Plane ticket (check), Offshore company (check), Offshore bank account, Payment processing (check),
NO TAXES …!!! ….. SLOW DOWN …. CFC will put a damper on your tax free dreams if you neglect to follow some basic guidelines listed below.
We will cover some information to protect yourself from liberty bashing politicians and regulatory authorities while you travel and enjoy the benefits of a location independent lifestyle.
While there are many jurisdictions where you can establish a company, other factors come into play aside from ‘x’ % – tax rate in ‘y’ country
CFC rules prevent many people from legally doing business through another company in another country while they are sitting in their home country or country of residency. Unfortunately these ruin grand plans people have about sipping fruity cocktails and working from their laptop on the beach.
However, there are some countries that do not have laws constraining your earning ability in a foreign country while you are in your current country.
Our goal is to help you better understand how to avoid the shakedown by the taxman in your country of citizenship and country of residence as you travel and work worldwide.
As you travel it is your responsibility to follow the laws so that you do not find yourself in a legal cluster-crash that could have been avoided with proper tax planning, or pay the penalties for breaking the laws.
Today’s story will cover a few examples of how CFC impacts you and others around the world. We will examine specific examples and provide some guidance in other scenarios.
Remember: You have a few options: Pay the taxes, structure yourself to avoid them, or accept the fines and legal punishments. Professional advice is often cheaper long term than the taxes or the fines.
CFC: Rules and Regulations
Many countries chase their tax slaves around the globe with a thirsty vengeance. Western nations seem to have a greater zeal for this currently. These laws aid the slave masters as they hunt their subjects globally for their slice of your pie.
Please note that this article covers corporate tax, and personal taxation is another matter entirely.
Some countries do not have CFC laws that limit your ability to prosper while you travel and vacation globally. We will highlight them later in this story.
First we will cover the capital grabbing CFC enforcers. They are (but may not be limited to): Norway, Sweden, Finland, Denmark, USA, Canada, Mexico, Brazil, Argentina, Peru, South Africa, China, Japan, South Korea, Australia, Indonesia, and New Zealand.
If neglected, CFC regulations will cause you and your business problems. It is important to consider your position as a partner of a company and your residence while working abroad. A natural person is not impacted by CFC laws.
A natural person is responsible for taxes of their income at the rate in their country of residence.
CFC rules come into play when you are working in a foreign country such as Spain for an Estonian company. It may look sexy online, however in reality, you would be breaking the law by not paying Spanish taxes.
Posting your selfie on Instagram from the beaches in Spain about working with your laptop only adds to the evidence that laws are being broken. It may not be currently enforced, however data from your posts in the future may be used as evidence to charge you with tax evasion.
In other circumstances companies that own shares of foreign companies are also subject to CFC laws in other jurisdictions.
CFC & Residency
Residency and lack of CFC laws combine nicely together to make your life easier if you choose to spend time in certain countries in the world. A few examples of this are Bulgaria, Cyprus, Croatia, the Balkans, Republic of Georgia, and Ukraine.
Other areas on the Globe include: Malaysia, Chile, Philippines, Thiland, and Singapore, in addition to many others.
These locations are subject to change at anytime due to the shifting global economies around the world, and as this is the case we recommend you consult with a professional legal team to achieve the best results.
If you need help with this, please let us know, and we will forward your questions to the right legal professionals.
While corporate taxes in these Jurisdictions with no CFC laws are minimized, you are still responsible for paying personal taxes when and where applicable.
Dividends are an interesting way to distribute profits depending on your country of residence. Some countries have very low taxes on dividends, and some have none at all. The really beautiful beaches and widely known locations may not always be the best strategy for your personal residency/ tax structures.
When you pick a residency, it should be somewhere that you actually spend time in. There is a lot of misinformation online about limited requirements for residency, or limited enforcement of residency requirements.
If the country that you picked for residency has limited stay requirements, this does not mean that your home country may not ask for proof of you living there (water bills, electricity bills, phone records in some cases, etc)
CFC Enforcement:
Simply setting up another country is not illegal, however the manor in which you report of manage the company is an issue with CFC rules in many countries.
