Best Country for Trading (Tax efficiency)

[Commodity_Trader]

I have the same problem that you have guys but I think I understand this problem in a whole different way with a bit more knowledge about this matter. Now I'm going to share my thoughts with all of you because I hope that someone can argue with me and someone can find a solution to all of us.

I'm an EU citizen so I can take a residency in another country and potentially I could escape the taxes. However the problem is way more complicated than this. I'm trading currencies, full-time, on a daily basis, as a day-trader.

The things I'm going to share below are facts. You can check the rules with each country. I'm thinking about my relocation since 2013 but I still can't find a good place to live without paying taxes.

Jurisdictions mentioned in this thread:

Territorial basis taxation (foreign sourced income is tax-free):

• Hong Kong: short-term capital gains are considered personal / trading income whether you trade under your name or via your HK company. If you trade with a foreign broker under your name it's still taxable. If you have an offshore (foreign) company then the local rules applies to your company since the effective place of management is located in HK thus it's taxable.
• Singpore: absolutely the same like HK.
• Malaysia: same.
• Panama: same
• UK: spread betting is tax free only if it's not your main source of income and if you're not trading regularly so there's no tax benefit. As a non-domiciled resident it's the same like in HK because your income will not be treated as foreign sourced income.
• Malta: there's a special tax regime for foreigners that is almost the same as the non-domiciled resident in the UK so still no tax benefits.
• Spain: there's a special tax regime for foreigners that make your foreign sourced income tax-free but there's no benefit as a local trader.
• Portugal: the same like Spain.
• Gibraltar: there's a special tax regime for wealthy foreigners but you're not allowed to trade or being employed in Gibraltar so you cannot live and trade there. Even if you would use an offshore company the company would be regarded as resident and it would be taxable plus you would lose your special status because you it's considered as gainful occupation.

Places without capital gains tax:

• Switzerland: Again, if you're trading then it's taxable and I may surprise you but the tax rates in Switzerland are pretty high! There's a special tax regime for non-Swiss citizens, called "lump-sum taxation". By opting for this type of taxation you can pay a flat rate, negotiated with the local tax office but you no gainful actives are allowed so you cannot trade forex. Switzerland doesn't have CFC (controlled foreign company) rules so you may think that you can setup an offshore company and you're good to go but unfortunately it's not true since if you're a Swiss resident and you control your company then your company is a Swiss resident as well and thus taxable.
• Netherlands: Same, trading is considered personal income thus taxable.
• Belgium: Same.
• Bulgaria: Same.
• Thailand: Same.

Places without personal income tax:

• Monaco: interestingly your trading income in Monaco is tax-free only if you trade under your name. If you setup a local or a foreign company (because you want limited liability for instance) to trade with then your company is subject to a 33.33% tax. You can lower your effective tax rate if you pay a huge salary for yourself because the personal income is tax-free but the tax man may not like this strategy according to local sources.

Places without personal & corporate tax (the only solution):
You can trade on your own name and through a company as well in these countries:

• UAE, Bahrain: you don't want to live there unless you're married. Sex outside of marriage is illegal and you would spend years in jail. Funny but true.
• Bahamas, Cayman Islands, Isle of Man, Jersey, Bermuda, Turks and Caicos Islands, British Virgin Islands and many more Caribbean Islands: you don't want to live there if you get used to a first world country.
• Brunei: Personally I wouldn't live there.

Interesting places:

• Estonia: It's a European country that doesn't levy corporate income tax instead you have to pay a flat 20% tax when you distribute the profits from your company. So you can legally earn tax-free profits with your local company and you can accumulate tax-free profits and you can retain your profits in your company as long as you want. You have to pay the 20% tax only on the money you pay to yourself as dividends for instance.

Important notes:

• Places without capital gains tax: this is beneficial to you only if you're clearly not trading otherwise you have to pay taxes.
• Territorial basis taxation: if you trade then there's no benefit whether you trade under your name or via an offshore company.
• trading via offshore company: no benefit regardless of your country of residence because the company is subject to the local tax rules if the effective place of management is not located outside of your place of residence. As a trader it's impossible to claim that your company is a foreign resident while you're trading with the company. Even if your country of residence doesn't tax foreign income.
• offshore trust: even more complicated but there's no benefit. Since you want to trade with the money held in the trust you need some control over those funds. If you trade with it then your trust will be regarded as resident for tax purposes in your country of residence whether you're the beneficiary or not.
• offshore foundations: the same with trusts.

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So, please feel free to ask anything and I'd be happy if someone would say that I'm wrong with something and I can live in a normal first world country without paying taxes

If you want to hide your income from the authorities without being caught then it's harder and more expensive than ever before. To be honest I know a solution that lets you hide your income and the chance to get caught is almost zero but it's a bit expensive.

Please feel free to approach me with your question. I'm not a tax advisor but I may be able to help you and please don't forget to correct my mistakes.

