This article, like much of what I write, does not apply to American and Eritrean citizens. In this particular case, it is because these jurisdictions are unique in that they (may) tax non-resident citizens, according to a 2011 report by E&Y.
This is a subject that is as popular as it is broad. It is unlikely that I will manage to cover everything here. This article will just be an introduction to the concept. I know many of you were expecting a deep dive, but we have to cater to the new-comers first.
Your feedback is especially important in deciding how follow-up articles turn out.
Tax Residence
Tax residence is the jurisdiction – or jurisdictions – in which you owe tax on a particular source of income.
For the vast majority of people in the world, this is simply the jurisdiction in which they live. The conditions under which tax residency is determined varies between jurisdictions.
As a general rule, if you are resident in a country for more than 183 days in a year, you are tax resident there. However, there are plenty of jurisdictions with shorter residence or other requirements to become a taxable person there.
I am not going to dig deeply into specific jurisdictions in this article, but for a quick overview of what the definitions of tax residency for personal income tax are, refer to the Deloitte’s tax guides. In the Highlights documents, look under Personal Taxation and Basis and Residence.
What is a Permanent Traveller?
On my glossary page, I have written the following definition of a Permanent Traveller: “A natural person who does not reside in any jurisdiction for a long enough period to be deemed tax resident, thus avoiding tax liability.”
As the name implies, a permanent traveller (PT for short) is someone who travels, permanently — or at least permanently enough so that they are not tax resident anywhere, or only in jurisdictions that lack income tax or only tax local income.
A typical PT runs a location-independent business or has income from investments. They will travel from one country to the next, often using just tourist visas or, in the case of EU nationals and comparable international agreements, travelling across country borders completely unhindered.
Legalities
While being a permanent traveller in and of itself is legal, most PTs technically break laws.
They break laws by working in a country whilst on a tourist visa and or by failing to file tax return (even if they owe zero tax) for these activities.
Virtually zero PTs end up facing consequences and there are no real efforts being made to go after them. A PT is not a migrant workers with no papers; it’s someone with every intent to move on.
For example, suppose that a PT arrives on a sunny islands somewhere and has a citizenship that gives them 90 days visa free. During those 90 days, the PT works on their (often internet-based) business from a hotel or AirBNB apartment wifi. They then leave the sunny island not to return again, at least not until after 366 days since last arrival.
In many cases, the PT was not allowed to conduct business whilst on a tourist visa. This typically includes businesses that aren’t even operating or trading in the jurisdiction.
Now, you may think – but I visited a sunny island on a tourist visa recently and answered a couple of emails from my phone whilst on the beach. Am I going to jail?
No, you’re not. The primary purpose of your stay was tourism and you entered the jurisdiction with the intention to be a tourist. You may have to explain yourself to your spouse who’s upset because you spent all day at the hotel answering emails, but that’s a completely different topic.
But a PT who enters a country with intent to work is in many cases technically violating the law.
Second, even if you are a non-resident (for tax purposes), any income earned from work that took place in a jurisdiction should generally be submitted on a tax return. Failing to do so may be a crime. However, chances are no one is going to go after you for failing to submit a tax return that states you owe no tax.
Banking
This is one of the most common questions about being a PT.
Although I realize not everyone is well versed in how the international financial services sector works, I continue to be surprised when people ask why a bank insists on clients providing a residence address when opening an account. For various reasons, mainly related to tax and prevention of money laundering and other financial crimes, banks need to know where you live.
What if you don’t live anywhere?
You still need an address. If you cannot provide an address, do not expect any bank to take you on as a client.
Residence vs. Domicile
Here we enter unchartered territories because the words mean different things in different contexts and across different languages.
Greatly simplified:
- Residence is where you live.
- Domicile is where you belong.
In the absence of a true residence, a domicile is sought. This can be the country where the PT spends most of their time, even if they don’t qualify as resident there, or a country to which they have the strongest ties. For some, this ends up being their country of citizenship.
Others seek to establish a domicile in a tax-favourable jurisdiction. In many cases, a domicile is set up by obtaining a permanent residence visa with minimal requirements on physical presence, such as Panama, UAE, Costa Rica, Paraguay, Cyprus, Malta, and a handful other jurisdictions.
