Best Country for Trading (Tax efficiency)

[swinging tick]

@dw31583
Hey DW, have you found solution yet? Btw, thanks a lot for sharing all this useful info, it is very generous of you.

I wonder about this set up:
- buy or rent a server in a tax-free jurisdiction
- run your trading robot on it
- hire some local to "control and manage" it (like feed data etc.)
Would that take "management and control" to the place where the server is located?

Also question to those who have experience trading in Malta:
- they say Malta has 35% corporate rate, but after rebates, effective rate is ~5%. Are those rebates applicable to forex day trading business?

Any info is greatly appreciated!

 

[dw31583]

@dw31583
Hey DW, have you found solution yet? Btw, thanks a lot for sharing all this useful info, it is very generous of you.

I wonder about this set up:
- buy or rent a server in a tax-free jurisdiction
- run your trading robot on it
- hire some local to "control and manage" it (like feed data etc.)
Would that take "management and control" to the place where the server is located?

Also question to those who have experience trading in Malta:
- they say Malta has 35% corporate rate, but after rebates, effective rate is ~5%. Are those rebates applicable to forex day trading business?

Any info is greatly appreciated!

Hi Swinging Tick!

If you're not trading yourself but you're using a robot then chances are your profits will be tax-free as a non domiciled taxpayer in Malta, Ireland, Cyprus and in the UK as long as you don't bring it home and likely will be tax-free whether remitted or not in all the traditional territorial tax system countries such as Hong Kong, Singapore, Panama, Malaysia, Paraguay, Costa Rica, Philippines (as a foreigner), etc.

So if you live in any of these countries and a program is trading with your money through a broker which is located in another country and it is running on a server that's located in another country, preferably in a tax-free country such as the UAE, Bahamas, Cayman Islands, etc. then chances are your profits are foreign sourced thus tax-free.

In this scenario you're unlikely to need to hire anyone because you're not trading with your money, you just setup/do maintenance on your program and that's it. Same as you would just choose your investment. As long as you're not actively involved, you should be fine but obviously you should seek professional advise from a licensed tax advisor in your country.

This way you could possibly live in Switzerland and in Liechtenstein as well, under the lump-sum tax regime however those programs comes with fixed 6+ figure annual tax bill.

As a Maltese resident you can't enjoy the 5% corporate tax rate because you as a resident have to pay up to 35% income tax. Furthermore I read somewhere from the Maltese tax authorities that they're cracking down on these structures if it's being used by a local resident. However if you're not trading but your program does then chances are you can have tax-free income in Malta as a non domiciled taxpayer.

 

[Mtrader]

In this scenario you're unlikely to need to hire anyone because you're not trading with your money, you just setup/do maintenance on your program and that's it. Same as you would just choose your investment. As long as you're not actively involved, you should be fine but obviously you should seek professional advise from a licensed tax advisor in your country.

I wouldn't trust this. If you setup/do maintenance it means you are ACTIVELY involved. Without your "setup/do maintenance" the system would not work. So in reality you manage the robot from your home, that's were the essentially needed actions happen. This is completely different from choosing your investment, because in that case you do nothing at all, you just give your money and intervenes NOWHERE at all.

If you make enough money and try to avoid taxes (and make considerable expenses for that), you can pay for a REAL professional tax advisor too I suppose. Don't rely on ET "specialists". Because relying on ET "specialists" is like Russian roulette. And probably the bullet will be in the first chamber, so you will get it at the first attempt. Game over and out.

I agree that asking advice on ET is cheaper, but the result will probably be expensive.

The only 100% save solution is to move to the low tax country and live there. All the rest is risky and can cost a lot of money if you are really profitable. I made the move, and another ET poster that I know made the move too.

 

[dw31583]

I wouldn't trust this. If you setup/do maintenance it means you are ACTIVELY involved. Without your "setup/do maintenance" the system would not work. So in reality you manage the robot from your home, that's were the essentially needed actions happen. This is completely different from choosing your investment, because in that case you do nothing at all, you just give your money and intervenes NOWHERE at all.

