Which Country of Residence is Best for Tax Purposes

If you are an entrepreneur looking to scale a large business, expanding globally, then your country of residence matters (a lot).

Your country of residence (or domicile) is different to citizenship. At the time of writing this article (October 2021), I’m an Australian citizen, but a tax resident of Malaysia.

My hope is that one day, we all become global citizens of planet Earth. That’s a philosophical debate for another day. In the meantime as entrepreneurs, we must plan our lives within existing national boundaries (“walls”) where each country has it’s own laws.

This discussion is complex to say the least, however, I will attempt to raise some issues to get you thinking strategically and open your mind to different perspectives.

A quick disclaimer. My purpose in this article is to raise issues for your further consideration and investigation. This is not advice, so please do not take action based on this article alone. Seek professional advice based on your unique circumstances. That said, let’s move on!

My focus here is business related, but lifestyle and family issues must also be considered. It’s a serious matter which requires medium to longer term planning and research to get the right balance.

Citizenship
Citizenship is straightforward compared to determining tax residence. It’s the passport(s) you hold. Citizenship is gained by meeting the legal requirements of a national, state, or local government.

In most countries, you are not taxed based on citizenship. You are taxed based on your domicile.

Why Domicile is Important
In simply terms, your domicile is where you live, your home. Most countries will tax you based on where you are domiciled. This becomes your place of residence for tax purposes.

Tax residency will vary from country to country based on local statutory and common laws, but there are some common themes.

Generally you are domiciled where you have a permanent place of residence. If you aren’t living there right now, then it’s the place where you intend to return and make your home indefinitely.

Most Governments will also look at your intentions. For example, you may move to another country for a year or more but your intention is to return to your ‘home’ country. Let’s say you get employment for 2 years in a foreign country, but you keep a home, car and personal belongings back in your home country. This becomes a grey area of law but, in general, this arrangement will not be seen as permanent, so you are likely to remain a tax resident of your original home country.

Documenting your intentions and being able to provide evidence to tax authorities becomes crucial if a dispute or doubt arises.

Why is tax residency important? It’s important, firstly because tax rates for residents are almost always lower than for non-residents. Secondly, it’s very important as you’ll want to avoid being double taxed. This is where Double Tax Agreements between countries become important. Thirdly, by managing your tax residence effectively, you can be exempted from certain taxes.

Capital Gains Tax (CGT)
As an entrepreneur, arguably, CGT is the most important tax to manage.

As your business grows, so does the value of your business. In fact, your business will almost certainly be the vehicle that will create the most wealth in the shortest period of time for you. It makes sense to plan ahead for the day when you decide to sell down or exit the business.

Each country has different CGT laws. In some countries capital gains are totally exempt. In others CGT can be 20% and more. How do you feel about spending your working life creating a retirement ‘nest egg’ of say $5 million and then being liable for $1 million in tax?

Bottom line, with proper planning, its possible to save millions of dollars in CGT.

Lessons from the Billionaires
In November 2021, Elon Musk made news when he ran a poll on social media asking his followers whether he should sell 10% of his Tesla stock. This is interesting because Elon lives in the United States (high taxes) but does not take a salary and so does not pay personal income tax. You can read more about Elon Musk’s tax affairs in this CNBC article: Taxes aren’t the only reason Elon Musk is selling Tesla stock.

How do such billionaires survive? Is this morally acceptable? There is a lot of criticism of billionaire’s tax affairs and the Biden administration is now contemplating a Billionaire’s Tax.

The wealthy have good advisors. Advisors that know the tax rules in each country and help their clients to manage their affairs to have control over their taxes. There is nothing wrong with tax planning. It’s no different to any other expense that needs to be managed. It would be ridiculous to have a policy that you wish to pay excessive amounts for any expense, be it rent, insurance, labour, travel, etc.

Here’s a simple tax planning tip used by the wealthy. Don’t sell your assets. When you sell assets, you crystalise a potential taxable gain. Unrealised gains are non-taxable in most countries. Complexities arise upon death as this can be considered a ‘sale’ as the asset passes to beneficiaries.

To defer tax, you don’t sell your valuable, appreciating assets. Instead you borrow against them. Taking a loan is non taxable. While interest rates are low, this also makes sense as the cost of interest is much lower than the capital appreciation on the assets eg Tesla shares.

We digress, so bringing this back to the question posed in this blog, what is the best country for tax purposes. As you can see from Elon’s example, with proper planning and advice, it’s possible to live in high tax countries, yet still manage your taxes within the laws.

Who Moved the Goal Posts
One challenge with selecting a country of residence (for tax purposes) is that the goal posts can move. In other words, you do your homework, get advice, move to your chosen country, then the Government changes the rules.

In Malaysia, the Government removed the MM2H scheme (Malaysia My 2nd Home) leaving many expats stranded. There are plans to reinstate MM2H, but with new (less attractive) rules. Needless to say it’s hard to plan and organise your life with such uncertainty. Expats are selling up and moving.

In their 2021 Budget the Malaysian Government announced new tax rules which significantly impact foreigners. Previously, only Malaysian sourced income was taxable in Malaysia. From 2022 Malaysia moves to a global tax regime, meaning if you are a tax resident of Malaysia, your income derived from whatever country will be taxable in Malaysia. This is not an attractive proposition for expats!