0% tax for digital nomad achievable?

[baio12]

If you are open to become resident of any country and establish your company in any jurisdiction, is it possible to arrange everything legally to achieve 0% taxation?

Assume you have no employees and max revenue $300,000 nearly all profit. You are only selling access to online services such as data or information to companies.

Your customers would be companies from around the world who will pay by transfer directly to company bank account or credit card payment.

What options are there to make it work? If not 0% what is the lowest rate achievable?

 

[Sols]

Yes, it is possible to have a 0% tax burden.

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This is the probably the answer to your question.

 

[baio12]

Anyone can suggest some options to look into to set things up this way?

Finding credit card processing in 0% jurisdictions looks challenging.

 

[BeyondBorders]

baio12 said:
Anyone can suggest some options to look into to set things up this way?

Finding credit card processing in 0% jurisdictions looks challenging.
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Many nomads use a US LLC with Mercury, Wise and Stripe.

 

[Sols]

baio12 said:
Anyone can suggest some options to look into to set things up this way?

Finding credit card processing in 0% jurisdictions looks challenging.
Click to expand...

As mentioned, US LLC works and for a business your size, will probably be fine.

Similar can be done in Hong Kong, where if you take certain precautions you can avoid taxation there. Costa Rica and Panama are similar but local payment processing and banking options are challenging.

Isle of Man is another option. Payment processing is a bit harder since for example Stripe doesn't accept it. But you can find solutions.

Cyprus can work, too, if you establish the company as tax resident somewhere else with zero tax. You could then conceivably benefit from having an EU member state company, and an effective tax rate of zero.

Another option is to live and form a company "offshore" but establish a subsidiary in for example UK or EU which acts as a payment agent company. This subsidiary collects payments on behalf of the offshore parent company. Not all PSPs accept it but enough do that it's a viable option. This wouldn't be a true zero tax setup since the payment agent needs to make a tiny margin of profit, to cover its own costs and incur a tiny taxable profit. Of a 300,000 USD/year business, you could probably leave 1,000 in the agent as profit and pay tax on.

And maybe @Don can explain some options in Estonia.

Last edited: Oct 16, 2023
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This is the probably the answer to your question.

 

[Clank]

Sols said:
Cyprus can work, too, if you establish the company as tax resident somewhere else with zero tax. You could then conceivably benefit from having an EU member state company, and an effective tax rate of zero.
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How is it possible to achieve 0 tax with a Cyprus company?

 

[Sols]

Jbb1 said:
How is it possible to achieve 0 tax with a Cyprus company?
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Since 2023, companies incorporated in Cyprus are tax resident in Cyprus by default (12.50% CIT) unless they are tax resident somewhere else. So, for example, if you live in Cayman Islands and register your Cyprus company as tax resident there, you can declare it as non-resident in Cyprus. In that case, only Cayman Islands tax applies, which is 0%.

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This is the probably the answer to your question.

 

[baio12]

Sols said:
Not all PSPs accept it but enough do that it's a viable option.
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What can stop them from accepting? Isn't UK or EU subsidiary the same as any other company they accept?

Sols said:
Of a 300,000 USD/year business, you could probably leave 1,000 in the agent as profit and pay tax on.
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If UK subsidiary gets audited and they investigate why only 1,000 profit for 300,000 revenue and see that it is not arms length deal it could cause problems with transfer pricing rules?

BeyondBorders said:
Many nomads use a US LLC with Mercury, Wise and Stripe.
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US LLC wouldn't have to pay corporate tax?

 

[Don]

Sols said:
As mentioned, US LLC works and for a business your size, will probably be fine.
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US LLC is great if you can establish your tax residence in a 0% tax jurisdiction. Otherwise, it's not a fully compliant structure, e.g if you claim you're not a tax resident anywhere, as you need to fill in the reports where you state your principal places of business and related parties.
If you use it to avoid tax in your home country, it can theoretically be considered a wire fraud in the US.

Sols said:
Similar can be done in Hong Kong, where if you take certain precautions you can avoid taxation there. Costa Rica and Panama are similar but local payment processing and banking options are challenging.


Isle of Man is another option. Payment processing is a bit harder since for example Stripe doesn't accept it. But you can find solutions.

