Taxes and Tax Residency

Unlocking financial freedom: Game-changing tax residency case studies that will make you consider Panama

9/8/2023 8:00:00 AM
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No businessperson should underestimate the importance of tax residency, however, this concept may be hard to understand, thus creating a field where misconceptions can grow freely. When it comes to why is tax residency useful there are many aspects to consider, and this includes a deep understanding of the matter. Naturally, the best way to establish tax residency effectively in low-tax jurisdictions is through a certified expert. In this regard, providing oneself with the right advice is not negotiable. Nonetheless, it is possible to set out some main points like the ones described in this article. 

Tax residency study case guide

We’ve already uncovered the myths and the truths concerning Panama tax residency and now it's time to add more information to the topic. Thus, the editorial team presents examples of tax residency through two different hypothetical study cases. With a good tax residency study case it's possible to understand more than through 1000 explanations. 

The reader should know that, in general, to be considered a tax resident legally in any country one must live for at least 6 months a year in the country's territory. However, your local tax expert will inform you of the specifics pertaining to the jurisdiction of your interest. The following cases are based on the premise that a person needs to spend six months a year in the country.

Tax residency study case 1: person lives in Panama, has tax residency in Panama, has a business in Estonia, has an American passport

In this case, person has to pay Panama taxes for the income that he/she generates in Panama or that he/she receives in Panama. Nonetheless, dividends, holdings, and other assets in Estonia or derived from the Estonian business are free of tax.

In other words, dividends from the company are not taxed in Panama while maintained abroad. Nonetheless whatever money the person transfers himself or herself to Panama will be subject to Panama taxes.

The business in Estonia will report to the tax residency country, i.e., Panama. But there’s another twist: since person holds an American passport, he/she will be subject to paying taxes in the United States for the income in Panama and for the income in Estonia. This applies even if person doesn’t live in the US. 

Thus, with an American passport, one of the main advantages of tax residency is defused since the US tax system is not based on physical residency but on the fact that the person holds a passport.

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Tax residency study case 2: person lives in Panama, has tax residency in Panama, has a business in the US, has an Argentinian passport

When incorporating in low-tax jurisdictions one must be aware of other factors such as where they have businesses, accounts, passports, legal residency, or simply where they spend their time.

Study case two shows us a much better picture since the person can pay Panama taxes only on the locally generated income or the income received in Panama. The US (where person has a business) won't report to Panama as it's not subject to CRS but, even if they did, they would report to a country that doesn't tax foreign income. If person has an Argentinian passport, this won't affect him/her as long as he/she doesn’t live in Argentina. However, if person spends more than six months a year in the said country, he/she will be subject to paying taxes there too.

Advantages of tax residency

The importance of tax residency lies in three principles: where you live, where you are taxed, and what income is taxed. Thus, the key is to find low-tax jurisdictions and, better yet, those jurisdictions that don't apply tax on foreign income. Nonetheless, this approach only works if you organize your business accordingly. For example, the advantages of tax residency in Panama are only viable if you have most of your assets abroad, and the same principle goes for every territorial taxation country.

There are other options we can add to the structure, for example, a trust. This structure separates ownership from the settler and therefore, in many cases, can bring tax advantages. Free zones, special exemptions, double taxation treaties, and similar tax incentives can be great resources, especially when combined cleverly.

Disclaimer: these examples of tax residency are mainly descriptive and do not constitute legal and formal advice. If you want to establish tax residency, make sure to consult with experts in all jurisdictions involved.

Why is tax residency useful especially with Mundo

Our wide experience and large network of experts allow us to offer comprehensive solutions including a variety of tools to put together a solid financial plan. The importance of tax residency is vital in such a plan, and the proof is that this is one of the main points in the five-flag theory. Check out our Forever Free article and find out more about this product and how the tax residency fits into the structure. Such decisions cannot be taken lightly and have to be made on a case-by-case basis. This is why you need solid advice like the one that you can get at Mundo. 

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