Expat Tax: What taxes are expats living in overseas liable for ?

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An issue to pay very close attention to is the type of taxes you pay. I say this for several reasons. Firstly, there are many types of taxes (income, capital gains, inheritance, etc) and just because you are not paying them now, does not mean that won’t be paying them in the future (inheritance).

What I am getting at here is that you try and get the most benefit from your time investigating taxation. The easy way to do this is to find a tax return or wage slip and calculate the type of taxes that you pay. For example, you might suddenly realise that you pay very minor rates and amounts of tax on dividends but lots more on interest earned in savings accounts. If you have only a limited time and appetite for research, it makes sense to try and save money on the larger of the two amounts.

Very simple stuff here, I know, but how rare it is to find someone doing these things… An understanding of rates charged to you is also useful. For example, you might suddenly find that an overlooked area of income is free of tax. A great example of this currently exists in the UK for income earned gambling – it is all tax free. Whilst I am not suggesting that we all take up the horses for a living, clearly there are people that can earn an income in this way. If you are one such person, it makes sense to spend a little more time and effort at it and be more professional. Such an approach could yield a tax free income which will certainly help to pay the bills each month.

Another example, this one in Belgium, relates to property. Personal tax rates in Belgium are cardiac arrest inducing they are so high. When buying a house, there is a tax at purchase in the region of 11% (I say ‘in the region of’ because it differs from one part of the country to another). However, presuming that you are a resident in Belgium, ALL income earned if the property is let is free of tax. It makes no difference whether or not you have a mortgage against the property and wish to deduct interest charges. The government wants you to declare the income, but will not (at the time of writing) be taxing the money. As you might imagine, many Belgians are landlords, most owning more than one property.

A third example is back in the UK. It relates to the current rules taxing dividends from UK shares. If you are a current basic rate tax payer (22%) and dividends earned are taxed at just 10%, whilst your income stays in the basic rate band. If you are investing for income, a few FTSE shares paying reasonable yields might therefore become very attractive. Any income that the same person would earn in a savings account would be taxed at 20%. Plus, if you select your holdings carefully, many large companies increase their dividend payments each year (unrelated to interest rates of course) and there may be the opportunity for capital growth too.

In the country in which you live, are there opportunities to benefit like those above? Without some basic study, you will never know.

Treaty Shopping

Many corporations choose to have offices in other countries. They will do this to enable their business to pay corporation taxes in other jurisdictions where rates are lower. Some will use a low tax nation, others will use high tax countries and benefit from discounted rates.

For example, if you pay corporation tax at, lets say, 40%, it may be possible for you to have a subsidiary pay tax in another country at only 20% on a portion of your profits. The savings in taxes are made and retained by the company.

Most western nations will have double taxation agreements between each other which ensure that taxes paid in one nation do not need to be paid elsewhere. If this is good enough for global giants to save money, it should be good enough for many others amongst us.

However, a word of warning is required. This is an area of tax planning in which specialised knowledge is likely to be required. If you do not have the skills, be very careful indeed. International tax planning will be very complex at best and so if you are only hoping to save a few thousand, it probably will not be worth your while even investigating.

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