5 countries with territorial taxation and how they can help you

Taxes are a major concern for anyone, and this is why a solid financial plan must consider how to save on taxes. A popular strategy consists of getting tax residency in a territorial taxation country and establishing one’s largest assets outside of this jurisdiction. Let's analyze how to lower taxable income through tax reduction strategies like this one.

Reduce your taxes by leveraging territorial taxation: how does it work?

Every country has its tax system, the difference lies in how they interpret a person's relation to the country and hence the tax responsibility. Considering this is vital to solve the question of “how to reduce taxable income efficiently”. 

In essence, there are three bases to establish tax residency: through citizenship, through residency, or through territorial taxation, which is the topic of this article.

Only two countries in the world have embraced citizenship taxation in which a person must pay taxes when they have a passport of the country in question, independently of where they live. If you are a citizen of the United States or Eritrea, but you haven't lived there for 10 years, you’ll be paying tax for your worldwide income only because you hold a passport from your home country. This is the strictest tax residency of all.

The most common tax residency is the one that's based on where the person lives. If you reside in a country, you must pay taxes here on all the income you generate no matter where it is. Generally, the person is considered a tax resident after spending 183 days (six months) in any country.

Last but not least we introduce territorial taxation, the type of tax residency that you can get, for example, after obtaining Panama permanent residency. The question of how to lower taxable income starts to glimpse a solution somewhere ahead, although still faint. What does it mean? The country with territorial taxation only taxes local income but not that generated abroad. Thus, it becomes a great tool to save on taxes because you can organize your affairs so that your most powerful sources of income are allocated abroad.

Does this mean that you will pay 0 tax? Not at all as this is a plan to reduce your taxes, not eliminate them 100%. Since tax residency can't be faked, the person in question has to live in the country for at least six months a year. Hence, he or she will have to receive money in the territory, which automatically makes this taxable. The secret of tax residency consists of having the lowest income possible generated or received within the territory so that you can solve the question of “how to reduce taxable income” optimally. This is why many decide to immigrate to Panama as this is one of the most interesting territorial taxation countries out there.

Save on taxes: Countries that have territorial taxation

Costa Rica

Besides helping you save on taxes, Costa Rica offers beautiful landscapes and an interesting culture. Located in Central America, bordering Panama and Nicaragua, Costa Rica may be exactly what you need.

It has nice weather, diverse flora and fauna, and a fascinating culture making it one of the most interesting places to live in Latin America.

Furthermore, here you'll find some of the best beaches in the region and affordable housing. Rental costs are relatively low and so are, in general, transportation, food, and expenses.

Its nice and polite population will make you feel at home and it's relatively easy to get around by speaking just enough Spanish.

Gibraltar

This is a small country located in the Iberian Peninsula and its only neighboring country is Spain (north). Its subtropical weather, warm summers, and mild winters make this an amazing place for relocation.

Besides offering you a solution on “how to lower taxable income”, Gibraltar boasts an amazing environment and nice people. The language barrier won't be an issue when it comes to communicating, socializing, and getting around as the official language is English. Some of its major industries are tourism, financial services, and online gaming and it receives many workers from Europe, mainly from Spain, that come here to work.

Although small, Gibraltar is quite diverse, and a big plus is that it has a low crime rate.

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Hong Kong

Obviously, this is not a country per se, but a special administrative area that helps you reduce your taxes through territorial taxation thanks to its rich history closely related to the West. 

Located South on the coast of China it’s one of the most densely populated places in the world and also one of the most important financial centers in Asia. Hong Kong is quite a developed city and it's famous for its modern architecture and extensive transportation system.

By establishing tax residency here, you will not only be covering your tax reduction strategies but also living in a strategic location. Right in the heart of Asia, you'll be close to important cities, countries, and regions like Europe, New Zealand and Australia, Vanuatu, Japan, South Korea, Russia, and the Middle East.

Paraguay

Better known as "the heart of the Americas" because of its location, Paraguay constitutes another great alternative to save on taxes in a territorial taxation jurisdiction.

For many years, Paraguay has experienced one of the largest economic growths in South America. Moreover, it's one of the countries with a lower cost of living in the world and it's relatively safe in comparison with neighboring countries. Here you'll find more than tax reduction strategies: you'll be living in a nation with wide cultural attractions, amazing nature, and diverse gastronomy.

Panama taxation

This is the point where we discuss one of our favorite topics: Panama taxation. Located in Central America, Panama borders Colombia and Costa Rica and it's one of the wealthiest countries in the region. This is because of the enormous economic development boosted by the Panama Canal. 

It has the Atlantic and Pacific Oceans only one hour away from each other, exuberant mountains, tropical forests, and incredible beaches. It definitely attracts many foreigners with its one-of-a-kind culture, active urban life, and a vibrant cosmopolitan environment. Those who immigrate to Panama feel at home because of the ethnic diversity they find here.

Why does Mundo recommend Panama for your territorial taxation country? 

The answer is simple: because of its easy paths to residency. Panama Golden Visa or Panama investment visa, whose official name is Qualified Investor, is a flexible program opening the doors to people of all nationalities who want to immigrate to Panama and establish their territorial taxation residency here. This path grants you Panama permanent residency immediately.

Furthermore, there are other alternatives that involve less cost but with a few more restrictions. The Friendly Nations Visa, for example, grants you a two-year permit and it's only available for citizens of certain countries. On the other hand, you can access by investing only 23,000 in a two-year period by opening your own company. 

The Pensioner Visa is even more accessible as you only need to prove you have a 1,000-dollar income for life. In this case, the trick is that it has to be a lifetime pension, and this must be proven before the national authorities. 

Can I get Panama citizenship by investment?

Since Panama doesn't have a citizenship-by-investment program, the only way to get citizenship is through the residency path. The law stipulates that a person can become a citizen after living five years in the country as a permanent resident. Thus, the Panama investment visa is the best option as it grants you Panama permanent residency immediately. If you establish yourself in the country right after getting your permit, in five years, you'll be on your way to citizenship. It's worth noting that this period can be shortened in some cases and subject to certain conditions, for instance, the country of origin.

Disclaimer: this is a general article about countries with territorial taxation and what they offer, however, the purpose of this article is to provide an overview and the information may be outdated. Before making any important decisions regarding tax reduction strategies consult with a certified professional in international taxation. The most recommendable thing to do is to consult with tax experts in each jurisdiction involved. It’s worth noting that getting legal residency doesn’t make you a legal tax resident automatically and doesn’t automatically exempt you from paying taxes abroad. There are processes that need to be completed with professional advice to have legal tax residency that foreign countries recognize as such. Not considering this may lead to noncompliance, fines, or imprisonment. 

Save on taxes through Panama Golden Visa

To sum up, legal residency is key if you want to save on taxes through territorial taxation because you will have to live in the country for at least six months a year. In Panama, there are easy ways to become a resident and a wide variety of programs that adapt virtually to every need and budget.

Moreover, Panama not only has territorial taxation but also a vibrant culture, business incentives, a dollarized economy, a low cost of living, and a growing economy.

At Mundo, we have close connections with lawyers and experts in all financial areas in Panama and we have an on-site team that knows the country closely. Our intimate connection with Panama has led us to help many people find solutions in this beautiful land. Do you want to be one of those people? Contact us today!

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