A permanent residence permit is obtained and an address is established, either by the PT renting an apartment, buying property as an investment, sharing a residence, or using a law or accounting firm’s office or other property.
This address can then be used for opening bank accounts, form companies, and so on.
Taxation and Costs
A PT with correctly structured finances pays zero or extremely little tax. They may break laws but doing so at essentially zero risk, provided no abusive activities take place.
Costs, however, can be significant. Aside from costs related to travel and temporary accomodation, the costs of private health insurance (PTs rarely qualify for universal healthcare anywhere, except possibly country of citizenship), foreign currency exchange related costs, and the cost of a domicile quickly ramp up.
I found this blog yesterday and I still can’t stop reading it 16 hours later. It’s brilliant! This article in particular as it describes pretty much my life in the recent years.
Now, let me detail the usual case I’m seeing in EU as I see the blog is focused mostly around Europe – a PT registers a one-man Ltd company in his home EU country (let’s call it country A) where he is tax resident by virtue of his citizenship (if people read carefully DTAs they’ll see in case of a dispute between tax authorities when you don’t spend 183 days anywhere things like “centre of vital interests” and ultimately “cizitenship” kick in). You find a contract job through an agency, you sign a contract and you move to country X, also in EU.
A few words about agencies. Despite chipping some cash for no real activities going through an agency has a benefit – it’s an extra layer to protect you from direct exposure to hostile tax authorities in rich countries. Agencies charge in bulk for multiple contractors at the same time so unless the tax authorities decide to dig deeper in the end customer’s contracts (and I’m not 100% sure my name will appear there each time as sometimes it’s just a purchase order from then end customer to the agency for “120 mandays civil engineer” let’s say) you are safe. I’ve heard about more than a few people that weren’t so lucky though. Tax authorities in rich countries are becoming more and more aggressive towards contractors (especially IT) as they generate quite a decent profit. With recruitment agencies in the picture though the business models are normally complicated enough to make the investigation not profitable – e.g. a contractor having a Czech company that is recruited by a British agency and works for a client in Germany – go trace that. And that’s a very very simple model, I’ve seen up to 4-5 layers between a contractor and an end customer.
Agencies are bad as well because (at least the more experienced ones) are very selective as to what types of companies they sign contracts with. You come up with something like Vanuatu they’ll laugh at your face and close the door. The problem is most of them (especially the UK ones which hold over 80% of the European market) avoid even locations with fairly decent reputation like Isle of Man/Jersey/Guernsey (probably scared of HMRC stories from the past decade). Bigger agencies also have an army of lawyers drafting contracts so if the agent doesn’t stop you the lawyer will.
Back to tax residency. As you mentioned somewhere in the blog it might turn out the company you work through is taxable in one country but your personal income is taxable in another country. Based on my research:
1) Income generated by labour performed on country’s X soil on legal person (e.g. corporate) level is always taxable in country X and not in Gibraltar or wherever you registered your company (it gets far more complicated with virtual/online businesses). You might not have to register a company in country X but you are still liable for corporation tax there. And if you don’t register it go explain to your tax authorities corporate tax has already been paid to another country – I guarantee you it’s almost certain you are going to pay corporate tax in 2 countries (especially if one of them is from the ex-Soviet bloc). That’s why rich companies end up doing complicated structures and utilize loans, invoice each other for non-performed services, etc. to shift profits cross-borders:
http://www.icij.org/project/luxembourg-leaks/leaked-documents-expose-global-companies-secret-tax-deals-luxembourg
For one-man Ltds with average income (let’s say 100-150K EUR per year) schemes as those mentioned in the article are overcomplicated and you end up paying more for them then you would pay for taxes if you stick to one country. The simpler offshore solutions you mention in the blog seem to make sense when income goes above 200-250K Euro per year to justify the high maintenance costs of an offshore solution. And that comes with a couple of big IFs – IF your agency will accept to sign a contract with your offshore company, IF the tax authorities in country X don’t monitor transactions to certain offshore countries, IF you are smart enough to find ways getting your money to your pocket without leaving traces in countries with presumably well-monitored banking transactions, IF you are willing to accept the risk you might have to spend the rest of your life on a desert island with a phony passport to avoid jailtime, etc. Then comes the problem of spending them and proving their origin on request but that’s another story.