Above, we covered some jurisdictions which are great places to live (and there are many more like these) as long as you are satisfying your residency requirements of your home country (if you have any questions about this, please contact us)
Ignoring these rules can be costly for your time and monetary situation. The price of setting up your legal structures correctly is cheaper and less of a hassle than simply ignoring the laws where you are traveling and or working.
In some rare situations, you can be taxed twice. This is another important consideration you as a traveler need to think about before operating your business in some countries.
Types of CFC rules
(these are examples, subject to change, and special conditions may apply to make some of these more favorable than others)
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Type of CFC Rule
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Countries that use this type of rule
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General policy
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1. Active companies
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UK, US, Germany, Brazil, China, South Korea, Egypt, Spain, Estonia, Finland, France, Greece, Hungary, Iceland, Israel, Italy, Japan, Norway, Portugal, Russia, South Africa
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Rules apply based of percentages of taxation in the country of your incorporation.
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2. Passive companies
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Australia, Canada, New Zealand, Denmark, Lithuania, Mexico, Peru, Venezuela
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Rules exist based on total income of the company while in that country
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3. Relaxed Rules
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Argentina, Indonesia, Poland, Turkey, Uruguay
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Higher % of income is acceptable to have in these countries, and in some cases specific rules for individuals
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4. International tax laws do not apply
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Austria, Latvia, Netherlands, Malta
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5. Blacklisted countries
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Andorra, Anguilla, Antigua and Barbuda, Aruba, Ascension Island, St. Helena, and Tristan da Cunha, Bahamas, Bahrain, Barbados, Belize, Bermuda, British Virgin Islands, Brunei, Cayman Islands, Cook Islands, Costa Rica, Curacao and Sint Maarten, Djibouti, Dominica, Ecuador, French Polynesia, Gibraltar, Grenada, Guatemala, Guernsey, Hong Kong, Isle of Man, Jamaica, Jersey, Kenya, Kuwait, Lebanon, Liberia, Liechtenstein, Macau, Maldives, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, New Caledonia, Niue, Panama, Samoa, San Marino, Sark, Seychelles, St. Kitts and Nevis, St. Pierre and Miquelon, St. Vincent and the Grenadines, Tonga, Turks and Caicos Islands, United Arab Emirates, Uruguay, US Virgin Islands, Vanuаtu, Venezuela
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If you want to avoid taxes legally while obeying CFC rules these jurisdictions have their place in the toolbox of strategies in combined with residency, and other legal options.
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Exceptions
First: Incorporate or move your company abroad
After reading above some of your dreams about sipping coconuts on the beach working from your computer may look kind of grim, however there are ways to legally minimize your taxes through a series of exceptions, and simply avoiding countries where these restrictions are in place.
The EU has some exemptions, and the US as well among other countries.
The EU provides an interesting set of options for people willing to live outside of their home countries and setup companies in the right countries while still living in a number of countries which have more relaxed positions on CFC laws.
Currently, the EU allows you to transfer or open a company in a lower tax jurisdiction like Bulgaria as a citizen of another country provided that they are following their residency requirements for their home country or country of residency.
In The USA you are able to run your company abroad, as long as you report your holdings and bank accounts properly while living outside of the us when you abide by the “Physical Presence Test”. To meet these requirements, you would need to Spend 329 full days in a 12 month period outside of the US in order to qualify for this exemption.
Second:
Substance: Does your company look like it actually has a foundation in the country which it is registered in. This part is where you show that it is not some mailbox in a building and nothing more.
Do you have an office there?
Do you have workers there?
Do you have a manager there?
These are the types of questions the authorities will ask when they look at your individual situation.
When you are in a position where you could be taxed double by two different countries, it is important to show substance in your actions and paperwork in your company to prove your substance so that you can save time and future business capital for your company.
Wrapping up:
CFC laws are seemingly put in place to make our lives difficult, however it is more of a goal of the countries involved to take a larger slice of the pie from your pocket book.
We wish solutions followed the “one size/ structure fits all” approach, however that is not the case. We recommend you talk with one of our consultants, lawyers, or accountants to better understand your needs. We get irritated with these laws just as you do, and we made it our mission to help you navigate this strange international chess game with taxes, residencies, citizenship, real estate, and asset protection.
You worked hard for what you have. Let us help you protect it, grow it, and prosper from it.