It is finally time to tackle this issue, which is the biggest source of confusion for the would-be, could-be, and often shouldn’t-be offshore entrepreneur.
You Pay Tax Where You Live
In its simplest terms, this is what it comes down to.
Merely transferring your personal wealth to an offshore bank does not change your tax liability (the amount of tax you have to pay and why you have to pay it). Unless you live in a tax haven, in which case you would hopefully already be aware.
Decades ago, many jurisdictions’ tax laws were not prepared for the legal loopholes that jurisdictions like Cayman Islands, Jersey, and BVI made possible to exploit. Back then, you could live in a high-tax jurisdiction and wire funds abroad, thereby avoiding tax or entering a legal vacuum.
Quickly, laws were passed to prevent this and the concept of tax residence became an international standard.
Nowadays, in most jurisdictions, residents (whether citizens or not) are taxed on their worldwide income. Some jurisdictions make exceptions for foreign-sourced income, which is an often ill-defined concept with lots of room for interpretation (and, from time to time, bribes). See for example Panama, Macau, and Thailand.
The same goes for companies.
While it may at some point have been possible to completely dodge tax by incorporating offshore, that is no longer the case. At least not without committing tax evasion.
While it is true that your Seychelles IBC doesn’t owe any tax in the Seychelles, you still have to pay tax where you live.
What is Tax Residence?
Tax residence is the residence for taxation purposes of a person: either a natural person (a human, you) or a legal or juridical person (a company).
Natural Person Tax Residence
For most people, this is the jurisdiction where they live or where the jurisdiction of their primary home. This most likely means that any income you earn (including money that ends up in your personal offshore bank account) must be taxed.
While secrecy may keep your tax authority from finding out about the funds, it is nonetheless a crime to declare and pay tax on taxable income.
Legal Person Tax Residence
There are a lot of different terms across different jurisdictions, such as permanent establishment, mind and management, and effective control.
These all mean more or less the same thing: a company is tax resident where the company is operated.
A typical example would be a Seychelles IBC. If your tax authority looks at your finances, they will in all likelihood determine that the company is a local company for tax reasons, since it is operated and managed from that jurisdiction.
Will not help you. Nominees have typically no bearing on tax residence.
What I have done in this article is to summarize thousands upon thousands of pages of laws, opinions by tax authorities, and court sentences across diametrically different jurisdictions.
Exceptions do exist. Don’t start celebrating, though. There probably aren’t any you can make use of.
How do you find out if you qualify for exceptions? How do you determine the exact nature of your situation? You would speak to a good tax adviser.
But sometimes not even that is enough. This is an industry and regulatory space built on trust, interpretations, and argumentations.
One good source for further research is Deloitte, which every year publishes about 100 tax guides on various jurisdictions.
To understand how different jurisdictions define residence, see Residence, Basis, and Taxable income under Corporation Taxation and Personal Taxation.
These are simplifications and, as discussed in my article on Finding a Tax Adviser, nuances can make a big difference.
In all likelihood, if you want to lower your tax burden and cannot afford the costly structures the likes of Google and Apple utilize, you are most likely going to have to move to tax haven. There might be things you can do to marginally lower your tax burden, especially if you have complex investments and savings.