2) Income generated by labour performed on country’s X soil on natural person level is taxable where the person that performed the labour is a tax resident. This is the moment tax authorities start reading DTAs and a PT ends up a tax resident where his citizenship is from (might be a totally different country from A and X). What happens with dual/triple citizenships is an interesting story 🙂
Of course nobody plays this right because it’s horribly overcomplicated and you might end up paying taxes in 2 (or more) places. It’s safer to break the law and keep a low profile. Be smart – don’t use debit/credit cards unless completely unavoidable, if you have to use such a card try to get a no-name one, don’t tell anyone where you work or live, don’t post your location in any social websites, travel by train whenever possible instead of airplanes, don’t use communication software with proven backdoors to government agencies (e.g. Facebook, Skype, Gmail), etc. This is not a nice lifestyle so I tried to find a solution…and I almost did. It is this piece of paper:
http://europa.eu/youreurope/citizens/work/work-abroad/posted-workers/index_en.htm
I’m not a lawyer but every lawyer will tell you EU legislation takes precedence over local legislation so any tax authority that mumbles about 183-days rules can kiss your ass. Right?
Almost.
The key thing here is called A1. It’s a permit that effectively allows you to stay under the social security system of country A and register for full health insurance benefits in country X (provided there is a bilateral social security agreement) + most importantly – to stay on business trips longer than 30 days without breaking them (in my country if you are posted abroad for more than 30 consecutive days you need A1). The drawback is that if you come from a lower minimum wage country your company in country A must pay you at least the minimal rates given in country X, give you the same vacation they have, etc. – e.g. you are considered as a local worker with full benefits in country X but you still pay taxes in country A. This is not fatal as there is a cap on soc/health insurance and income tax in some EU countries so by paying a large enough salary it might turn out it’s even more beneficial than paying yourself a minimum salary. Well, you run into the risk of being charged with “hidden distribution of profits” which is normally 20% of the amount + interest but it’s up to you to decide whether you want to take it. Here is a sample application form for A1 from HMRC to get an idea what they are asking about:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/406685/ca3822.pdf
The problem is that in order to obtain A1 your company needs to show at least 25% of its income from customers in country A (and also have some operational history, at least 2 years normally). It’s mission impossible for one-man companies and that screws people in multiple ways:
1) You need to break your business trips in periods of less than 30 days otherwise you risk your company to be forced by the local tax authorities to pay social security, health insurance, and income taxes based on the min rate paid in country X for the periods you were there + penalties + interest (at least in my country but must be similar elsewhere). Travelling so often is a very expensive thing to do usually.
2) You don’t have any health insurance in country X (you have the so called EU health insurance card but in most cases you need to pay out of your pocket and claim with the health agency in your home country to get something refunded).
3) You are liable for income tax in country X if you stay over 183 days in a tax year on top of corporation tax which you are not paying there but you are still liable 🙂
You can always create a second company/arrange with a friend to exchange bogus invoices to reach the 25% limit about whatever (e.g. “consulting services”) but that increases operational expenses and doesn’t automatically grant you with an A1. It could have been all so nice and legal but no – PTs have to suffer 🙂
Taxation is one area where the EU has failed miserably. They want to play US-style but having disparate taxation systems, different VAT rates (and I don’t want to start a VAT discussion as this is nothing but a HUGE platform for frauds imho), different social security and health insurance systems (with no bilateral agreements), and not to mention – NON-FREE movement of vehicles – it all ended up in a huge failure. Do you know that if you decide to go in Denmark for more than 14 days you need to register your vehicle with SKAT (the local tax authority), pay up to 185% tax on the value of the car (which they determine by some magical formula) and get Danish plates? And there are plenty of stories online for vehicles seized in Denmark by the police and people forced to register their cars there. The only benefit I see from this union is freedom of travel and getting some things from Amazon (almost) VAT-free.
Btw I’d love to see a simple article explaining all the different kinds of taxes you can face EU-wide or simply include them in the glossary with examples. I’m reading a lot about taxes but I believe there are quite some discrepancies in the interpretation of different countries’ legislation.
