How Foreign Tax Havens Work

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Welcome to another issue of Passionate Income.

Today we’ll be discussing how both Americans and non-Americans can legally reduce their taxes - potentially to 0% - by moving to a Territorial Tax Country.

Let’s dive in.

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In a previous issue, we discussed how Americans can save money on their taxes by traveling the world or relocating to a foreign country. Mainly by taking advantage of what‘s known as the Foreign Earned Income Exclusion (FEIE).

While that advice is valid for Americans, it doesn’t apply to our foreign readers.

So today, we wanted to go deeper into the topic of how to legally reduce your taxes by relocating overseas.

We should note that while the previous issue discussed the possibility of full-time travel, which would not require you to get residency in a foreign country, today’s content is focused on people who are willing to relocate to a foreign country (for at least 4 to 6 months out of the year).

If that is something you’re opposed to, feel free to exit as this advice will not be relevant to you.

If that’s something you’re open to, however, keep reading.

One of the most confusing aspects of foreign taxes is understanding the difference between one’s physical location, the tax obligations of whatever country that person is from, and what is known as tax residency.

First, your physical location is wherever you are physically present (duh lol).

The second factor to understand is your home country's tax obligations.

In the US and many Western countries, it’s normal for governments to tax worldwide income. Meaning, regardless of whether you’re living in a foreign country (or even have a business set up there), your home country still expects you to pay taxes on whatever income you generate.

Now, in many cases, the taxes you owe will be less than what you would owe if you were living in your home country (e.g. as part of the FEIE in the US, Expat Tag Regime in France, etc.). But that’s a different topic for a different day.

The third factor is what’s known as your Tax Residency. After obligations to your home country, your tax residency has the largest impact on what you owe.

For example, if you’re an American residing in Mexico, you are obligated to pay taxes in both countries regardless of whether you move any of your income into a Mexican bank account or not. Why?

Because Mexico (as an example) is not a Territorial Tax Country (TTC).

What makes territorial tax countries interesting is that they do not tax income generated outside of the country's borders.

Meaning, if you’re a Westerner residing in a TTC, and work online/remote, you would not owe taxes to the government of the country you’re living in.

As you can imagine, this can have a dramatic impact on your tax burden.

If you’re home country doesn’t tax worldwide income, and/or gives you an exemption on your first $____ in income, moving to a TTC could reduce your tax burden to 0%. And it could do so legally.

On the flip side, relocating to a non-TTC can have the opposite effect.

Mainly because the tax brackets in many foreign countries are much lower when converted into Western currencies like the dollar, euro, or pound.

For example, while making $40,000 per year in the US would put you at a max 12% tax bracket, in a country like Brazil that’s a very high income (when converted into the local currency). And because of that, you would be taxed at Brazil’s highest income bracket, which is 27%.

Considering this, relocating to the wrong country could result in you owing more than if you were to stay in your home country.*

*With the caveat being your cost of living could drop so much it’s still worth it to pay more in taxes. Lots of factors to consider here.

Now, we don’t have the time or space to get into the individual nuances of every single country. If you want to go deeper into this, I highly encourage you to do some searching on Bard (which is Google's free version of ChatGPT).

With that said, if you live in a country that does not tax worldwide income and/or does not tax the first $_____ amount of income if you reside overseas, relocating to a territorial country can dramatically reduce your overall tax burden.

Admittedly, you may or may not be interested in living in a TTC. With a handful of exceptions, most TTCs are not considered Top Tier places to live.

With that said, if this is a topic you’re interested in exploring further, I highly encourage you to do some research on YouTube and X / Twitter.

As someone who’s been living overseas for over 11 years, X and YT are IMO the best sources of accurate content and relevant information.

💡 Takeaway: Relocating overseas involves much more than just taxes. From lifestyle to cost of living, where you choose to live depends on a variety of factors. With that said, if you find a Territorial Tax Country that meets your other criteria, you can slash your tax burden in a 100% legal way.

I'll leave you with this quote…

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