the advantage that the Digistore sales platform handles VAT wherever necessary and can seamlessly transfer its customers’ money to virtually anywhere in the world.
10. Navigating the world.
Situation: Matthew is an Irish sailing enthusiast who’s lived in Italy for a long time. He wants to leave Italy and travel the world for several years. He’s received an inheritance, so he has enough capital to buy the boat and live without working, just trading in futures,something he has a lot of experience in. He’s looking for a tax-free place to live where he can easily register his yacht.
Solution: Matthew decides on residence in Panama, where he can register his yacht cheaply. Foreign income is tax-exempt and if, as in his case, you don’t need a tax certificate, you only need to enter the country once every 2 years. Matthew doesn’t need access to double taxation agreements, as no withholding is applied in the case of futures. Immigration with a Friendly Nations visa costs him $5,500 or so, as well as a deposit of $5000. The Panamanian company included in the price and part of the immigration requirements is perfect to keep the yacht. Now he can embark on his journey around the world as a permanent resident in Panama.
11. Hotel in Germany – exit tax
Situation: Kirsten has a small but luxury 5-star hotel in the North Sea. She runs it through a German GmbH, although, on her tax advisor’s recommendation she doesn’t participate in it directly, but through a UG (a type of limited company, but cheaper and simpler) in which she is the only shareholder. Kirsten doesn’t want to live in the cold and humid region of the North Sea anymore and would rather move to the Caribbean. However, what she’s heard about the German exit tax seems to complicate the situation.
Solution: Kirsten has got used to the idea that she won’t be able to emigrate to the Caribbean at the moment, at least until she’s dissolved the German companies. However, the Mediterranean is also a good option for her and her family. She decides to move her residence to Cyprus and meet the minimum stay of 2 months there, spending the rest of the time in the Caribbean. Cyprus is in the EU and she thereby avoids activating the exit tax. Kirsten pays a withholding tax on dividends from the hotel business in Germany, a withholding which is reduced to 15% thanks to the double taxation agreements. Cyprus is not obliged to pay tax on foreign dividends.
Without being aware of it when she set it up, her German holding (the UG) will come in very handy for Kirsten. Secondly, she creates a Cypriot company as a new company holding and sells the GmbH from her UG to the new Cypriot holding. Instead of paying 27%, she’ll only pay somewhere under 1% in this transaction, as with transactions within one holding you only pay 5% of company tax and tax on economic activities (Gewerbesteuer). The market value of her hotel is some €5 million, although in liquid she couldn’t have had more than €50,000, which could have tied her to Germany forever.The Cypriot company now owns 100% of the GmbH, allowing Kirsten to benefit from the EU Parent-Subsidiary Directive. This means that in the future dividends from the GmbH will pass to the Cypriot holding company after payment of 5% of the German corporate and business tax. Once the dividends have arrived at the holding in Cyprus, they are transferred tax-free to Kirsten as sole shareholder.
Kirsten will use the next 2 years to take out all profits from the UG with a 15% withholding in Germany. And when she’s finished withdrawing the money she’ll proceed with the liquidation of the UG. As there won’t be any more companies in Germany, Kirsten will then be able to emigrate to from Cyprus to the Caribbean without having paid any exit tax. She’ll keep the Cypriot company as it will allow her to continuedistributing dividends without withholding taxes. Incidentally, she’s decided to move her residence to the Bahamas, taking advantage of the fact that she gets an immigration permit when she buys a property.
12. Sex in exchange for cryptocurrency
Situation: Carla is a luxury Viennese prostitute. Her customers pay her €2000 per night in cash. But she doesn’t want to squander all the money; she’d like to start investing it. Unfortunately, no bank accepts such large sums in cash, especially if you can’t justify the income and the source is unknown. However, Carla is forced to continue earning money in cash for her work.