Thanks ,it was an interesting post .i did not get the point about "Territorial basis taxation",once you said foreign sourced income is tax free in these countries and in another place you said , if you open a foreign brokerage account , you have to pay tax ...
would anyone please clarify this ?

 

[dw31583]

Thanks ,it was an interesting post .i did not get the point about "Territorial basis taxation",once you said foreign sourced income is tax free in these countries and in another place you said , if you open a foreign brokerage account , you have to pay tax ...
would anyone please clarify this ?

The source of your income is usually not the country where your bank account is located. If you're actively trading in a country then your trading income is sourced from that country. Consequently territorial tax countries are useless for traders but useful for investors.

Let's see an example of both:

- Joe is a Canadian citizen and decides to relocate to Hong Kong. Hong Kong doesn't tax capital gain regardless of its source and it doesn't tax foreign sourced income either. Joe wakes up in the morning and logs into his account with his UK broker and he opens and closes positions within the day. Since Joe is actively involved in the process of making the money, it's considered active income & trading income & income from self employment activities. Consequently the money he makes by opening and closing positions with his foreign broker account is taxable in Hong Kong.

- Tom is a Swedish citizen and decides to relocate to Malta where he opts for the non domiciled taxation which means that his foreign sourced income and capital gains is not taxable in Malta. He then logs into his brokerage account in Luxembourg and buys 5,000 shares in Amazon, 100 ounce of spot gold, 150 options on DXY and 50 contracts of oil on the ICE futures exchange. He gets dividend from his investment in Amazon that he lives of in Malta which is considered a foreign sourced income and it's tax-free. After 8 months the market turns and he decides to sell his investments and sells his shares in Amazon, his options on DXY and his oil future contracts on ICE. The proceedings of his investments are tax-free. He then decides to reinvest his profits into gold because he predicts a bear market and thinks that most people will run into gold so he uses 90% of the proceedings to buy spot gold and some options. As you can see he is not actively trading, he was not actively involved in the process of making money but he gained money with his investment.

There isn't any tax authority which could define what is trading and what is investing from tax point of view so if there is a doubt they'll analyze your case individually and they use common sense. I think you must clearly know whether you're trading or investing. The latter is tax-free in countries where foreign sourced income is not taxed.

 

[Commodity_Trader]

The source of your income is usually not the country where your bank account is located. If you're actively trading in a country then your trading income is sourced from that country. Consequently territorial tax countries are useless for traders but useful for investors.

Let's see an example of both:

- Joe is a Canadian citizen and decides to relocate to Hong Kong. Hong Kong doesn't tax capital gain regardless of its source and it doesn't tax foreign sourced income either. Joe wakes up in the morning and logs into his account with his UK broker and he opens and closes positions within the day. Since Joe is actively involved in the process of making the money, it's considered active income & trading income & income from self employment activities. Consequently the money he makes by opening and closing positions with his foreign broker account is taxable in Hong Kong.

- Tom is a Swedish citizen and decides to relocate to Malta where he opts for the non domiciled taxation which means that his foreign sourced income and capital gains is not taxable in Malta. He then logs into his brokerage account in Luxembourg and buys 5,000 shares in Amazon, 100 ounce of spot gold, 150 options on DXY and 50 contracts of oil on the ICE futures exchange. He gets dividend from his investment in Amazon that he lives of in Malta which is considered a foreign sourced income and it's tax-free. After 8 months the market turns and he decides to sell his investments and sells his shares in Amazon, his options on DXY and his oil future contracts on ICE. The proceedings of his investments are tax-free. He then decides to reinvest his profits into gold because he predicts a bear market and thinks that most people will run into gold so he uses 90% of the proceedings to buy spot gold and some options. As you can see he is not actively trading, he was not actively involved in the process of making money but he gained money with his investment.

There isn't any tax authority which could define what is trading and what is investing from tax point of view so if there is a doubt they'll analyze your case individually and they use common sense. I think you must clearly know whether you're trading or investing. The latter is tax-free in countries where foreign sourced income is not taxed.

Thanks for your reply.
what if someone trades actively as well as investing ?.(trading intraday futures as well as holding positions for weeks) . in this case he should pay tax on his trading income (short term) and not pay tax on his long term income .so still countries like Panama ,Netherlands may work for this purpose.please correct me .

 

[Commodity_Trader]

PS,
There are some countries with Free Trade Zones which there is no tax or tax is very low (something like 3 to 5 %) ,in that case is it possible to establish a corporation on those FTZs?
i guess trading via a corporation account in FTZ would not be possible , because FTZ usually deal with manufacturing ,repacking and etc. duties .

 

[dw31583]

Thanks for your reply.
what if someone trades actively as well as investing ?.(trading intraday futures as well as holding positions for weeks) . in this case he should pay tax on his trading income (short term) and not pay tax on his long term income .so still countries like Panama ,Netherlands may work for this purpose.please correct me .

