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How do you feel after you’ve filed your tax return?
You might feel relieved that the work is all done. But when you look at how much you’ve paid, you might feel a huge strain lingering over you.
The fact is, many of us pay very high taxes. If you run a business, you know how this can be a major hindrance to scaling your company.
But how do international taxes compare? You might find that you can reduce your tax burden if you establish your business overseas.
Here’s what you need to know about overseas taxes:
Incorporate Your Business Overseas
You want to look at the right business structure when moving overseas. You might need to change the structure to suit your tax obligations.
For example, your LLC in the United States might have a higher tax obligation than running a sole proprietorship.
But you might find that to be the reverse in another country — such as one with a salaries tax.
You have to first research a list of possible countries that you’d be interested in relocating your business to.
Then, research the different business structures in those countries and the tax obligations.
Worldwide vs Territorial Taxation
The next step is to look at whether the overseas jurisdiction operates on worldwide or territorial taxation.
Worldwide taxation means that your company’s profits get taxed regardless of the source of funds. With territorial taxation, you only pay corporate tax to the jurisdiction if funds come from the same jurisdiction.
For example, the UK has a worldwide taxation system. On the other hand, Panama operates with a territorial taxation system.
Let’s say you start a book publishing house based in the UK. If your books sell outside of the UK, you still have to pay corporate taxes to the UK on those profits.
But what happens if you incorporate this book publishing house in Panama? You would only pay corporate taxes to Panama if you sell books within the country. Books sold in other countries wouldn’t be subject to taxes in Panama.
Most countries work with worldwide taxation. As such, it’s hard to find a country that works using a territorial taxation system. But if you can find a territorial tax country to incorporate your business you can save a lot on taxes.
Next, you want to look at the tax obligations that your company will have in the new jurisdiction.
At a minimum, most jurisdictions charge an income tax to companies — also known as corporate tax.
Some countries will have a flat corporate tax which means that your company gets charged one rate. With a progressive corporate tax, your company pays a higher percentage as your profits grow.
There might also be taxes based on the type of business you run. For example, Singapore is lauded for its low corporate taxes.
But what happens if you run a business where you sell alcohol? Singapore charges “sin taxes” on products such as alcohol. This means that if you sell alcohol in the country, you’ll have to charge consumers a high tax to buy your products.
This doesn’t mean that you cannot succeed as an alcohol business in Singapore. But these sin taxes might lead to reduced revenue compared to if you sell in a country without such tax.
The island of Guernsey doesn’t charge taxes on royalties. This means that if you run a business that depends on royalty income you won’t owe any money to the tax collector!
The book publishing house company that we used in the previous example would benefit from a jurisdiction such as Guernsey.
You want to look at other taxes that your business might face. For example, does your business sell products? You want to consider the cost of sales tax or VAT in addition to corporate tax.
What if you sell products and services online? Digital businesses are still relatively new.
As such, digital taxation is still quite rare. Nevertheless, you want to make sure you don’t enter a jurisdiction that charges tax for selling products and services online.
Assessing the Future
But before you look at tax laws overseas, you have to assess the future of the jurisdiction.
You’re migrating your business overseas because you aren’t happy with the taxation in your home country. But what happens if another country changes its tune and raises taxes in the future?
None of us can predict the future. But as an entrepreneur, you have to assess the future of a country the best you can. You have to assess whether a country is likely to raise taxes or reduce them.
For example, most economies in the world suffered during the lockdowns of 2020.
Some governments decided to raise taxes on corporations to help their economy recovers. Others reduced taxes to encourage more entrepreneurship to recover the economy.
You want to belong to the latter group of countries. These are countries that don’t try to attack businesses during times of crisis.
It’s also imperative to look at the overall culture of a country. Many countries offer great labor protections at the expense of raising taxes on corporations. Other countries have cultures that encourage entrepreneurship and innovation.
Once again, it’s these latter groups of countries that are likely to keep your tax obligations low. You want to be in a place where entrepreneurs are welcomed rather than scorned.
Don’t leave your country just to go to another country where taxes are likely to go up. Go to where your company will get the maximum support from the government and society!
Pay International Taxes Instead
So, are you tired of paying high taxes in your country? Then you should look at international taxes that work best for your business.
Find a set of countries where you think your type of business would work best. Then, research the business structures that’ll work best for this business.
After you do that, you want to find the tax system that works best for you. You want to find a jurisdiction that lowers your tax burden as much as possible.
This will make it easier to scale your business and keep your hard-earned money! You can find more business tips on our website.