If you make enough money and try to avoid taxes (and make considerable expenses for that), you can pay for a REAL professional tax advisor too I suppose. Don't rely on ET "specialists". Because relying on ET "specialists" is like Russian roulette. And probably the bullet will be in the first chamber, so you will get it at the first attempt. Game over and out.

I agree that asking advice on ET is cheaper, but the result will probably be expensive.

The only 100% save solution is to move to the low tax country and live there. All the rest is risky and can cost a lot of money if you are really profitable. I made the move, and another ET poster that I know made the move too.

I told him to seek professional advise. Btw you're just plain wrong but don't take it personal. The international tax treaties and 99% (actually 100% but you would challenge me) of the countries says that a trade (any kind of trade) is taxable in the country where the trade is occurs and/or in the country of the beneficiary's tax base.

A good example is a hedge fund. A trader might be trading in Singapore for a hedge fund registered in the BVI and managed from the US. The fact that the trader is executing trades makes the profits taxable in Singapore. However there are two reasons why the trade is not taxable there. The first one is because Singapore specifically grants a tax exemption to money market trades which has been executed for a nonresident by a third party trader/manager and second, if s/he is trading on non discretionary basis for a nonresident.

If the trader is trading on a discretionary basis so in other words s/he comes up with the ideas that s/he is trading then it would be taxable however Singapore still grants an exemption. If s/he is trading the his bosses' ideas which comes from the US then it can't be taxable.

Long story short, the central management and control that you both are referring to is non existent when we're talking about an individual. You can't be centrally managed and controlled. So as an individual all you have to do is to make sure that:

1) the trade gets executed from another country, preferably from a tax neutral (tax-free) country
2) the trade was not your instruction but happened on a discretionary basis, for instance if someone is trading with your money on a discretionary basis (managed account) or if a computer is trading with your money

Yes, you may write the code, you may modify it but the algorithm makes the decisions, the program finds the opportunities, the application opens and closes the deals and all this happens without your intervention even while you're sleeping. As long as this occurs lets say in Dubai or in Nassau while you're sleeping in Kuala Lumpur, it cannot be taxable because it's foreign sourced income. No matter how many times you modify that code it's still not you but someone/something else who makes the decisions, opens, closes and managed the trades. Do not get confused, different rules applies to individuals and to companies! If you were doing this with a Limited company then it may be taxable but still not in all territorial tax countries. However you may be able to do this with an LLC since it's tax neutral.

This is the territorial tax system.

I could write probably 3-4 A4 pages about why this is accurate and how this differs in different countries with different structures but these are the basics. Take this as my free opinion so now you just have to confirm it with your local advisor and you don't have to pay him to find the solution. Again, it depends on your country of tax residence but I can share my more detailed opinion in PM if any of you wants that.

Still, I strongly recommend to seek professional advise.

 

[swinging tick]

@dw31583
DW, thank you for such a detailed reply! You are quite knowledgeable on the subject, do you have a formal education in this field by any chance?
You mentioned you could be reached by PM for more details, but as a new member I can't receive or send PMs yet.
In regard to trading robot, what do you think tax authorities are likely to ask/demand when one tells them about trading robot in Bahamas? Could you speculate on this one?
I imagine, they'll need a proof that one is not trading thru vpn/robot, but it is actually the robot that does the trading? Can they demand the code for that purpose?

I also was wondering about another solution to this problem:
Find a country that allows to legally delay paying taxes for a few months every year.
During these few months profits from trading on delayed taxes could cover some/all taxes.
What do you think about that?

 

[swinging tick]

The only 100% save solution is to move to the low tax country and live there. All the rest is risky and can cost a lot of money if you are really profitable.

Mtrader, I completely agree with you, I wouldn't play with some tax schemes that are not 100% legal. Still, if there are legal ways to minimize / eliminate taxes, why not?
I'm sure most people getting info from this thread are smart enough to confirm it with tax authorities, before acting upon it.