Exactly. You can avoid taxes on your investments but you have to pay taxes on your trading income even if both is being done on the same account.

PS,
There are some countries with Free Trade Zones which there is no tax or tax is very low (something like 3 to 5 %) ,in that case is it possible to establish a corporation on those FTZs?
i guess trading via a corporation account in FTZ would not be possible , because FTZ usually deal with manufacturing ,repacking and etc. duties .

Well, it's not that simple. The free trade zones in most jurisdictions are being offered for certain industries only however there are countries where you can do pretty much anything in a free trade zone, for instance the UAE. Using an FTZ in Europe won't work.

Even worse I heard about cases where the tax authorities said to a trader that you're using a company only to lower your taxes, the company is effectively an extension of you thus they gonna disregard it and you have to pay self employed taxes (income tax + social security) on your entire trading income... this is extremely rare and happened in Western European countries only.

So, the lesson is clear. If you make a decent amount then follow the laws, strictly. Even the anti avoidance laws. Here in Europe the tax authorities may say that if there is no real business reason of your structure then they can reclassify or disregard it altogether.

I'll get back to your PM in a few mins.

Btw I should seriously consider forming an advisory company for traders and investors

 

[Mtrader]

Even worse I heard about cases where the tax authorities said to a trader that you're using a company only to lower your taxes, the company is effectively an extension of you thus they gonna disregard it and you have to pay self employed taxes (income tax + social security) on your entire trading income... this is extremely rare and happened in Western European countries only.

So, the lesson is clear. If you make a decent amount then follow the laws, strictly. Even the anti avoidance laws. Here in Europe the tax authorities may say that if there is no real business reason of your structure then they can reclassify or disregard it altogether.

Only lowering taxes is indeed handled with what they call “transparancy”. This means that the benificiary of the money will be taxed personally and the company will be considered as non existing.

Things change completelly if the company is managed in the country where it is established, because that is considered as a real activity. In that case the company will be taxed. The place where the management in reality happens is the place of taxation.

Following link is interesting but not exactly the same as it is about mother-daughter companies and tax avoidance. It shows the logic followed by European Courts:

http://curia.europa.eu/juris/liste.jsf?language=en&num=C-196/04

Most important: there should be economical activity. Letterbox companies have no economical activity.

Btw I should seriously consider forming an advisory company for traders and investors

I think it is a bad idea as 99% of those who ask you information have no money and make no profits that are big enough to worry about taxes. People with real tax issues go to professional advisors or try to find people who have already such a construction operational. They will not be found on ET.

 

[dw31583]

Only lowering taxes is indeed handled with what they call “transparancy”. This means that the benificiary of the money will be taxed personally and the company will be considered as non existing.

Things change completelly if the company is managed in the country where it is established, because that is considered as a real activity. In that case the company will be taxed. The place where the management in reality happens is the place of taxation.

Following link is interesting but not exactly the same as it is about mother-daughter companies and tax avoidance. It shows the logic followed by European Courts:

http://curia.europa.eu/juris/liste.jsf?language=en&num=C-196/04

Most important: there should be economical activity. Letterbox companies have no economical activity.



I think it is a bad idea as 99% of those who ask you information have no money and make no profits that are big enough to worry about taxes. People with real tax issues go to professional advisors or try to find people who have already such a construction operational. They will not be found on ET.

It was a joke.

What I said is there were cases where the tax authorities in European countries has disregarded domestic companies. I have no information whether the taxpayer has challenged them.

 

[Mtrader]

It was a joke.

What I said is there were cases where the tax authorities in European countries has disregarded domestic companies. I have no information whether the taxpayer has challenged them.

I know a few who already paid or are still negociating a deal with the tax authorities.
Bit by bit all doors get closed.
Want to pay lower taxes? Move to that place, don't fake or you will pay.
All constructions without real activity will be considered as non existing.

 

[viruscore1]

if 95% of traders lose money, this thread only applies to the 5% that have profit. Out of the 5% I wonder how many have enough investment earning to pay taxes that really affect their income. And would consider the expense of offshore setup. Let's be realistic folks ...

 

[dw31583]

I know a few who already paid or are still negociating a deal with the tax authorities.
Bit by bit all doors get closed.
Want to pay lower taxes? Move to that place, don't fake or you will pay.
All constructions without real activity will be considered as non existing.

Yes, that's true. What I said though in those cases the tax authorities argued that he could had been trading on his own name as a self employed person rather than using a legal entity and they concluded that he had been using the company only to lower his tax bill because the entity had no employees, no office, nothing. He was trading from home through his company's brokerage account. I've just shared this because I'd bet there are plenty of people who are using an entity to lower the total effective tax rate.

Nowadays the Western European authorities are just like the IRS where they say that you can only take your profit out of your entity without paying social security taxes if you pay yourself a high wage on which you pay social security taxes.

I guess the guy could have avoided all this if he would have paid $5-$10k / month in salary to himself.