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The best tax system in the world

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Philipp Burger

Treuhänder mit eidg. Fachausweis Steuerexperte

No taxes to pay! One dream of many. Is that even legally possible? I say yes! If done correctly, it is possible to live without taxes. To pay no taxes, you have to know the individual worldwide tax systems and be able to use them correctly. And that is exactly what I show you in this article.

Overview of the global tax systems

Worldwide there are “only” four different tax systems:

  • Residence Taxation
  • Non Dom
  • Territorial Taxation
  • No direct taxes

Residence taxation is the tax system used by most countries in the world (currently in about 130 countries). It is followed by territorial taxation, which is applied in about 40 countries. The non-dom system, as for example in Cyprus or Malta, is a kind of mixed form of residence taxation and territorial taxation. The Non-Dom system is especially interesting for location-independent entrepreneurs and digital nomads.

Yes, and there are still countries that do not levy any direct taxes. These are relatively rare and usually immigration is very difficult and the political situation is not very stable.

It is important to clarify whether the respective country has foreign tax laws. This can be crucial if it is possible to establish a foreign company in a country with residence taxation without negative effects. For example, if a country with residence taxation has no foreign tax laws, it is possible to reduce the tax burden considerably.

In the following I will take a closer look at the individual tax systems.

Global tax systems: Residence Taxation

In Europe, practically all countries apply residence taxation, so this system will be familiar to most. Residence taxation is the most widespread tax system in the world.

How does the Residence Taxation work?

Basically very simple: If you have a residence and partly only a habitual abode in the country (keyword: 183 days rule), you are automatically taxable with your entire world income.

As already mentioned, it is of decisive importance whether the respective country with residence taxation has a foreign tax law. If the country does not have a foreign tax law such as Switzerland, it is possible to establish a foreign company without negative effects.This way the tax burden can be massively reduced and, depending on the company structure, only income tax on dividend distributions has to be paid.

However, if the country has a foreign tax law like Germany, it becomes much more difficult and there can be considerable negative consequences from setting up a foreign company. Therefore, it is important to get advice beforehand and to know the foreign tax laws (CFC-Rules) of the respective country.

The most common CFC-Rules:

  • Level of participation in the foreign company
  • A considerably lower tax burden compared to the domestic market (less than 10% – 15%)
  • Management from the country of residence

If a point applies, the foreign company is taxed locally according to the respective corporate income tax and trade tax rates. In most cases, this is much worse than with a domestic company, as the full tax rate is incurred and not reduced.

5 EU countries with CFC Rules

  • England
  • Austria
  • Germany
  • Spain
  • Italy

5 EU countries without CFC Rules

  • Switzerland
  • Czech Republic
  • Belgium
  • Luxembourg
  • Netherlands

The list is of course not complete, but it gives a small overview of the most important countries in Europe.

Global tax systems: The Territorial Taxation

Territorial taxation is one of the best tax systems for location-independent entrepreneurs such as digital nomads. But what is territorial taxation? In short: Countries with territorial taxation tax only domestic income. So if you generate income abroad, you pay no taxes. Brilliant, isn’t it?

Territorial taxation is one of the best tax systems in the world

A LOCAL COMPANY DOES NOT HAVE TO PAY TAXES FOR A BRANCH IN ANOTHER COUNTRY. AND THE COMPANY CAN SHIFT PROFITS TAX-FREE UNDER CERTAIN CONDITIONS

There are about 40 countries with territorial taxation. Among them e.g:

  • Georgia
  • Hong Kong
  • Philippines
  • Guatemala
  • Malaysia
  • Paraguay
  • Panama
  • Nicaragua

And these countries have no foreign tax laws. For example, it is possible to live in Georgia, own a company in Belize and collect the profits tax-free.

Global tax systems: The Non-Dom Status

The non-dom system is a hybrid of residence and territorial taxation. A distinction is made here between domicile and residence.

Domicile

Domicile is the country in which you spend most of your life and in all probability you will die. In most cases, the nationality of the father is decisive.

Residence

Residence is equal to domicile. If someone has his residence in a non-dom country like Cyprus, but not his domicile there, the territorial principle applies. From this point of view, every foreigner is automatically a Non Dom (not domiciled).

Many non-dom countries have foreign tax laws. These are not always applied to all of them. For example, the UK’s Foreign Tax Act is only applied to residents (i.e. citizens), but not to non-doms. This results in very good tax vehicles, which can build up non-doms like territorial taxation.

This makes non-dom states very interesting for entrepreneurs who are not tied to a specific location. Countries with a Non Dom system are for example:

Global tax systems: No direct taxes

Yes, these countries exist too! States that levy no or very low taxes. This means: income, corporate and capital gains taxes. For example, rich oil states only tax the banking and oil sector.

Unfortunately, the states without direct taxes are mostly rather uninteresting. These states are often Islamic, so that many immigrants feel a cultural stranger. In addition, it is also difficult to obtain residence in such countries.

But there are three countries that can be very interesting and where immigration is comparatively easy:

  • United Arab Emirates
  • Bahamas
  • Bahrain

It should be noted, however, that such countries often impose very high import duties and value-added taxes.

The best tax system in the world

It is difficult to say in general which tax system is the best in the world. Every person has individual needs and different circumstances. It is possible for everyone to take advantage of different tax systems legally and thus optimize their taxes or even live tax-free. A consultation is certainly an advantage here!

From my point of view, and especially with regard to the topic “living independent of location”, the tax system of territorial taxation and the non-dom system is certainly the best.

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