Tax authorities are on the prowl
The taxman will inevitably be looking for additional revenue, and expat workers living offshore, whose primary tax residency is back home, may be in for a shock when the taxman demands more tax comments. Why? Most countries have incurred astronomical debts in the financial fight to keep essential services going and to keep food on the table for citizens whilst in lockdown.
Before your tax year-end ensure your financial affairs are in order and that you are maximising your after-tax income.
The general rule is that if you are physically present more than 183 days in a country, it is regarded as your primary tax residency, and with most countries having adopted the rule that worldwide income is taxable; even though you are an expat working in say Kuwait, your total income is reportable to your primary tax residency and any tax benefits that you may have enjoyed by working offshore are negated.
The taxman’s primary source of taxes
- Direct tax: Income which includes salary, dividends, interest, royalties, rentals …
- Indirect tax on income and expenditure: VAT/GST, rates, fuel levies, social security services …
- Tax on assets (while alive or on death): Capital gains, donations, gifts, inheritances.
Methods to reduce tax
There are two primary options:
A. Use all the available tax planning tools to reduce the various forms of tax
- Retirement annuities (RAs);
- Tax-free interest;
- Business losses;
- Structuring estates; trusts/companies local/offshore …
B. Switch primary tax residency to a ‘friendlier taxman’
This does not mean you lose your home citizenship or rights to residency. You are only switching your primary tax residency.
A. Expat workers (Out the country more than 183 days per tax cycle):
- On an oil rig;
- A miner in Africa;
- Teacher in the UAE
Local tax residents and non-local tax residents are usually taxed differently:
- Local tax residents are required to pay tax on income earned locally and offshore. For example: Earn $50 000 locally plus the $150 000 earned offshore. The expat worker is taxed on $200 000 of income.
- Non-local tax resident owns property in South Africa or Zambia and earns rent, the tax will need to be paid in South Africa or Zambia on the income earned from the rentals.
Previously, in many tax jurisdictions, the $150 000 per annum was not taxed locally and only, and rarely taxed in the country where the work was/is performed.
To attract expat workers such countries, like many in the Middle East, did not tax expat workers. This has all changed. Firstly, many governments, because of pandemic and the drive to use local workers, are not renewing work permits and due to sovereign debt are beginning to tax expats.
So not only are expats having to relocate home, but they are also are facing taxes that they never paid before.
Cyprus as a friendlier taxman option
Your primary tax residency is Cyprus (60-day rule)
- Continue as an expat worker, foreign income earned is tax-free;
- Pay tax on local assets and income;
- No inheritance, donations or gift taxes;
- Excellent healthcare and social services;
- Former British colony, drive on left, 90% speak English;
- Excellent education and British universities including for medicine;
- Obtain permanent residency for life;
- Obtain EU Citizenship immediately or by naturalisation;
- Visit home for 180 days or less pa, “be a tax swallow”.
Cyprus is a country that has emerged from lockdown without mortgaging the future.
Cyprus taxes in brief
- Local income/rentals under €19 500 pa tax free;
- No inheritance taxes;
- 17-year tax holiday on worldwide dividends, rentals and interest.
- 12.5% less expenses;
- Dividends tax-free;
- Establish a business. Trade through Cyprus, an EU country, along with all its trade advantages.
B. High-net-worth estates
On death, primary tax residency determines the total inheritance tax bill, with credit for taxes paid on assets in other countries.
Presently many countries still tax deceased estates and/or the beneficiaries:
- Nigeria 10%;
- South Africa 20-25% less R3.5 million per estate;
- Botswana 25% on all value over US$14 400;
- UK inheritance 40% less excluding ₤325 000 per taxpayer;
- US maximum 40% on assets topping $11.4 million for 2019 ($22.8 million for married couples).
If we take a case study and assume an estate of $20 million and assume an inheritance tax rate of 20%, cash of $4 million will need to be paid to the taxman before beneficiaries inherit. If Cyprus were the primary tax residency and these assets were linked to Cyprus, there would be a saving of $4 million as Cyprus has no inheritence taxes.