Nesta, very interesting thoughts. It would be interesting to explore these ideas at length with you. Living in continental Europe as a PT is what I’d like to do.
I’m currently resident in the UK and run my own Ltd for consulting services I provide to UK companies. I’m looking to obtain some international contracts I can perform across the Internet. I am not a UK citizen, but hold EU citizenship through my father as well as another citizenship through birth, so I suspect I have a number of options to set things up tax efficiently.
“The only benefit I see from this union is freedom of travel and getting some things from Amazon (almost) VAT-free.”
If only one question, then, tell me about this! How do you shop on Amazon Europe almost VAT-free? The standard VAT rate is 20% in the UK, 19% in Germany, the countries with the largest European Amazon operations, I guess.
PS Sorry about my grammar – I meant :
‘But does the bank recognize your PT status or is the address you must provide considered a residence address by the bank ?’
Also I wanted your opinion on so-called ‘ghost addresses’ if you have heard of them ? Some authors suggest creating such a ghost address in order never to reveal your home address (never to link your name to your home address). You can use it for bank accounts in particular. It can be the address of a trustworthy friend or family member or an accounting firm’s address (with the accounting firm offering this type of services). Also do you think a PT can use a POBox for the bank account address ? I suppose not. Thank you
Banks aren’t going to accept that you have no residence. Whatever address you provide them with is where they assume that you live.
I assume ghost address is an address you don’t actually live at? That’s very common and is something I even mention in this article. I call it domicile here, which are often set up for PTs in low-tax countries. “an address is established, either by the PT renting an apartment, buying property as an investment, sharing a residence, or using a law or accounting firm’s office or other property.”
No bank will accept a PO box as a residential address.
“Banks aren’t going to accept that you have no residence. Whatever address you provide them with is where they assume that you live.”
Since you say they assume that you live at the address you provide. Don’t you have to show them proof of residency? Like a residency card?
“I call it domicile here, which are often set up for PTs in low-tax countries. “an address is established, either by the PT renting an apartment, buying property as an investment, sharing a residence, or using a law or accounting firm’s office or other property.””
So if I use the address of a friend living in Monaco, the bank will assume I have my residency in Monaco?
Varies from bank to bank. Some ask for nothing. Some ask for a utility bill or other proof of address. Rarely do bank asks for residency cards or equivalent. But if you are a British citizen and claim to live in Turkmenistan, for example, the bank might ask a couple of follow-up questions. It depends on your overall profile.
As per above, if the bank believes you – yes. Be prepared to back it up with something, though.
hello Streber
About your comment : “You still need an address. If you cannot provide an address, do not expect any bank to take you on as a client.”
But does the bank recognize your PT status or does the address you must provide is considered a residence address by the bank ? In other words can you provide an address to the bank but specify that you do not reside anywhere ? IMHO, this is especially important with the AEOI as if you are legally considered not resident anywhere then the bank cannot reveal your account(s) to any jurisdiction ? ALSO Is you PT status recognized by the jurisdiction where you have a domicile (but no residency) ? Suppose I am a European citizen and bought myself a house in London (which is my domicile but I repeat I do not leave there ). thank you
Yes, but if the bank isn’t confident that you live there, they may assign your country of residence to be your country of citizenship.
The bank will decide that you are resident somewhere. It’s either an address you provide or your country of citizenship. As per above, they will usually default to country of citizenship if no other country can be determined confidently.
No jurisdiction will recognize your status as such. You will just not be tax resident and therefore they will not care about you. Depending on where you choose to set up your domicile, this may or may not require certain filings every year (tax return, proof of tax paid elsewhere, et cetera).
Depending on how much you earn, the costs of being a PT may be less than what you’d pay in income taxes back in your country of origin. Not to mention other taxes like those on vehicles and your home, and expenses like car/home insurance. And depending on the countries you travel to and your country of origin, your cost of living may also decrease.
Also, for a 30 year old healthy male, international health insurance will only cost you $100-$200 per month for coverage worldwide excluding the USA. Why pay 50% income taxes for “free” healthcare coverage in your home country when you can pay a tiny percentage of your income for health insurance that covers you worldwide?
And my favorite part… the exposure to different cultures as you travel is priceless.