Solution: Carla learns to handle cryptocurrency as a means of anonymous payment. From now she has the option of paying in Bitcoin, but also with other cryptocurrencies. All this opens the door onto a new audience amongst which she is known as a ‘Blockchain Girl’ and, of course, allows her easily to invest her money. She periodically takes the opportunity to buy Bitcoin with the money she continues to receive in cash through the local stock exchange and Bitcoin ATMs (especially in neighbouring countries, the Czech Republic and Slovakia where there are higher limits). She uses this Bitcoin to buy gold in a precious metals shop in Singapore. From this shop she can transfer the money after she sells the gold to her Austrian bank account, without any problems.
Situation: Mark is from the UK and has already lived in Austria for a decade and works as a developer. He works with a team of Romanian programmers in software developmentfor several large companies. He currently pays a huge amount of tax on his annual €500,000 revenue, so he’s looking for an alternative that’ll allow him to continue living in Austria.
Solution: One of the options involves setting up the company in Hungary as it’s nearby, and he could rent an office there where he’d work periodically, giving his foreign business the entrepreneurial substance it needs to be recognised by the Austrian tax authority. Although that 9% corporation tax is very attractive, there are actually other options. One of them is to set up the company in Romania, where he already has 3 Freelancers working for him. It’s a quick decision for him when he learns that Romania has a special scheme which allows you to pay only 3% of the amount billed when revenue is under 1 million euros. Especially when it turns out that having local employees can reduce the amount to almost 1%. Now he only pays 1% of tax on the billed amount, has a company with entrepreneurial substance, and can keep working comfortably from home.
14. Acting anonymously
Situation: Mercedes lives in Spain but wants to remain anonymous to avoid problems with competition. This is something she can’t achieve if she sets up her company in Spain, as the register is public. Since she’s at the beginning of her business activity she doesn’t have enough income to set up the business abroad with the necessary business substrate to be fiscally recognised. Anyway, she wants to have from the very beginning a structure that allows her to save as much tax as possible in the future.
Solution: Mercedes sets up an offshore company in the Marshall Islands completely anonymously. Since she’s just starting out, and the company’s profit is minimal, she wouldn’t mind too much entering into the international tax transparency scheme and thus paying for the company’s profits in her personal income tax return (although she’s actually decided to do something even better, as we’ll explain later). The biggest advantage of the offshore company is that although the foreign company fiscally pays tax in Spain, it isn’t governed by Spanish commercial law, so it can work anonymously in the face of competition. To get greater anonymity, she uses an SL as a holding company, a company for which she uses the services of a fiduciary agent. The additional SL not only gives her greater anonymity, but is also a good method for tax optimization, as she can better control the taxes she pays as an individual, and should she ever want to leave Spain, she’d have a better deal with the exit tax.
15. Influencers – requests and sanctions
Situation: Christina lives in the EU, and has an Instagram account with around 200,000 followers, in which she posts about swimsuits. She advertises fashion items from international brands and gets a commission for her recommendations. She’s already received several requests and has had to pay on multiple occasions faced with threats from different brands, as she can’t always take their conditions for treatment and mention into account. The new data protection laws (GDPR) have only worsened things. Christina wants to be untouchable, and to be able to ignore all these demands. She wouldn’t mind moving outside Europe, to somewhere in Southeast Asia.
Solution: Christina leaves her country and gets a 5 year visa in Thailand for around €12,000, taking advantage of the Thai Elite Programme. To make things more difficult for the brands that would continue to pester her, she sets up an offshore company in Nevis. This doesn’t pay tax in Thailand. It’s true that the odd customer won’t want to work with an offshore company, but in return all the scares and demands become a thing of a past.
16. Emigrating as a family
Situation: The Alvarez are an Argentinian family who left Argentina for Germany during the 2002 corralito, in search of a new opportunity. Now they’re looking for a country outside the EU to emigrate to, where they can spend the whole year. A mild climate, safety, German schools for the children and a high quality of life are important for them. They’ve considered going back to Argentina, to be closer to the rest of their family, but they’re not sure. They don’t have many assets, but they have a regular income due to their affiliate business, which they can run from anywhere in the world.