 

[dw31583]

@dw31583
DW, thank you for such a detailed reply! You are quite knowledgeable on the subject, do you have a formal education in this field by any chance?
You mentioned you could be reached by PM for more details, but as a new member I can't receive or send PMs yet.
In regard to trading robot, what do you think tax authorities are likely to ask/demand when one tells them about trading robot in Bahamas? Could you speculate on this one?
I imagine, they'll need a proof that one is not trading thru vpn/robot, but it is actually the robot that does the trading? Can they demand the code for that purpose?

I also was wondering about another solution to this problem:
Find a country that allows to legally delay paying taxes for a few months every year.
During these few months profits from trading on delayed taxes could cover some/all taxes.
What do you think about that?

Zero formal education here.

Well, there are several countries where you can legally pay 0% on your trading income: Monaco, Dubai, Bahamas, Cayman Islands, etc. Then there are countries where your company pays 0% but you do pay some taxes when you take money out of your entity: Isle of Man, Estonia, etc.

Alternatively you may consider low tax countries: Paraguay and Bulgaria both has a 10% corporate tax and the personal income tax is also a flat 10% in Bulgaria. The corporate income tax is only 9% in Montenegro and in Hungary. The corporate tax rate is just 5% in Lithuania up to 300,000 Euro income. Trading income is taxed at 12.5% in Ireland for companies. So there are plenty of places where you can pay nothing or just a small fraction of your income to taxes.

[ Here you have the European tax rates, I've updated this page several times so it's probably 90% accurate and up to date: https://en.wikipedia.org/wiki/Tax_rates_in_Europe ]

I can't help you with tax evasion and I don't want to. What you're saying is tax evasion. I may be able to help with tax avoidance which is legal.

Legal tax avoidance:

VPN is not necessary. Just live in a country where foreign sourced income is tax exempt, hire someone to code your profitable strategy, rent a server in the Bahamas or in Dubai, run the code from that server and the profits generated by your program will likely be considered tax-free in most territorial tax system countries. Indeed, if the authorities doesn't believe you and challenge your claims/statements then you must prove the opposite. In other words, you may need to show them the actual code that was executing the trades and you may have to do a back testing (or they will hire someone to do it for them if the tax they want you to pay is significant) so you can prove that the program has opened the positions by its own. So in other words if you're going to use a program for legitimate reasons and the program is going to trade on a discretionary basis then you're fine.

Illegal tax evasion:

However if you want to say that a program is trading but in fact you're trading through a VPN then you may get caught when they demand the code and backtests. Since we're talking about a program, the backtest must show either the exact same positions/results or 90%+ similar. If you fail in this then you're unlikely to survive an audit without paying hefty penalties + back taxes + interests.

 

[Mtrader]

I would like to know who has REAL experience with so called robots that trade without interference. So not Wikipedia. On Wikipedia anybody can post anything, even the biggest nonsense.
And especially if authorities will believe you, or not, would be interesting. Because what THEY believe is the only thing that counts. They are not idiots, they know the game much better than most people here.

A thing that really works, from my own REAL experience, is being physical present in a low tax country and trade from there. You can go even for short times and go back to your native country. But you should only trade from the low tax location. Check also for double tax treaties or you lose again money.

They will check if you were really on this tax location when the trades were done. So keep boarding passes, bills from hotels or flats, ticket from restaurants... Buying tickets and not fly does not work anymore. They can check your statements and see if dates are corresponding with periods when you were in the low tax country.
All trades are logged by your broker, so they can check from which IP address the orders came. So just using VPN is not working, you will get caught.

If you don't make at least 1 million net it is useless to start this adventure. So for most people on ET this is just wishful thinking. You can also not have a regular job anymore as you have to spent a lot of time in the low tax country, so you lose your regular income.

What is never mentioned here is that even with low taxes, in most countries you also have to pay social security that will add up for the bill. For instance Hungary is 9% but you pay a lot of social security, so Hungary is not interesting as the total bill will be 3 or 4 times more than the 9% you had in mind. Capital gains are taxed as income in Hungary.

Go to a real tax advisor, don't listen to what people tell here. Unless you have no problem with paying huge claims if they catch you. There are not a lot of legal options.