Cyprus can work, too, if you establish the company as tax resident somewhere else with zero tax. You could then conceivably benefit from having an EU member state company, and an effective tax rate of zero.
Click to expand...

Interesting to know what would be the setup/maintenance cost of the above, including costs for obtaining a residence permit, and functioning bank account.

Sols said:
Another option is to live and form a company "offshore" but establish a subsidiary in for example UK or EU which acts as a payment agent company. This subsidiary collects payments on behalf of the offshore parent company. Not all PSPs accept it but enough do that it's a viable option. This wouldn't be a true zero tax setup since the payment agent needs to make a tiny margin of profit, to cover its own costs and incur a tiny taxable profit. Of a 300,000 USD/year business, you could probably leave 1,000 in the agent as profit and pay tax on.

And maybe @Don can explain some options in Estonia.
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The payment agent structure works well indeed. However, in most EU jurisdictions, there are obligations to obtain a financial license with such a structure. Cyprus is one of the exceptions.
Similarly to a payment agent, a franchise model could sometimes work.

Estonia:

• First of all, no tax must be paid before income is deemed as distributed, and it's pretty flexible since you can take out assets for up to 12 months in certain cases
• There is no need for an audit for a company of this size. Overall, maintenance fees are very competitive.
• Making in-kind contributions is highly flexible and feasible and can be used to benefit from tax deferral (you put some assets in the company, generate profit and withdraw the corresponding amount without it being considered as dividends or income)
• Possible to lend money to related parties from the company with specific structures
• 0% tax setups can work if you pay a salary that is not taxed in Estonia if you are a non-tax resident or resident in a zero-tax jurisdiction
• Your company + yourself in an unincorporated partnership (e.g., you are based in Dubai)
  • A natural person shall be subject to UAE Corporate Tax in case they derive an annual Turnover exceeding AED 1 million from a ”˜Business' or ”˜Business Activity' in the UAE, as defined by the Corporate Tax Law and in Cabinet Decision No. 49 of 2023.
• Cashing out by liquidation - possible to avoid tax with certain structures
• Debt push-down schemes
• Selling your home to your own company (which is tax-free income)
• Estonian Tax residence can be maintained by just having a registered address. No WHT exists for resident companies; in certain cases, 0% tax income can flow into your pocket through a foreign PE

 

[Sols]

baio12 said:
What can stop them from accepting? Isn't UK or EU subsidiary the same as any other company they accept?
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PSPs can reject for any reason they want. Some have decided it's too risky to work with a payment agent or they just don't want anything offshore-related on their books.

baio12 said:
If UK subsidiary gets audited and they investigate why only 1,000 profit for 300,000 revenue and see that it is not arms length deal it could cause problems with transfer pricing rules?
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Yes, which is why you should have a lawyer write the relevant service agreement for you.

baio12 said:
US LLC wouldn't have to pay corporate tax?
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LLCs are not taxable entities unless you specifically opt in for that.

Don said:
Interesting to know what would be the setup/maintenance cost of the above, including costs for obtaining a residence permit, and functioning bank account.
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Hong Kong and Isle of Man: expensive if your only paths to entry are investor-type visas. Entrepreneur visas exist that have lowers bars to entry. Unclear if a business this size would qualify, though, especially if it doesn't create jobs.

Cyprus non-resident: very broad price range, depending on where you take up residence.

Don said:
The payment agent structure works well indeed. However, in most EU jurisdictions, there are obligations to obtain a financial license with such a structure. Cyprus is one of the exceptions.
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Yes, stick to jurisdictions where this is known to work, such as Cyprus, UK, and Malta.

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This is the probably the answer to your question.

 

[saintjohnny]

Don said:
US LLC is great if you can establish your tax residence in a 0% tax jurisdiction. Otherwise, it's not a fully compliant structure, e.g if you claim you're not a tax resident anywhere, as you need to fill in the reports where you state your principal places of business and related parties.
If you use it to avoid tax in your home country, it can theoretically be considered a wire fraud in the US.
Click to expand...

Can you explain further? How is that theoretically considered wire fraud in the US?

E.g. He sets up a US LLC, uses it to invoice US clients easily, and becomes tax resident in a territorial tax country (fills in the reports as resident of this territorial tax country, etc.) or in a 0% tax country while traveling the world. Since he is not required to pay tax legally... Who is he defrauding?

