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Lowest Tax Countries: Top Three Pitfalls to Avoid in 2020

Contributed by Zugimpex
18 June, 2020

Some countries in the world have low corporate or personal income taxes. For instance, Monaco and UAE residents enjoy a 0% income tax. Malta, Cyprus, Portugal, and Spain offer special programs to have certain foreign-sourced income tax-exempt - either temporarily, or permanently.

It sounds tempting to move to a sunny luxury place and save on taxes. Hold on, do not rush to pack your suitcase before you read what pitfalls there may be!

Consider Other Taxes

Let us take the example of Monaco. There is no personal income, capital gains, dividends, and wealth tax for the residents of the Principality.

The flip side of this favourable tax treatment is having the most expensive real estate in the world: an average cost is EUR 48,150 per square meter.

The country needs to earn somehow, so there are still some other taxes:

  • 33.3% on the profits from selling real estate
  • 19.6% VAT
  • 33.3% corporate income tax if more than 25% of a company's turnover is generated beyond Monaco, from patents or other intellectual property rights
  • 8%-16% inheritance and gift tax in case of non-direct relation

Beware of Old Obligations

Physical presence requirements for claiming tax residence are often simple. In the UAE, it is sufficient to visit the country twice per year. In Portugal, Golden Visa holders can spend 7-14 days annually.

However, these rules do not cover the tax obligations that can remain in the country of origin. The best way is to check whether there is a double tax agreement between the two. From our practice, these are the main steps to take:

  1. It is better to sell or rent out any real estate back home, as it may be seen as a permanent home.
  2. The spouse and underage children define the centre of vital interests. If you change your tax residence, take your core family with you.
  3. Make sure not to spend 183+ days per year in the country of origin. Keep an account of the days spent there and seek to stay in bordering states where possible.

Structure Business and Assets

Once again, let us see the importance of proper structuring by using a practical example of Malta.

In the case of residents without domicile, the Mediterranean archipelago taxes foreign-sourced income on a remittance basis. Capital gains are tax-exempt regardless of their remittance to Malta.

Thus, if you convert your source of income into capital beforehand, you can then remit it tax-free. Likewise, if you have a foreign bank account for receiving income from abroad - and do not use it for payments or withdrawing cash in Malta - it will be disregarded by the Maltese tax authorities.

Final Takeaways

It is rather simple to take up residence in a low-tax country. However, there is some homework to do before the actual move. This includes researching on any hidden taxes, checking the double-tax regulations in force, and reorganising assets in advance. Should you struggle with any of these tasks, Zugimpex Group will be pleased to ensure your smart tax planning!


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