For those thinking of working overseas or moving to a different location more favorable for taxation, international tax planning can be frustrating. The rules and regulations are going to be different, and knowing what is required to comply with the necessary international and domestic requirements can seem intimidating.
What’s the best way to get the most favorable taxation rate? When settling in a country as a tax resident without permanently moving there, will your foreign income be tax-free? How do you register for tax purposes when in a foreign country? Although international tax planning can be daunting, knowing these five tips will make it much easier and less complicated:
1. Take the time to understand what income qualifies as tax-free.
Many countries around the world have special tax allowances for tax residents as long as they will not settle there permanently. When settling as a private individual in a different country for tax purposes, it’s very important to have an understanding of what income will qualify as tax-free and what won’t.
In most cases, foreign income, or income which isn’t earned in the country where the person is not a tax resident, can qualify as tax-free. On top of that, this foreign income cannot enter the country where the person is a tax resident. It needs to be earned and kept abroad.
2. Make sure you understand your tax obligations to your home country.
When working and living overseas, it doesn’t guarantee that your home country will not tax you on your income abroad. For example, U.S. individual income tax applies to a worldwide basis. That means that if you’re a U.S. citizen, doesn’t matter where you are in the world, the U.S. government will tax all of your foreign income. So Americans working and living in London, will have to pay both the UK and U.S. taxes. But in many cases, individuals living abroad can claim credit for the taxes they paid overseas, which will eliminate double taxation.
3. Make sure you understand relevant tax laws and treaties.
When talking about international tax laws, it’s not only the national laws at play but how different laws intersect, including international tax treaties. It’s crucial to research this and clearly understand which treaties and laws apply to your individual situation.
4. Remember, documentation is key.
The majority of countries require a ton of information from its citizens whenever they file an income tax return, even more so when those citizens are earning or have assets abroad. It’s important to keep all documentation regarding your foreign income and taxes paid and any proof to support any deductions you may qualify for. These are key pieces of information and should be stored in a safe place.
5. Don’t wait until the last minute.
The best way to maximize your financial potential and minimize stress is to have a comprehensive long-term international tax planning strategy. That means you should never wait until the last minute! Take time and plan accordingly.