The Territorial Tax Myth

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Today we are talking about a topic that I will call ‘’Territorial Tax Myth’’.
People seem to have this thought that if you want to reduce your taxes the first thing you should do is to find a territorial tax country. This is almost universally wrong advice!
Many tend to have a bad understanding of what territorial tax means and what local income means.
Most countries in the world will tax you on your worldwide income, some countries have territorial tax. The idea of the territorial tax is that they tax only local income.
So people think: my customers are abroad, my business is abroad, my employer is abroad, etc therefore I don’t have any local income. I can come to a territorial tax country and pay no tax. WRONG!
This is not nearly straightforward and simple as many like to think. There are differences among territorial tax in different countries, and different types of income are viewed differently.
If you’re doing work or running a business FROM a certain country, many countries will consider that as a local income.
Hong Kong is one of the first countries that come to mind when talking about territorial taxes. They have what’s called ‘’the operations test’’ and they will tax the operations within Hong Kong.
Many people have wrong assumptions around this type of taxation, and sometimes they unwillingly break the law due to misunderstanding of what territorial taxes actually mean.
This is not good!
The most common misconception that I hear a lot has to do with the location of customers.
The location of your customers doesn’t determine where do you pay taxes!
The second has to do with where the investments are. What if you have investments in stocks abroad? Stocks, as a form of income, are considered to be a resident where you are. Territorial tax country won’t let you not pay taxes on your capital gains.
However, some countries don’t tax capital gains at all, and this is where the confusion tends to come from.
How about interest income, royalties, dividends?
When you have a territorial tax system, dividends from a foreign company will usually not be taxable. There are exceptions to this as well.
When doing tax planning you shouldn’t be looking for countries with territorial tax systems. There is a whole set of parameters to look at: your sources of income, is it earned income, do you have a company, are you making any royalties income, dividends, capital gains, etc? Based on the type of income you have, you should reverse engineer and look for a country that will have a favorable tax for YOUR type of income.
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We are Offshore Citizen team. We help people become global: get a second passport, set up a second residency, pay less taxes, do banking abroad, etc.
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Author: Michael Rosmer
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[@tw9419]

It’s very useful to think in these terms. People often get deluded by some articles or hype videos they watch that contain buzz words such as territorial tax or offshore. In reality it doesn’t mean much if your situation isn’t right. It’s not about a country and their system, it’s about you and your business and where does it fit in the big puzzle. If it was so simple as many tend to think nobody would ever pay taxes. Open an offshore company and an offshore bank account and voila! No taxes. If only.

[@pvmoore1154]

As always Michael, you offer clarity and common sense to complex matters. Your reference to "reverse engineering" is spot on. Start with what one wants and assess the pros/cons. It may not be as painful as one thinks, but even if it is,... engage a professional like yourself, and explore alternatives and options, until you find a desirable (not tolerable) balance. Thanks again for all your content as well as your one on one assessment, input and expertise. Myself and my family have benefited greatly from our time with you. Peter

[@OffshoreCitizen]

Peter, thank you for all the kind words and support! It was my pleasure 🙏

[@holeefuk8505]

Came across your channel a year a ago & shortly after you clarified this in the comments. Can't believe i was so stupid to believe the myths before but since then have been making plans to correct and get ahead of this while i still have the opportunity to do so. Thanks again Mike!

[@Bri-wi8kq]

Thanks for clearing that up Michael. Your insights are getting through and resonating. I respect your efforts to encourage us to cover ourselves by making the effort and setting up properly. Thank you

[@OffshoreCitizen]

You're welcome! Always happy to be of service ☺ What's your take on the topic?

[@Bri-wi8kq]

@@OffshoreCitizen The Paul Hogan saga revealed the extent to which the ATO will pursue overseas taxes. So when I start set operation I'll need to invest the time and resources to be watertight. I appreciate the efforts you make to guide us through the pitfalls Michael.

[@kallaji7383]

As always: SUPERB clarification! Thanks Micheal 🤗

[@yessikaalexandraperezvilla9666]

HEY THIS MY FIRST TIME HERE...... I LIKE YOUR KZbin CHANNEL, THANKS FOR THIS INFORMATION IS REALLY IMPORTANT AND VERY INTERESTING TO KNOW ABOUT ALL OF THIS!.......... THANKS AND REGARDS FROM BOGOTA COLOMBIA!