 

[baio12]

Sols said:
So, for example, if you live in Cayman Islands and register your Cyprus company as tax resident there, you can declare it as non-resident in Cyprus.
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How do you declare to Cyprus as non resident? Does Cayman Islands give you some documents about this when you've registered the Cyprus company as tax resident there?

Don said:
The payment agent structure works well indeed. However, in most EU jurisdictions, there are obligations to obtain a financial license with such a structure.
Click to expand...

Instead of calling it a payment agent can't you call it something like marketing agency that is doing the selling, and then paying the main business entity which owns the IP?

Sols said:
PSPs can reject for any reason they want. Some have decided it's too risky to work with a payment agent or they just don't want anything offshore-related on their books.
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If it is EU or UK subsidiary how would the PSP be concerned about anything offshore related? It's not just another EU or UK client of the PSP?

Don said:
There is no need for an audit for a company of this size. Overall, maintenance fees are very competitive.
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What are audit requirements in Estonia?

 

[Don]

saintjohnny said:
Can you explain further? How is that theoretically considered wire fraud in the US?

E.g. He sets up a US LLC, uses it to invoice US clients easily, and becomes tax resident in a territorial tax country (fills in the reports as resident of this territorial tax country, etc.) or in a 0% tax country while traveling the world. Since he is not required to pay tax legally... Who is he defrauding?
Click to expand...

If you actually stay in a territorial tax country and its the principal country where the business is conducted, but you file something different in Form 5472, or you fail to register PE locally, it could have legal consequences (in theory).
It would look like you're avoiding local tax in most cases since working from a territorial tax country using a foreign company doesn't free you from paying tax per se. Most jurisdictions have PE rules.
If there is clear evidence of intentional deception or fraudulent activity(e.g. foreign tax evasion) related to the LLC's operations, it could potentially lead to wire fraud charges. Check Pasquantino v. United States: accordingly a plot to defraud a foreign government of tax revenue violates the federal wire fraud statute.

That being said, although US LLC structure is widely used and convenient, there are less risky non-CRS solutions.

baio12 said:
Instead of calling it a payment agent can't you call it something like marketing agency that is doing the selling, and then paying the main business entity which owns the IP?
Click to expand...

There are different legal arrangements available such as
Payment institution, e-money institution, commercial agent, single- and multi purpose vouchers.

baio12 said:
What are audit requirements in Estonia?
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https://www.eesti.ee/en/doing-business/accounting-and-reporting/auditing-a-company

Last edited: Oct 16, 2023

 

[Sols]

baio12 said:
How do you declare to Cyprus as non resident?
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Not familiar with the exact paperwork involved. Your lawyer/service provider in Cyprus can help you with that.

baio12 said:
Does Cayman Islands give you some documents about this when you've registered the Cyprus company as tax resident there?
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You get what's available, which depends on the chosen jurisdiction; usually a tax ID number (TIN). Caymans might not have been a great example because they don't issue TINs. So in that case, you'd demonstrate the company's directors are resident in Cayman Islands as proof of tax residence.

baio12 said:
Instead of calling it a payment agent can't you call it something like marketing agency that is doing the selling, and then paying the main business entity which owns the IP?
Click to expand...

Marketing companies don't collect payments on behalf parent companies. If they do, there's a greater risk that the whole amount is considered income, whereas a payment agent is fairly well understood to just be an entity that takes money and passes it on, keeping only a small fraction.

Payment agents work. I see companies processing many, many millions a year through them. Why reinvent the wheel?

baio12 said:
If it is EU or UK subsidiary how would the PSP be concerned about anything offshore related? It's not just another EU or UK client of the PSP?
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No, it's not. It's classified as a subsidiary of an offshore company.

Baio Limited owned directly by Baio is a normal UK company.
Baio Limited owned by Baio International Limited in BVI is a UK company with a BVI parent. Why is there a BVI parent? Is the owner dodging taxes or evading liabilities? That's what some PSPs/banks will think.

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This is the probably the answer to your question.

 

[saintjohnny]

Don said:
If you actually stay in a territorial tax country and its the principal country where the business is conducted, but you file something different in Form 5472, or you fail to register PE locally, it could have legal consequences (in theory).
It would look like you're avoiding local tax in most cases since working from a territorial tax country using a foreign company doesn't free you from paying tax per se. Most jurisdictions have PE rules.
If there is clear evidence of intentional deception or fraudulent activity(e.g. foreign tax evasion) related to the LLC's operations, it could potentially lead to wire fraud charges. Check Pasquantino v. United States: accordingly a plot to defraud a foreign government of tax revenue violates the federal wire fraud statute.

