Best Country for Trading (Tax efficiency)

[luisHK]

@Trader KGB What I don't see though is how could this worth it for you? Let's do the math here:

- 15k EUR tax to Malta
- 9.6k EUR (800 EUR / mo) apartment costs in Malta incl. utilities
- 9.6K EUR apartment costs in Cyprus incl. utilities
+ if you wanna play safe:
- 9.6k EUR apartment costs incl. utilities in a third country

= ~ 43,800 EUR / year just to be tax-free and to play it safe!? The third country thing is the safety layer, I won't explain it here but it's necessary if Cyprus asks you.

Let's say you move to Estonia. The apartment cost is the same but only once, so it's 9.6K EUR. You save 34,200 EUR but you'd pay 20% tax on your withdrawals from your company and 0% tax on the retained profits. This means that you can withdraw 171,000 EUR on which the tax bill will be exactly 34,200.

Consequently if you're not planning to spend (not earn, spend!) more than 171k EUR per year then Estonia is the cheapest tax-free option.

How do you wind up your company without paying 20% on formerly retained profits ? If the way to go is to pay 20% on the profits stuck in the company once you want to take off, than it is not as good as Malta set up, where there are are no retained profits or funds, although it remains to be seen who will bank over 171k a year over several years.
Also retained profits are at risk of a tax regime change, at least in a situation like in Malta if the laws change in a way you dislike, you can leave with your money from one day to the next. If Estonia increase its corporate tax to 30% and you have millions accumulated profits, it will feel awkward (i'm interested in neither of those specific schemes btw, but the same issues could be found elsewhere)

 

[dw31583]

How do you wind up your company without paying 20% on formerly retained profits ? If the way to go is to pay 20% on the profits stuck in the company once you want to take off, than it is not as good as Malta set up, where there are are no retained profits or funds, although it remains to be seen who will bank over 171k a year over several years.
Also retained profits are at risk of a tax regime change, at least in a situation like in Malta if the laws change in a way you dislike, you can leave with your money from one day to the next. If Estonia increase its corporate tax to 30% and you have millions accumulated profits, it will feel awkward (i'm interested in neither of those specific schemes btw, but the same issues could be found elsewhere)

Well, if you want to withdraw all your retained profits then you will have to pay the CIT at the time of distribution and yes, there is a risk the government may change the rules however it's highly unlikely because Estonia has the best tax system according to the OECD, they're the healthiest economy in the EU and they have the lowest debt. The difference between Malta and Estonia is that you can live full time in Estonia and pay just 20% on your withdrawals while you have to pay 35% on all your profits if you live in Malta.

Btw, just thinking, how could the Estonian authorities stop you from becoming a non resident once you have millions of accumulated profits and then you relocate to the Bahamas for a few years where you setup an LP in which the Estonian entity is a limited partner for a 0% profit share and you're the general partner for a 100% profit share. In practice what happens is you kept your Estonian company which invested all of its funds to another company in which you as the fund manager gets a 100% profit share. They'd have a hard time challenging this no matter how aggressive this looks like. You can play safer and adjust the numbers but the point is you may be able to mitigate the effects of the reversed corporate income tax of Estonia.

 

[dw31583]

Foreword:

In order to save on taxes as a trader/investor, it’s important to understand the difference between trading and investing because from tax point of view the two are treated completely differently. Trading income is always sourced from the country where the trader executes the trades no matter on which market the trader trades, what financial instruments or where the bank and brokerage accounts are located. On the other hand, investment income is treated as capital gains which is in some countries either fully exempt from taxes or subject to much lower taxes and if you invest in foreign markets and you live in a jurisdiction with territorial or remittance basis tax system then you may also avoid taxes on your foreign capital gains altogether.

As far as I know, there is not a single tax authority which clearly defined the difference between trading and investing, so you bear the risk of getting caught if you mistreated the nature of your income. In general, however you should apply common sense. If you have a job where you earn $50k and you open let’s say up to 20 positions a year, without much leverage and you earn $20k this way then you can safely assume that it will be treated as capital gains. If you don’t have a job and you have a wealth of $10 million which with you open up to 20 positions a year and you live off the received dividends and interests, then you can also safely assume that it will be treated as capital gains. However if you earn $50k with your job and you make $100k with trading financial instruments, you open several positions in a month and the nature of your activity shows that you’re sophisticated, then it’s highly likely that you’ll be classified as an individual trader and you will have to pay personal income tax on your trading profits. The same applies if you’re trading with your $10 million.