[@OffshoreCitizen]

Happy to be of service! 😄 What would you like to see on our channel?

[@p.c.h.6721]

Really, really well analyzed, thanks Sir 👍

[@alexanderprykhodko8769]

Great video, thank you

[@OffshoreCitizen]

Always a pleasure! Anything you'd like to see next?

[@nilsmarketing]

Love your videos man, could you make one for Ecuador? There's no info about it on youtube, how can you reduce your taxes there since they have a strange foreign income policy (if you pay taxes already somewhere abroad you pay 0 there) I'm considering moving there and want to know if I pay dividend taxes abroad, is that enough for them or do they tax you again somehow. Thanks man, hope you find it an interesting theme for a video!

[@OffshoreCitizen]

Sure, great suggestion

[@bullsharkdb]

In the case of Paraguay you may review your sayings, as Paraguay up to 2024, has 0% Tax for those with legal residence in Paraguay on incomes generated outside Paraguay. Can you give your opinion again?

[@hhh-lt8sk]

Thanks for your great video, What are best places for day traders especially in Europe?

[@OffshoreCitizen]

Cyprus

[@emmanueljames2487]

In territorial countries with CGT like Guatemala and Nicaragua, do you need to pay long term capital gains tax on foreign capital gains? For example, if you sell your gold on an offshore vault with profit, or sell stock or bonds in a foreign stock exchange, or trade currency in an offshore bank or sell a real estate on a foreign country? Thanks for the content.

[@laevabea]

Thank you so much! You speak about Costa Rica- If i am a german citizen, have german customers, with an american LLC and business bank account in the US- my research is saying that then I wouldn´t have to pay taxes in CR because it has a territorial tax system. Do you think so as well?

[@gn2650]

As you were explaining, there is no "one fits all", but I guess having a nomadic lifestyle would help you comply with the "operation test". Also. Is the location where your employees work from important?

[@OffshoreCitizen]

It very often is yes

[@DC-et1yn]

LOVE the channel an love the content. Thanks for all the work you do! Here’s my question: I believe that New Zealand citizens, that are also NZ tax residents, pay no tax on capital gains or dividends from international stock market investments. (Whereas profits made on ‘trading’ the markets ARE taxable). Would a NZ citizen that was an international nomadic traveler but who officially retained their NZ tax resident status still maintain this no tax obligation status if they had no other income? TIA!

[@OffshoreCitizen]

They do pay tax on dividends. Capital gains typically no. This is the same if you're a tax resident no matter whether you are nomadic

[@DC-et1yn]

@@OffshoreCitizen Many thanks! That’s a huge help. My partner and I will be booking our consultation with you in the next couple of weeks. 👍🤙🏻

[@WhyYouTrippin]

Would foreign income earned from KZbin AdSense be taxed on a territorial tax system? (If I'm outsourcing everything to the Philippines and doing KZbin automation)

[@sandytw5229]

Loved this video

[@OffshoreCitizen]

Thank you, Sandy! Were you aware of these myths?

[@sandytw5229]

@@OffshoreCitizen hello, I’m at the start of trying to figure out my best tax position, but think I have made a lot of mistakes through ignorance 🙈

[@PSKuddel]

Nevertheless, for the vast majority of people, unless they have a big business with production facilities, going to one of the many countries with for example a territorial tax system and a not so well functioning government and earn their money on forein accounts will in fact lead to 0 taxes and 0 hassle in those countries, where everybody is doing things that way. On the other hand establishing some kind of official structure can lead to a lot more of disadvantages other than being regularly taxed once the bureaucrazy starts to deal with you. When in Rome, do as do Romans do!

[@OffshoreCitizen]

Well no, it doesn't load to zero tax, you might be able to get away with it, that's perfectly possible but not the same thing as not being liable for tax.

[@haych27]

Just picking up the reverse engineer point...so if a person's income is derived from crypto assets, then the best countries to reside to minimise tax are those with no capital gains tax.

[@OffshoreCitizen]

Can be, depends on the type of crypto income, we've done some previous videos on this. Also note some countries like France, Portugal, etc have some crypto specific rules as well as there are places like Netherlands with a very different approach via box3 income.

