Many people mistakenly think that they can avoid taxes with offshore accounts.
But, the truth is, an offshore bank account alone can’t be used to reduce taxes. An offshore bank account is only one piece of a larger strategy and financial plan.
More specifically, opening an offshore personal bank account online (or in person) will only lower your tax burden if it is used in combination with tax-efficient structures and residencies.
- Banking secrecy no longer exists
- Banks automatically share your account information with tax authorities in your home country
- It is 100% possible and legal to reduce taxes with offshore bank accounts, you just need to understand the proper steps to do so
- It is nearly impossible to “hide money” offshore
If you acquire residency in a no-tax or low-tax jurisdiction outside your home country, you will be able to reduce your personal tax bill significantly.
Alternatively, you could incorporate a company in a no-tax or low-tax jurisdiction and significantly reduce your business’ tax bill while still living at home.
You could choose to implement other tax minimization strategies for your business that can significantly reduce or even eliminate your tax bill.
But in all instances, in order to optimize your taxes to the most efficient level possible, you will need to open an offshore bank account. And for this reason, an offshore account plays an important role in almost all tax strategies.
So if you’re wondering how to avoid taxes with offshore bank accounts, read on as we discuss this and the other critical components that you need to consider.
If you’d like to get a head start on account opening for your tax strategy then download our FREE Non-Resident Banking Starter Guide right now!
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- Avoiding Taxes With Offshore Banking: What NOT to Do!
- How to Avoid Paying Tax With an Offshore Account
- Opening Offshore Bank Accounts in Low Tax Jurisdictions as a Non-Resident
- How Companies Can Avoid Taxes With Banking Offshore
- How to Open Offshore Company Bank Accounts
- Ready to Explore Your Options?
Avoiding Taxes With Offshore Banking: What NOT to Do!
Do not hide money. By “hiding money”, we mean not reporting the bank account or your financial holdings when the tax laws in your home country or country of residence legally require you to do so. This is illegal. And, on top of being a horrible idea, you’ll probably get caught.
With the global adoption of CRS, FATCA, and information-sharing agreements – banks now automatically share your account information with the tax authorities in your home country anyway. So, there is literally no benefit to “hiding money” anymore.
For example, let’s say you are a UK citizen who is a tax resident of Germany. You open an offshore bank account at DBS in Singapore. Because of CRS, DBS Bank in Singapore must send all your bank account’s financial information to tax authorities in Germany. So, the German tax authorities will see exactly how much money you have in the account. They will also see all of your past transactions and more. If the bank does not send this information to your country of residence, they can jeopardize their own business and incur huge financial penalties.
If this UK citizen who is a German tax resident decides he wants to be “sneaky” and not tell the German government about his bank account in Singapore… he’s making a very poor, short-sighted decision. The Singapore bank is going to tell the German government about the bank account no matter what, even if he doesn’t report it. This means that the German tax authorities will find out, will still try to collect the tax owed, and will probably slap him with additional financial penalties.
Sadly, many people, especially the mainstream media, are still in the dark about this concept.
They incorrectly think that just because someone has an offshore bank account, they must be doing something wrong, illegal, hiding money, or evading taxes. But, this isn’t true.
The bottom line, banking secrecy no longer exists. Tax avoidance with an offshore bank account is a thing of the past. Information-sharing agreements now dominate the banking world and have made “hiding money” offshore much more difficult.
When it comes to taxation, you are subject to the tax law that governs your country of citizenship, your country of residence, or sometimes both (depending on which country you are from). So, as always, speak with a qualified tax advisor and accountant to make sure you are fully compliant and reporting properly.
How to Avoid Paying Tax With an Offshore Account
Now, let’s talk about some of the ways that you can legally reduce your taxes as a foreign non-resident individual.
The easiest option is to obtain tax residency in a no-tax or low-tax jurisdiction. The best residency options for you will depend on your country of citizenship.
In most countries, if a citizen or resident leaves their home country and establishes residency in a new jurisdiction, they become a tax resident of that new jurisdiction. This means they are subject to the tax laws of the new country.