The point is to apply common sense and don’t try to deceive the authorities because you may end up paying back taxes, penalties and interests which is far more than what you would have paid in the first place. There are several legal methods to reduce your tax bill, most of which requires you to relocate to another country. Consequently if you’re a US citizen, resident or green card holder, then you should stop reading this post here.

It’s important to know that a company has its own tax residency and it is usually a tax resident where it was registered and where the central management and control is located. Consequently you can’t avoid paying taxes if you incorporate a foreign entity where there is no tax. You also can’t say that your nominee director is trading with your money for no salary or for a negligible salary when your company made significant profits. Tax authorities are clever and they get information about your foreign bank and brokerage accounts automatically whether those are personal or business accounts.

There may be other jurisdictions where you can pay very little or not taxes but these are the ones I find livable.

CIT = corporate income tax
PIT = personal income tax


Low tax and no tax jurisdictions for traders (CIT / PIT):

- Cayman Islands: 0% / 0%
- Bahamas: 0% / 0%
- British Virgin Islands: 0% / 0%
- Bermuda: 0% / 0%
- United Arab Emirates: 0% / 0%
- Monaco: 33% if your activities are deemed to be retail or commercial / 0%
- Isle of Man: 0% / 20% but there is a cap on the tax payable which is GBP 125,000
- Estonia: 0% on retained profits, 20% on distributed profits / flat 20% which you don’t have to pay on dividends from local companies
- Hungary: 9% / 15%
- Montenegro: 9% / 15%
- Bulgaria: 10% / 10%
- Paraguay: 10% / 10%
- Zug, Switzerland: 13% / 25%
- Russia: 20% / 13%
- Lithuania: 15% / 15%
- Hong Kong: 16.5% / 15% which you don’t have to pay on dividends
- Singapore: 17% / 22% which you don’t have to pay on dividends


No capital gains tax jurisdictions & solutions for investors:

- Luxembourg: 0% with SPF at the entity level and max. 43.6% PIT on dividends from the SPF
- Switzerland: there is no capital gains tax
- Liechtenstein: you can pay an annual fixed tax instead of capital gains tax
- Netherlands: a theoretical 4% return is subject to 30% tax which results in a 1.2% tax on your assets so it’s like a wealth tax
- Belgium: there is no capital gains tax
- Spain: if you’re a highly skilled employee of a local company then foreign sourced capital gains is tax free
- UK: as a non domiciled taxpayer you don’t have to pay tax on your foreign capital gains as long as you don’t remit your income to the UK
- Malta: same as UK
- Cyprus: same as UK
- Ireland: same as UK
- Italy: as a non domiciled taxpayer you don’t have to pay tax on your foreign sourced capital gains in exchange for a fixed EUR 100,000 annual tax
- Paraguay: foreign sourced capital gains is tax free
- Thailand: foreign sourced capital gains is tax free
- Paraguay: foreign sourced capital gains is tax free
- Costa Rica: foreign sourced capital gains is tax free
- Malaysia: foreign sourced capital gains is tax free
- Philippines: if you’re a foreign citizen then foreign sourced capital gains is tax free
- Hong Kong: no capital gains tax
- Singapore: no capital gains tax
- Bulgaria: no capital gains tax from shares on EEA stock exchanges
- Gibraltar: you can pay max. GBP 30,000 on your foreign sourced capital gains
- Israel: no tax on foreign sourced capital gains for 10 years for returning Jews
- New Zealand: no tax on foreign sourced capital gains for 4 years for new residents once in a lifetime
- China: no tax on foreign sourced capital gains for 5 years for expats

 

[Mtrader]

Every now and then when I go thru the postings of this thread I ask myself: how many people here really make enough money by trading to have an issue with taxes?

I think less than 5.

 

[lovethetrade]

I already did that, visit page 36. I'll create a new one on the weekend, thanks for the recommendation.

Sounds awesome. Maybe if we try categorise the key aspects that will help others also.