 

[dw31583]

I would like to know who has REAL experience with so called robots that trade without interference. So not Wikipedia. On Wikipedia anybody can post anything, even the biggest nonsense.
And especially if authorities will believe you, or not, would be interesting. Because what THEY believe is the only thing that counts. They are not idiots, they know the game much better than most people here.

A thing that really works, from my own REAL experience, is being physical present in a low tax country and trade from there. You can go even for short times and go back to your native country. But you should only trade from the low tax location. Check also for double tax treaties or you lose again money.

They will check if you were really on this tax location when the trades were done. So keep boarding passes, bills from hotels or flats, ticket from restaurants... Buying tickets and not fly does not work anymore. They can check your statements and see if dates are corresponding with periods when you were in the low tax country.
All trades are logged by your broker, so they can check from which IP address the orders came. So just using VPN is not working, you will get caught.

If you don't make at least 1 million net it is useless to start this adventure. So for most people on ET this is just wishful thinking. You can also not have a regular job anymore as you have to spent a lot of time in the low tax country, so you lose your regular income.

What is never mentioned here is that even with low taxes, in most countries you also have to pay social security that will add up for the bill. For instance Hungary is 9% but you pay a lot of social security, so Hungary is not interesting as the total bill will be 3 or 4 times more than the 9% you had in mind. Capital gains are taxed as income in Hungary.

Go to a real tax advisor, don't listen to what people tell here. Unless you have no problem with paying huge claims if they catch you. There are not a lot of legal options.

Well, you're wrong, again. The 9% tax rate in Hungary applies to companies, not for individuals, consequently the social security charges doesn't apply. Companies pays corporate taxes only. If you make let's say $250,000 a year and you can live on $100,000 then you can save a lot by moving to Bulgaria or Hungary because you pay $25,000 and $22,500 corporate tax respectively. Even if you declare a $100k dividend, you'll still have over a $100k retained in your company for further investments.

On the other hand, I do agree with you! He should not try to say that he is trading from somewhere else. He should either relocate to a low tax country or he should make his income foreign sourced by using the above mentioned method.

If you live let's say in Kuala Lumpur and you're not trading from there but a robot is trading from a server in Dubai then it's not taxable in KL. Please try not to mislead this guy just because you want to win an argument that has been created by yourself. I'm talking about facts, checked by KPMG and PWC. All you're saying is he shouldn't listen to anyone. That's correct, but it's time to share some facts buddy.

 

[Mtrader]

Yes, social security is only for individuals. I should have specified this. It would mean around 27.5% extra taxation above the normal taxrate. That's what I wanted to tell. So individual taxation would be around 35% in total.

At this moment corporate tax in Hungary is 10% and 19%. 9% is a proposition for 2017. The measure would only benefit midsized Hungarian and foreign-owned companies with more than €2m in revenue. So the trader should make at least 2million euro profit a year. Probably not for ET traders.

But at 9% the money has to stay in the company. If you take the money out you pay again 15%. So $100 profit will be net in your hands only $77.35, on condition that the 9% will be voted, and the trader makes at least 2million euro profit a year. So total tax is 22.65%. Add cost of running the company...and risk of tax problems in your native country.

In many European countries there is also a law that says that the owner of a company can be taxed in his native country at fullrate because it is interpreted as tax fraude. This means that if a trader (or his wife or children) is owner of a company in a low taxation country he can have huge problems as he can bet taxed at much higher rates. Maybe not the case for US citizens.

Bulgaria is a much better solution. 10% flat rate. Cash out is best thru salary as it is flat 10% too and social security is limited to below EURO 2400 a year. Salaries are deductible in company.

About the servers. Why do traders still pay taxes in the US, or anywhere else? If it is so simple as you tell they just have to put servers in Dubai and pay nothing anymore. But reality is different. And reality counts. Have you any idea about the cost of renting an office and installing servers in Dubai? And the cost of maintenance? Or will the trader quickly fly to Dubai to fix the problems. All these costs will add up quickly.
There is a big difference between theory and reality in $$$.