Solution: The Alvarez emigrate to Uruguay. As Mercosur citizens the process is even simpler, but even if they were EU citizens they wouldn’t have had any problems proving their ability to support themselves financially (monthly income of around €2000) and spending 9 months in the country for the first year.Since foreign income is tax-exempt in Uruguay and they charge their commissions through a company in the US, they remain tax-free.
17. Tax-free in Monaco
Situation: Rudolf is German but has lived in Spain for over 20 years (where he’s called ‘Rodolfo’). He sold his commercial empire in Spain and, despite the high tax on his assets (he could’ve undoubtedly further optimized his situation had he formed an asset-holding company or a holding company), has enough money to retire at 40. His assets, of just short of 3 million euros, are invested in shares, but he under no circumstances wants to pay tax on his stock market profits. He’d rather move to a safe country in Western Europe.
Solution: Rudolf decides to go to Monaco. Switzerland would’ve been another option for him, but he doesn’t want to pay Swiss property tax. In Monaco he lives completely free of tax in his beloved Mediterranean area and is surrounded by like-minded people. Contrary to what he thought, emigrating to Monaco has been relatively straightforward. Renting a flat has turned out to be more expensive than what he thought, although on the other hand, he’s had no trouble getting the €500,000 together required by the authorities and transferring it to an account in Monaco. You don’t have to be a multimillionaire to live in Monaco today.
18. Amazon Kindle Publishing (self-publishing on Amazon)
Situation: Helena isn’t tax-resident in Spain anymore, and sells e-books through Amazon KDP (a programme for self-publishing books). She thought that as a non-resident in Spain she’d pay 0% tax on her commissions, but this wasn’t the case. In fact, Amazon suddenly withholds 30% of her revenue, having been told it is a withholding. Helena had never had to pay this while in Spain.
Solution: When Helena lived in Spain, she had to pay the normal income tax there on her book sales, but thanks to the double taxation agreement between the US and Spain, Amazon’s withholding was only 5%. After the drop in Spain she no longer pays tax on her royalties and book sales, but nor does she enjoy the reduction in the withholding tax. So, she decides to set up a company which, on one hand, reduces the withholding tax on copyright through a double taxation agreement and, on the other hand, also has a low corporation tax.
In the end it turns out that she can choose between Bulgaria, with 10% corporation tax and 5% withholding in the US, and Cyprus, with 12.5% corporation tax and 0% withholding tax. Since Bulgaria also has a 5% withholding tax on dividend payments, Helena decides to set the company up in Cyprus, despite it being more expensive to set it up and run it. It also turns out that in Cyprus she can cut her tax burden in using certain completely legal tricks.
19. Consultant resident in a country with a territorial tax system
Situation: Fritz is a Swiss consultant using a company in Zug (Switzerland) to serve his German-speaking customers. He emigrated to Costa Rica because he thought the salary and dividends from his company would be tax-free as they’re foreign income. However, he didn’t take into account taxes as a non-resident and the high withholding of 35% in Switzerland.
Solution: As a Swiss citizen, Fritz doesn’t have to pay any kind of exit tax and so can transfer his assets to the Swiss company to a parent company tax-free as soon as he ceases to be tax-resident in Switzerland. He goes for a holding company in Estonia, as the distribution of his shares is tax-exempt under the EU Parent-Subsidiary Directive, which also applies in the case of Switzerland. Estonia doesn’t have a withholding tax if the dividends distributed by subsidiaries are distributed directly to shareholders. The Estonian company’s 20% deferred tax can’t be reduced by double taxation agreements or offset by other capital gains taxes, as it is a corporation tax paid at the time dividends are distributed. Fritz decides to take advantage of the deferred tax and invest the money transferred from Switzerland in shares. Another advantage of investing from his Estonian holding company is that he can take benefit from the Estonian double taxation agreements and thus avoid withholdings on his investments. In the end he only pays 20% tax (and only when he decides to distribute dividends from the holding company in Estonia).
As you’ve seen, tax optimization and applying Flag Theory isn’t something only a selected few can do. If you’re prepared to move, or move your business, and start internationalising your life, there’s probably many ways you could do it, too.
Because it’s your life!