Common mistakes
Table of contents
Territorial tax myths
If I move to a territorial-tax country, I can work for a foreign employer/client and pay no tax.
When considering territorial-tax countries (ex: Panama, Malaysia, etc.), it's important to clarify (using their tax code) how they define foreign-sourced income. In most cases, it doesn't matter where the employer/clients are. If you live and work in a country, then your income qualifies as local-sourced and is thus subject to domestic income tax and socials. For individuals, the territorial tax exemption mostly applies to passive income from abroad - it does not apply to active earned income.
If I run my business through a foreign company, then I don't owe any tax under the territorial system.
This setup involves a foreign pass-through entity, such as an LLC in the US or LLP in the UK. The non-resident LLC is not subject to tax in the US, and its income is incorrectly declared as foreign-sourced to the territorial country. This practice is most certainly tax fraud, because the business constitutes permanent establishment, it is managed and controlled in the country, and its income is sourced locally, making the owner liable to domestic tax.
If I live in a territorial-tax country, I can earn passive income from abroad tax-free.
When you earn income that is sourced in a foreign country, a non-resident withholding tax is usually deducted before the payment is received. For example, if a US company pays you, a foreign person, a dividend, it will withhold 30% from the distribution (thus diminishing your dividend yield). Although this tax is non-refundable, it's usually reduced by a tax treaty with your home country (ex: from 30% to 15%). If your country then taxes those dividends again as worldwide income, you can offset double taxation by claiming foreign tax credits on your tax return.
Tax haven myths
If I open a company in a tax haven country, I don't have to pay any corporate tax.
In almost any country, your company is a tax resident if it has its management and control there. It usually doesn't matter where the business is registered, and those countries that consider the place of registration (ex: Bulgaria, Thailand, etc.) also apply CFC and/or source income rules. For example, if you a. manage your business, or b. are a tax resident of, or c. have source income in your home country, your company is also a tax resident in that country.
If my offshore company owns the IP, my other company can pay out its income as royalties tax-free.
The country where the income is sourced will withhold royalty tax (30% in the US, unless reduced by a tax treaty). Further, this income will be subject to transfer pricing rules. It must be paid at arm's length using a fair market rate.
If I open a bank account in a tax haven country, I don't have to pay taxes on the interest.
Most countries would tax your worldwide income, meaning that regardless of where your income originates, it's still subject to domestic taxes. If you fail to report this income (or disclose your foreign holdings, ex: FBAR in the US) on your tax return, you may face penalties. There are some exceptions - for example, under territorial tax, your foreign passive income is exempt, and under remittance-based tax, you don't pay the tax if you don't (or until you do) remit foreign income into your country.
Perpetual traveler myths
If I stay less than 183 days in a country, I don't have to pay any tax.
It's possible to spend less than 183 days and still become a tax resident, or spend more than 183 days and not trigger tax residency. That's because most countries consider not only the time you spend there, but also your residential ties such as your primary home, spose/common-law partner and/or dependents, as well as your center of vital interests and habitual abode (the place you return to). For instance, if your primary home is in Australia but you spend most of the year traveling abroad, you would still be deemed an Australian tax resident, even if you spend less than 183 days there. As you'll see below, even if you're not a tax resident in a country, you may still owe taxes there.
If I live 4 months in 3 different countries, I don't have to pay taxes anywhere.
A popular strategy is to establish a base in a tax-friendly country from which you travel the world. For instance, Cyprus offer tax residency if you spend a few weeks or months there. However, being a tax resident in one of these countries, even having a tax ID or a tax certificate, does not prevent you from also becoming a tax resident in another country (the same rules as described above apply). Unless you are exempt under a double-tax treaty, doing work or running a business abroad can make you liable for income tax in that other country (based on PE and/or source income rules).
Another approach is to become a tax non-resident of your home country and travel abroad as a tax resident of nowhere, particularly to countries that have a simple days test for residency (ex: Paraguay, Costa Rica, etc.). While possible in theory, this creates challenges when dealing with banks and brokerages (having to declare tax residency or provide proof of address). Further, when expatriating from countries like Canada and Australia, unless you establish tax residency elsewhere, it may fall back to the country of your citizenship.
As long as I don't become a tax resident in a country, I can work there without paying any tax.
Most countries tax both residents and non-residents on income that is sourced locally. As such, you do not have to be a tax resident in a foreign country to owe taxes there. For instance, if you stay in a foreign country and work remotely, even without triggering tax residency, your income is still technically local-sourced and thus subject to non-resident income tax. Often though, the DTT with your home country will overwrite the local tax code, and you will only pay taxes to one of the two countries - the one in which you have your permanent home or other ties. If however there isn't a DTT between them, you may owe taxes to both.
Withholding tax myths
Once I am no longer a tax resident of my home country, I don't have to pay taxes there.
Your home country will still withhold non-resident tax on any income sourced locally. For example, as a tax non-resident, if you keep a rental property when you leave Canada, your rental income will be subject to the 25% withholding tax. This tax also applies to any other local-sourced income like interest or dividends (although the rate on those may be reduced with a tax treaty). You may also need to file a non-resident income tax return to report this income.
If I invest in stocks through my offshore company, I can pay a lower withholding tax on dividends.
Most countries have anti-treaty shopping provisions, in particular, limitation on benefits clauses. If you want to benefit from a reduced WTH tax rate in a foreign country, you will need to establish economic substance there.