That being said, although US LLC structure is widely used and convenient, there are less risky non-CRS solutions.


There are different legal arrangements available such as
Payment institution, e-money institution, commercial agent, single- and multi purpose vouchers.


https://www.eesti.ee/en/doing-business/accounting-and-reporting/auditing-a-company
Click to expand...

Hmm ok, thanks for your response, this is interesting.

Q: What if this territorial tax country establishes that it is not necessary to establish a PE as a tax resident (and/or national), and that a consulting company only is only considered a PE if the operations from within the country surpass the 6 month mark, and the owner of this LLC travels year round (digital nomad), only spending 2-3 months in the territorial country?

I mean, you'd be following the law to a tee. No actual tax evasion going on in in the US side (non-US income, non-US person) or the territorial country of tax residency.

Check Pasquantino v. United States
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Looks like an explicit criminal operation. Should a digital nomad consultant following the law of both countries take a case like this into account when designing their (seemingly) compliant tax strategy?

 

[Don]

saintjohnny said:
Should a digital nomad consultant following the law of both countries take a case like this into account when designing their (seemingly) compliant tax strategy?
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Good question. I was actually informed about this by an international tax advisor who specializes advising digital nomads.

 

[baio12]

Sols said:
whereas a payment agent is fairly well understood to just be an entity that takes money and passes it on, keeping only a small fraction.
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Depends on many factors but how low fraction have you seen companies keep without transfer pricing problems? Payment processors like stripe and braintree charge 3% per transaction, can your payment agency also charge that? If countries are using comparable price method for arms length transaction to check transfer pricing then 3% can be enough? Assuming payment processors and payment agencies are the same thing.

 

[saintjohnny]

Don said:
Good question. I was actually informed about this by an international tax advisor who specializes advising digital nomads.
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Gotcha. Can see this being relevant if for example someone in the UK opens a US LLC to bill Canadian clients and leave money parked in the US and not declare anything in UK.

In such case the intent to evade UK tax is clear, same applies to wire fraud... i.e. using the US bank as a tool for tax evation.

BUT I can't see this being relevant if an individual has a valid reason to open a US LLC (i.e. most clients are US-based), and has no obligation to pay tax in his/her country of residency (for whatever reason) ”“ How and why the US would go after this individual and charge him/her with wire fraud if there is no fraud being committed?

Let's assume my previous post as context ”“ which would apply to popular territorial taxation countries such as Panama.

saintjohnny said:
Q: What if this territorial tax country establishes that it is not necessary to establish a PE as a tax resident (and/or national), and that a consulting company only is only considered a PE if the operations from within the country surpass the 6 month mark, and the owner of this LLC travels year round (digital nomad), only spending 2-3 months in the territorial country?

I mean, you'd be following the law to a tee. No actual tax evasion going on in in the US side (non-US income, non-US person) or the territorial country of tax residency.
Click to expand...

Thoughts?

 

[baio12]

Sols said:
Payment agents work. I see companies processing many, many millions a year through them.
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Is it common for a payment agent to process payments for their parent company only? Or tax people don't like that and they need to be processing payments for many companies to be acceptable?

 

[Don]

saintjohnny said:
Gotcha. Can see this being relevant if for example someone in the UK opens a US LLC to bill Canadian clients and leave money parked in the US and not declare anything in UK.

In such case the intent to evade UK tax is clear, same applies to wire fraud... i.e. using the US bank as a tool for tax evation.

BUT I can't see this being relevant if an individual has a valid reason to open a US LLC (i.e. most clients are US-based), and has no obligation to pay tax in his/her country of residency (for whatever reason) ”“ How and why the US would go after this individual and charge him/her with wire fraud if there is no fraud being committed?

Let's assume my previous post as context ”“ which would apply to popular territorial taxation countries such as Panama.

Thoughts?
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I believe the risk for wire fraud is rather theoretical and US LLC can work well with zero tax if one is careful, but the concept of a true perpetual traveler doesn't seem to fit into the framework of Form 5472.