[@AlbertRossvids]

You're a non US citizen sole proprietor with a tax residency in territorial tax country Malaysia who works & operates a Wyoming LLC that provides education services in Malaysia for customers abroad. The customers pay the LLC & the LLC pays the sole proprietor in the form of dividends. Are these dividends considered foreign sourced or locally sourced income?

[@attentioncestpaslegal7847]

The rule is to look for the “economic substance”. Is there anything substantial happening in the USA here ? I guess no.

[@straight6604]

Does it apply to investment profits that are not brought into the country of residence? If so, and you are taxed on worldwide income, then territorial tax countries are no different then residential tax countries. Both are taxed on worldwide income.

[@OffshoreCitizen]

Depends on the country but in most cases the sale of shares will be taxed even if it is foreign shares. Most of the time dividends and interest from foreign sources will not be taxed.

[@leonardcamacho]

Would you say the same for non US digital nomads? Most income for digital nomads are earned income which if you go for a territorial tax system and then travel that can reduce their taxes

[@OffshoreCitizen]

Depends on the details but if you're a resident doing your business from the country usually that would qualify as taxable. Sometimes you can avoid it by not bringing the money into the country and very often you can avoid it by having a foreign company then taking dividends but it varies by country and circumstances, the details matter.

[@attentioncestpaslegal7847]

@@OffshoreCitizen Almost always, if the company (from country A) is managed in country B, then country B considers it a tax resident.

[@stevemyers2092]

I own 50% of a CDN company, I will be doing Business Dev. and traveling, but my partner in Canada will be running the company and performing Operations. Our workers are offshore contractors. I might stay in a country for 2-6 months at a time depending if I like it or not before moving on to other countries. How can any country tax me for making phone calls setting up zoom meetings in many other countries between my partner myself and a potential customer?

[@OffshoreCitizen]

Depends on the details, would need to look more at the specifics. Usually if you're not a resident of a country it's not too bad.

[@bquinn4533]

Can someone who knows, I emphasise who knows, tell me which countries do not tax monies which one has inherited from abroad. So which country can I move to where I will not be taxed on inherited money I bring in from abroad.

[@OffshoreCitizen]

Tons of countries don't tax inheritance. The real question is where would you want to live and where can you get a residency permit?

[@FighterFred]

International tax law is a jungle, the whole City of London is filled with people doing just that. The need for a professional increases with the earning level, to be in the wrong country could be a disaster taxwise.

[@OffshoreCitizen]

True. Are you in London?

[@JK-pb3gv]

tinglestingles

[@biznessizbizness8368]

1:57

[@matthawksworth]

Glad i didnt go ahead and move to Nicaragua 😂

[@attentioncestpaslegal7847]

Why ?

[@Jimmy-mx4cc]

You know the answers...but your so busy to push a agenda to get some sort of work.. Basically this is a add video

[@jesselivermore9285]

Dude you need a girlfriend to iron your tops for you

[@tw9419]

Sounds a little sexist

[@jesselivermore9285]

@@tw9419 saying men dont care enough about their clothes and women care more about appearance is sexist? Im so tired of people that get offended over absolutely nothing

[@i1pro]

Who irons a t-shirt nowadays?

[@jesselivermore9285]

@@i1pro men hate ironing so single men usually walk around in unironed clothes. Women generally want their men to look good in well pressed clothes so they do what they can to help their man look better. Theres nothing sexist about that, its called human nature. Imagine a girl tells her friend to find a boyfriend so she has a helping hand around the house for maintenence purposes, then some guy says that is sexist. Theres nothing wrong with a woman wanting a capable man, and theres nothing wrong with a man wanting a capable woman.

[@tw9419]

@@i1pro Everybody?

[@sinoblawg]

why cannot you speak more clearer English? and hit the point right away?

[@OffshoreCitizen]

Not sure what you're talking about this is native English. As for the point, sometimes context and nuance are important people like overly simplistic answers but the rules don't match that simplicity

[@sinoblawg]

@@OffshoreCitizen it is your personal way of pronunciation, not uttering every word in a clear way. Sorry, compared to your peer, Andrew Hinderson. for foreingers like me whose mother tongue is not English, clearer speech is easier to understand.