Lets first discuss what the word “tax Haven” is, and how I am referencing it here. I am not discussing how to hide money from your government, to pay less taxes. I will be discussing how to use different countries official tax systems, to pay less taxes.
Panama has recently been touted as one of the best countries in the world to move to, for many reasons. Articles this year from Time, Fortune, CNBC and International Living list it as the number one Country for an expat to move to, for many reasons. Ease of residency, lower cost of living, great climate, and a lower and very friendly taxation system for many.
The tax system of Panama is the main reason I moved here, and I will explain this in detail later in the article. The purpose of this writing is to educate people on world wide tax systems, and how you can benefit from living in a country like Panama.
This article is not really directed to people who are retired and looking to live out their retirement years overseas, rather it is targeted to those in their working years, looking to become expats, to work and invest, and possible open a business overseas, and especially targeted to that group of people, like myself, that lead a digital nomad lifestyle. More on this later.
There are basically only 4 taxation systems that cover all the countries in the world. Taxation by citizenship, taxation by residency, territorial taxation system, no personal tax. Let’s cover these one by one.
1. Taxation by Citizenship.
You may be surprised there on only 2 countries in the world that use this system, The United States of America, Eritrea. These countries require their citizens to file taxes every year whether they are living in that country or not, and this is forever. And they must report worldwide taxable income, in addition to paying taxes in the country they are residing in.
No, they are some exemptions, like for example USA citizens currently have an exemption on their first $100,000 of foreign income, but the money they earn over that, they must pay tax in their country of residence and to the US government. In some countries this could amount in a tax burden over 74% of income. This I find ridicules, to pay taxes to a country that you do not live in and that is not providing you any services, but maybe that is just me.
There are a few other countries, like Finland, Italy, Mexico and Portugal, that do tax its nonresident citizens that move to specific countries, like tax haven countries (countries with low “effective” rates of taxation for foreigners) but only for a few years, or until that person demonstrates that they no longer have ties to their original country.
2. Taxation by Residency.
This is the most popular taxation system, with more than 75% of the countries in the world practicing this taxation system. It’s basically pretty simple: If you reside in that country, you are required to file ad pay taxes there. If you move away from your country and reside in another country, you no longer pay taxes to the country you are from, but you pay the taxes of the new country you are residing in.
Some of the countries that are in the category of taxation systems are Canada, Australia, United Kingdom, Denmark, China, Finland, France, Germany, New Zealand, and over a hundred more. This is a great taxation system if you are looking to move overseas and earn a living in another country, as it is fair. If you are not using your citizenship country’s services, why should you pay them tax?
3. Territorial Taxation Systems.
In this system, you pay tax on income generated from that country. For example, if you have a job, or a business in that particular country, that make you money from, you pay tax on that. But, if you earn money from another business, or maybe a virtual job, in another country, that is considered “off shore or non-territorial” income, and you do not pay tax on it.
There are about 25 countries that follow this taxation system like Panama, Costa Rica, Singapore, Malaysia, Belize, Hong Kong, Paraguay, Philippines, and more. To me this is the fairest type of taxation system. I live in Panama, and I pay taxes to Panama on money earn from Panama sources.
4. No Personal Taxes.
Yes, there are still countries that do not charge tax on personal income, and very low tax if any on business income.
These include Bahamas, Cayman Islands, Monaco, Qatar, Saint Kitts and Nevis and Vatican City, and others.
Now, why I bring all this up?
If you are considering a life overseas, starting a business in another country, or just reducing you tax burden, or complete eliminating it, think about this. If you are a citizen from one of the taxation by residency countries, and you move to and become a resident of one of the territorial taxation or no tax countries, this could greatly reduce or eliminate your taxes. Let me give you an example.
I am a Canadian, and in 2010 was operation a work from home online business. I did SEO, web site building, affiliate marketing, and was making a great living, just topping 6 figures. But, in Canada I was paying nearly 50% of my income to taxes, and sorry, that is just wrong.
So, I started doing my research, speaking with other online marketers living all over the world, and found the information contained in this article and started making plans to move abroad.
I was looking at Philippians, Costa Rica, Paraguay and Panama, and after months of research, I chose to be a “digital nomad” and move to Panama in 2011 because of its ease of residency, proximity to North America, cost of living being ½ of Canada and of course, no taxes on this type of income. So, I now have a permanent residence and work visa in Panama, and hold my Canadian Passport, which if course is one of the best in the world.
Now it is not that I am against any taxes, I have started several businesses in Panama, and work for them, and pay my fair share of taxes on my Panama sourced income. In Panama, personal taxes range from 10% – 25%, and corporate taxes top out at 25%.
So, is Panama a tax haven for you?
I guess that depends, but not just Panama as you see by this article. Are you interested in the digital nomad lifestyle? Thinking of becoming one? I’m asking a lot of questions here, but I hope this article shares some light on the topic of what really a tax haven is, and how you can take advantage of the tax systems or various countries.
To learn more about Panama, and its benefits, come on one of our Retire in Panama Tours .
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** Please do not take any of this as tax advice, We are not a tax accountants. When making major decisions in your life, always consult a professional tax adviser.