Some category suggestions
Best for traveling traders
Best for small hedge funds
Best for companies/Individuals
Best for residents/non residents

Some heading suggestions
Country
Initial Capital Required
Ease of setup/structure
Advantages/Disadvantages
Risks

 

[dw31583]

Sounds awesome. Maybe if we try categorise the key aspects that will help others also.

Some category suggestions
Best for traveling traders
Best for small hedge funds
Best for companies/Individuals
Best for residents/non residents

Some heading suggestions
Country
Initial Capital Required
Ease of setup/structure
Risks

Look above this page, there is the new list. I won't go into more details. I agree with @Mtrader , even this is too much. If someone need more specific advise then I highly recommend to seek professional advice in the chosen country.

 

[luisHK]

Foreword:

In order to save on taxes as a trader/investor, it’s important to understand the difference between trading and investing because from tax point of view the two are treated completely differently. Trading income is always sourced from the country where the trader executes the trades no matter on which market the trader trades, what financial instruments or where the bank and brokerage accounts are located. On the other hand, investment income is treated as capital gains which is in some countries either fully exempt from taxes or subject to much lower taxes and if you invest in foreign markets and you live in a jurisdiction with territorial or remittance basis tax system then you may also avoid taxes on your foreign capital gains altogether.

As far as I know, there is not a single tax authority which clearly defined the difference between trading and investing, so you bear the risk of getting caught if you mistreated the nature of your income. In general, however you should apply common sense. If you have a job where you earn $50k and you open let’s say up to 20 positions a year, without much leverage and you earn $20k this way then you can safely assume that it will be treated as capital gains. If you don’t have a job and you have a wealth of $10 million which with you open up to 20 positions a year and you live off the received dividends and interests, then you can also safely assume that it will be treated as capital gains. However if you earn $50k with your job and you make $100k with trading financial instruments, you open several positions in a month and the nature of your activity shows that you’re sophisticated, then it’s highly likely that you’ll be classified as an individual trader and you will have to pay personal income tax on your trading profits. The same applies if you’re trading with your $10 million.

The point is to apply common sense and don’t try to deceive the authorities because you may end up paying back taxes, penalties and interests which is far more than what you would have paid in the first place. There are several legal methods to reduce your tax bill, most of which requires you to relocate to another country. Consequently if you’re a US citizen, resident or green card holder, then you should stop reading this post here.

It’s important to know that a company has its own tax residency and it is usually a tax resident where it was registered and where the central management and control is located. Consequently you can’t avoid paying taxes if you incorporate a foreign entity where there is no tax. You also can’t say that your nominee director is trading with your money for no salary or for a negligible salary when your company made significant profits. Tax authorities are clever and they get information about your foreign bank and brokerage accounts automatically whether those are personal or business accounts.

There may be other jurisdictions where you can pay very little or not taxes but these are the ones I find livable.

CIT = corporate income tax
PIT = personal income tax


Low tax and no tax jurisdictions for traders (CIT / PIT):

- Cayman Islands: 0% / 0%
- Bahamas: 0% / 0%
- British Virgin Islands: 0% / 0%
- Bermuda: 0% / 0%
- United Arab Emirates: 0% / 0%
- Monaco: 33% if your activities are deemed to be retail or commercial / 0%
- Isle of Man: 0% / 20% but there is a cap on the tax payable which is GBP 125,000
- Estonia: 0% on retained profits, 20% on distributed profits / flat 20% which you don’t have to pay on dividends from local companies
- Hungary: 9% / 15%
- Montenegro: 9% / 15%
- Bulgaria: 10% / 10%
- Paraguay: 10% / 10%
- Zug, Switzerland: 13% / 25%
- Russia: 20% / 13%
- Lithuania: 15% / 15%
- Hong Kong: 16.5% / 15% which you don’t have to pay on dividends
- Singapore: 17% / 22% which you don’t have to pay on dividends


No capital gains tax jurisdictions & solutions for investors:

- Luxembourg: 0% with SPF at the entity level and max. 43.6% PIT on dividends from the SPF
- Switzerland: there is no capital gains tax
- Liechtenstein: you can pay an annual fixed tax instead of capital gains tax
- Netherlands: a theoretical 4% return is subject to 30% tax which results in a 1.2% tax on your assets so it’s like a wealth tax
- Belgium: there is no capital gains tax
- Spain: if you’re a highly skilled employee of a local company then foreign sourced capital gains is tax free
- UK: as a non domiciled taxpayer you don’t have to pay tax on your foreign capital gains as long as you don’t remit your income to the UK
- Malta: same as UK
- Cyprus: same as UK
- Ireland: same as UK
- Italy: as a non domiciled taxpayer you don’t have to pay tax on your foreign sourced capital gains in exchange for a fixed EUR 100,000 annual tax
- Paraguay: foreign sourced capital gains is tax free
- Thailand: foreign sourced capital gains is tax free
- Paraguay: foreign sourced capital gains is tax free
- Costa Rica: foreign sourced capital gains is tax free
- Malaysia: foreign sourced capital gains is tax free
- Philippines: if you’re a foreign citizen then foreign sourced capital gains is tax free
- Hong Kong: no capital gains tax
- Singapore: no capital gains tax
- Bulgaria: no capital gains tax from shares on EEA stock exchanges
- Gibraltar: you can pay max. GBP 30,000 on your foreign sourced capital gains
- Israel: no tax on foreign sourced capital gains for 10 years for returning Jews
- New Zealand: no tax on foreign sourced capital gains for 4 years for new residents once in a lifetime
- China: no tax on foreign sourced capital gains for 5 years for expats

Nice list, just some additions from the top of my head :

Sweden , Investmentkontos, if they still work, taxation depends on interest rates and is on a fixed percentage of the invested capital, a couple of years ago it came to significantly less than 1 % of the capital.

Uruguay, Panama have similar territorial systems at least for foreigners, I read a while ago Colombia also offered a similar deal to new immigrants.

Brazil, Daal in this thread has documented a tax set up which seems to work even for the ultra rich locals there, I suspect it should work for expats as well. From memory only profits remitted in Brazil are taxed.

China's 5 year limit is extended if one stays out of the country 30 days in a row during the 5 years.

 

[HobbyTrading]

@dw31583 thank you for all your effort and sharing the results of your (probably many) hours of study. It is highly appreciated.

- Netherlands: a theoretical 4% return is subject to 30% tax which results in a 1.2% tax on your assets so it’s like a wealth tax

Small correction: this has changed since January 1st, 2017. As usual, they have made it more complex. The resulting tax percentage now depends on the amount of your capital. In case you can read Dutch, you can find a description of the new rules here: https://www.belastingdienst.nl/wps/...ing_over_uw_inkomsten_uit_vermogen_vanaf_2017
Why did they make this change? The Dutch believe that people with higher capital are able to get a better annual return, and thus should be taxed more heavily.

 

[dw31583]

Nice list, just some additions from the top of my head :

Sweden , Investmentkontos, if they still work, taxation depends on interest rates and is on a fixed percentage of the invested capital, a couple of years ago it came to significantly less than 1 % of the capital.

Uruguay, Panama have similar territorial systems at least for foreigners, I read a while ago Colombia also offered a similar deal to new immigrants.

Brazil, Daal in this thread has documented a tax set up which seems to work even for the ultra rich locals there, I suspect it should work for expats as well. From memory only profits remitted in Brazil are taxed.

China's 5 year limit is extended if one stays out of the country 30 days in a row during the 5 years.

I knew I missed some countries. You're correct in the countries you said except Brazil. Btw afaik Sweden still offers that account. Regarding Brazil, it doens't work. I asked a few local advisors and all of them disagreed because of two reasons: 1) they do have a CFC rule and 2) trading income is locally sourced whether it's held in a company or in an individual account and thus it's taxable according to the tax laws.
It may work for investors though, I have not asked that.

 

[propwarrior]

Every now and then when I go thru the postings of this thread I ask myself: how many people here really make enough money by trading to have an issue with taxes?

I think less than 5.

very few indeed however there will be some lurking who have substantial wealth accumulated via inheritance, property gains, sales of non-trading businesses, large insurance/compensation payouts & high earning professions (surgeons, top tier lawyers, banks) so it's all good advice and I am grateful for it.