For example, if a citizen and resident of Mexico obtain permanent residency in Panama, he will be subject to the tax laws of Panama.
Choosing where you acquire tax residency is an important financial decision that most people overlook. Where you have tax residency will dictate the size of your tax obligations for the rest of your life (or until your permanent residency expires). So, choose wisely… and strategically.
Note: Depending on where you are currently a citizen and resident, how you go about acquiring your new tax residency will vary.
Option 1: The Two-Step Approach to Residency That’s Better Than Being Able to Avoid Taxes With an Offshore Foreign Bank Account
This “two-step” approach to residency requires people to obtain residency in an onshore or mid-shore jurisdiction before moving to a no-tax or low-tax jurisdiction. Obviously, where you choose to move will depend on your citizenship and current residency.
For example, Germans can’t just wake up one day and decide to relocate to a no-tax jurisdiction, get residency there, and start paying zero taxes. Germans have to continue paying taxes to Germany and would effectively be penalized for moving to a no-tax country.
Instead, many German citizens opt to first obtain residency in a more acceptable jurisdiction (that their government approves of) for a few years. We’ll call this a “non-tax haven country.”
Once established in that country, German citizens can strategically divest (or restructure) any personal or company assets that would trigger German tax liabilities in the future. Then, they can move to a low-tax or zero-tax country.
Some nationalities, like German and French, have more hoops to jump through than citizens of other offshore countries when it comes to moving abroad to optimize their personal tax situation. Thus, careful planning is required before they can move to a low-tax or no-tax country and reap the benefits.
Option 2: Obtain Official “Non-Resident Status” That’s Better Than Being Able to Avoid Taxes With an Offshore Foreign Account
Some offshore countries are easier than others to get “non-resident status” in. In many western countries, there is a formal process to follow in order to become a foreign non-resident.
For example, a Canadian can leave Canada and still be a tax resident. It is only after that the Canadian citizen has proven their non-resident status to the CRA that they are no longer obligated to pay taxes to Canada.
Sticking with this example, a Canadian can obtain tax residency in a country with no tax, low taxes, or that has territorial taxation. Then, the Canadian citizen can simply file their “exit tax return” (if they haven’t already) and officially obtain “non-resident status” from the CRA, the Canadian tax authority.
Almost overnight, a Canadian citizen can dramatically reduce (or entirely eliminate) their personal tax bill. So long as they follow the CRA-specific guidelines and sever the necessary ties to support their non-resident status. That might not be the same as allowing you to avoid taxes with offshore bank accounts, but it’s pretty good.
Unfortunately, many Canadians incorrectly think they can just move abroad without applying for “non-resident status” from the Canadian tax authority. But this is a huge mistake that can result in significant tax liabilities, financial penalties, and legal trouble.
Some countries that require their citizens and residents to get “non-resident” status before freeing them from domestic tax obligations include Canada, Australia, South Africa, and more.
Option 3: Special Considerations for Countries With Citizenship-Based Taxation That’s Better Than Avoiding Taxes With an Offshore Account
Unfortunately, citizens of the United States and Eritrea are exceptions to the residency options presented above. These countries have what’s called citizenship-based taxation. Meaning, their citizens must continue to pay taxes to their home countries, no matter what. This is true even if they don’t reside in the country or benefit from its services.
Still, there are several strategies that Americans can use to minimize taxes. And while there is still a tax obligation for Americans living outside of the United States, they can benefit from the foreign-earned income exclusion, which allows Americans to dramatically reduce their tax bill. But, we’ll get into the specifics of this in another article.
Another option that US citizens have been increasingly choosing is moving to Puerto Rico or Saint Thomas. Both of these US territories offer special tax exemptions for approved applicants.
In these instances, you can opt to “leave” the United States for tax purposes. But you get to maintain your US citizenship. In doing so, you lock in significantly lower tax rates. This includes a 5% income tax and 0% capital gains tax, in the case of Puerto Rico. That might not be the same as tax avoidance with offshore bank accounts. But it’s a significant change in your offshore tax rate.
