If you talk about taxes with other digital nomads, the topic of an offshore company for digital nomads will very quickly enter the discussion. Let’s have a look at the elements you need to know about.
Benefits of Forming an Offshore Company for Digital Nomads
There are three important benefits of forming an offshore company for digital nomads:
- Tax: you can lower your tax burden by opening an offshore company in the right jurisdiction
- Administration: certain countries will have lower administrative burdens and are easier to deal with
- Protection: an offshore company for digital nomads can also help you with protecting your assets
How to Choose the Right Jurisdiction to Form an Offshore Company
If you want to choose the right jurisdiction to form an offshore company, you need to take the following elements inot account.
Trustworthy Jurisdiction
When picking offshore companies for digital nomads you should first and foremost look at a trustworthy jurisdiction.
What I mean by that is that the country should have clear and stable regulation regarding setting up companies and (foreign) investments.
In addition to a stable climate, you could save yourself a lot of hassle with picking a country with as little red tape as possible. This will save you a lot of frustration and will most likely lower the cost of doing business there.
Furthermore, it might also be interesting to look at countries that don’t have the stamp of tax haven on them but which are still interesting from a tax point of view.
Offshore Company for Digital Nomads: Corporate Taxes
When looking at offshore companies for digital nomads, the first reflex is to ask what the applicable corporate tax rate will be.
It doesn’t need further explanation that a country where corporate tax rate is 10% is probably of more interest to you than a country where the tax rate equals 20%.
Saving on taxes is one of the most underestimated pay raise you can give yourself. Most people often say that housing is their biggest expense but they forget about the huge amounts of (income) taxes they pay.
Withholding Taxes
Once your company paid its fair share of corporate tax, your money is still in your company. In order to get the money to your private account, you’ll probably pay it out as a dividend.
Most countries have a withholding tax on dividends that your company pays out. The rate can vary depending on the country and the double tax treaty that will be applicable, if any.
Most people focus on corporate tax rates. However, to get the full taxation picture, you should also take into account the withholding taxes to make a proper assessment of your tax burden and to compare different options.
One country might have a slight higher corporate tax rate but if they don’t levy any withholding taxes, that might make a major difference.
Double Tax Treaties
If you have your offshore company in one country but you are having your tax residence in another country, there will be two countries involved in your tax setup.
This is where double tax treaties come into play (1).
Double tax treaties are basically agreement between countries in which they make arrangements on which country is authorized to tax which income.
The most important thing to remember is that double tax treaties limit the withholding tax that one country can levy if you are living in another country. The reason for this is that your country of tax residence has the right to tax your dividends.
Relationship to the Country of Your Personal Tax Residence
This is a bit of the summary of all the above.
You’ll specifically have to check how the country of your personal tax residence and that of your company work out together. This depends amongst others on the double tax treaty between them, if there is one.
Legal Considerations and Compliance
The legal considerations and compliance requirements for your offshore company for digital nomads will depend on the country where you decide to incorporate your company.
How to Establish an Offshore Company
How you establish an offshore company will depend on the country where you want to set up the company.
Warning: Setting Up an Offshore Company Might Not Be Enough to Reduce Your Taxes
International tax planning isn’t as easy as just setting up an offshore company for digital nomads. You need to have a strategy in place which ensures your entire set up works.
Management & Control
From a legal perspective, you can register your company anywhere you want. However, it’s not because you’ve set up a company in a certain jurisdiction that you automatically will pay corporate tax in the same country.
The reason for this links to the concept of management and control.
Let’s say you incorporate a company in an exotic location without any corporate tax. The Cayman Islands can be a good example. Nonetheless, you don’t feel like spending a lot of time on the Cayman Islands and do most of the work from other places.
Because of this, you can actually become liable to pay your corporate tax in country where you do actually perform your work from. Moreover, your country of personal tax residency can have anti-abuse measures in place to come after this income.
In order to determine where you pay your corporate taxes, not only the place of incorporation is important but also the place where you actually run your business from.
If you are actually hiring people on the Cayman Islands to work for you: perfect! You have people on the ground performing the activities of your company and by that local presence.
Yet, most digital nomads won’t necessarily do this. They might be operating as a freelancer on their own or have a small team of (remote) freelancers/employees.
Consequently, you become a vulnerable target for other tax authorities. Accordingly, you can end up paying (high) corporate taxes after all (possibly plus some fines).
Not ideal; not to speak of all the hassle that comes from dealing with the different tax authorities.
Permanent Establishment
Apart from management and control, there is also the concept of permanent establishments.
This basically leads to the same result: you’ll end up paying taxes in the country where you operate your business from instead of where it was originally registered.
Popular Jurisdictions for Setting Up an Offshore Company for Digital Nomads
If you’re interested in learning which jurisdictions are popular for setting up an offshore company for digital nomads, you can check out our article about the best countries to set up an offshore company.
Frequently Asked Questions about Offshore Companies for Digital Nomads
Let’s have a look at some frequently asked questions about offshore companies for digital nomads.
What is the Best Jurisdiction to Set Up an Offshore Company?
The best jurisdiction to set up an offshore company will depend on your situation.
There is no one solution that suits everyone. Therefore, it’s important to assess your options taking into account the criteria and elements we described before.
How Does an Offshore Company Help in Reducing Taxes?
An offshore company helps in reducing taxes by offering you low taxes. In some cases, you won’t even pay any taxes at all.
However, please note that we are talking about the corporate tax rate in the country where you establish your offshore company. You need to make sure you don’t trigger any adverse tax consequences in any other countries. This will mainly be the country of your personal tax residency.
Furthermore, not paying much or any corporate tax isn’t the same as not paying taxes at all.
If you want to spend the money, you still need to transfer the money to your private account. There are generally two ways you can do this. First by paying yourself a salary. Second, by paying out dividends.
You might still have to pay tax on these income streams in your personal country of tax residence.
What are the Legal Requirements for Maintaining an Offshore Company?
The legal requirements for maintaining an offshore company will depend on the jurisdiction where you open your company.
However, in most cases this will mean you need to keep track of accounting and file a tax return. Moreover, in some countries you’ll also have to renew your business license.
Can I Open a Bank Account for my Offshore Company?
An offshore company without a bank account is useless. You need a bank account in order to be able to operate your business.
Whether or not you’ll be able to open a bank account for your offshore company will depend on the requirements of the bank. You’ll mostly have the best chances by opening a bank account with a local physical bank or by using a fintech. Nevertheless, for the former one you might have to visit a branch physically.
In any case, opening a bank account for a business has become harder over the past few years.
Are there Any Risks Associated with Forming an Offshore Company?
The most important danger with forming an offshore company for digital nomads is that you don’t fully understand the risks.
International tax planning isn’t as easy as just setting up an offshore company in a country with low taxes. Although I’ve seen many digital nomads making exactly this mistake.
However, they forget that in our modern world, countries have rules in place to still come after the income of your offshore income if you don’t do your setup right.
Work With Me
Reach out if you want to get a better understanding which options you have for opening an offshore company and which one might be right for you.