Lastly, another option that continues to gain popularity is renunciation. Renunciation is the act of giving up your citizenship. This isn’t a small decision. And while the number of people renouncing continues to increase every year, doing so simply for tax purposes isn’t allowed. But reducing your tax bill is one of the outcomes that you would enjoy if you did choose to renounce.
Opening Offshore Bank Accounts in Low Tax Jurisdictions as a Non-Resident
As mentioned, if you’re wondering how to avoid taxes with offshore bank accounts, you’re out of luck. On their own, they don’t do anything. They are, however, an important part of a tax optimization strategy.
Unfortunately, whether you are obtaining residency or not, opening an offshore bank account in low or no-tax jurisdictions is becoming increasingly difficult.
And while it’s easier to open offshore accounts for certain nationalities than others (e.g. Russia, Nigeria, Iraq, etc), finding great banks that offer the service and quality you’re looking for can be a challenge.
Knowing which offshore banks are best suited to your needs is an important consideration. Especially as this can change depending on your residency and your citizenship. All of this is key to minimizing your taxes and optimizing your financial life.
How Companies Can Avoid Taxes With Banking Offshore
Leaving your home country isn’t always an option or desired. So what can people do to decrease their tax obligations without leaving home? In most instances, if you own the company you work for, the answer can be very simple. You just need to set up a company in an offshore no-tax or low-tax jurisdiction. Though there are exceptions to this, of course.
The strategies available to you will depend on your country of citizenship. It will also depend on your residency and the corporate tax laws that apply to your company.
By setting up a company in a tax-efficient jurisdiction, you can improve your corporate taxes. In certain instances, you can either lower or completely remove corporate income tax from the equation.
In some instances, the company can retain those earnings tax-free into perpetuity. So long as your country of citizenship or residency doesn’t tax retained earnings as distributed earnings, like the US.
You can continue paying yourself the same wage. As such, you continue paying income tax on that wage. But you end up keeping more of your money by decreasing the corporate income tax that your company pays. If you choose to take out more money, you could be taxed at the lower capital gains tax rate instead. That’s because income tax is typically applied at a higher tax bracket. All of this depends on the tax laws that apply to you and your company.
Some entrepreneurs and small business owners prefer to get tax residency in a low-tax jurisdiction first.
Then they set up a foreign company in a low-tax country. Followed by opening an offshore corporate bank account, and start doing business. Depending on where they have tax residency and where the company is structured, the owner the company can withdraw a salary, dividends, or fees with a low (or zero) personal tax burden.
As always, speak with a qualified tax advisor and accountant before making any decisions. The best options for you will be heavily dependent on your citizenship, residency, business, and financial goals.
How to Open Offshore Company Bank Accounts
If you use an offshore company in a low or no-tax jurisdiction, be prepared to face banking challenges. Similar to high-risk residency, offshore companies are having problems opening bank accounts too.
It’s becoming challenging to find banks that are willing to open offshore company bank accounts because of increasing pressure and new laws placed on banks by international authorities and regulators.
Fortunately, there are still several banks around the world that are willing to accept offshore companies. But you need to know which banks will actually accept you and your company. This can be tough if you don’t know where to get started.
If you’re not yet a GlobalBanks IQ Member and would like to learn all you need to know about how to open an offshore company bank account, click through below.
Important: Before choosing where to incorporate a foreign or offshore company, map out your banking needs and identify which banks will realistically open accounts for you. One mistake that many people make is choosing an offshore country to incorporate solely based on taxes or privacy. After the company is incorporated, they can’t open a bank account anywhere. So, choose your country of incorporation wisely. Before starting, map out your banking plan and determine which structure will be best for opening and maintaining bank accounts. If you want to learn more, sign up to GlobalBanks IQ.
Ready to Explore Your Options?
Opening an offshore bank account and preparing yourself for a lower tax life is something that you can start doing right now.
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