Taxes are inevitable when investing, even for non-professional traders. There are ways in which you can minimize such taxes, and there are even some jurisdictions that do not have a tax. This article will not describe the legality or logistics of investing in jurisdictions around the world; instead, it will focus on their different taxes.
How easily you can make use of them is different for each place, as some may require you to be a resident or citizen, whilst others may not even require you to ever step foot in that country. Ultimately, you need to think carefully about where you are a tax resident.
Before getting started, let’s take a quick look at the three most prominent ways you’ll be taxed when investing.
Tax on interest
Many governments will treat interest income, which is of course the reward for your savings, as ordinary income. In the United States for example, it will merely be subject to the marginal rate that this economic actor pays. There are some exceptions, such as interest on US-issued bonds, but this is too specific to be considered in the general tax information below.
Tax on capital gains
Tax on capital gains is a tax on the profit that was made from the purchasing and selling of a security. This might be stocks, property, a car and so on. Most countries separate this from income tax, and it is also often separated into short-term and long-term capital gains (short-term capital gains may be lumped in with regular income tax rates).
Tax on dividend income
The money earned from dividends is almost always taxed too. This is slightly more confusing, because dividends come from the profits after tax — so companies have already paid taxes, which leads to a double taxation. In order to make this more fair, some countries give tax breaks for dividend income and apply a reduced tax rate to them.
Considering most countries consolidate short-term capital gains tax with income tax into one payable amount, we’ll predominantly focus mostly on countries than have less of this tax (or their equivalent). It is of course worth gaining insight into long-term capital gains tax too, as this will be extremely relevant to property, land and business equity investments.
United Arab Emirates
UAE is one of a few taxless middle eastern countries, but it’s seen as the most attractive one due to its political and economic stability. Companies there do not pay corporate taxation, which means that there are more profits leftover (potentially leading to better dividends, too). UAE is a great place to invest because it has a ton of English speaking, a liberal visa policy as well as being a very stable currency that is pegged to the US Dollar.
There are certainly taxes collected elsewhere in Emirates, predominantly from consumption and living-based levies. So, if you do want to invest here with as little tax as possible, it might be a good idea to not be physically there full-time.
Monaco is a great place to buy a property to rent out. You will only pay 1% of the annual rent as tax, and of course, rent is extremely high in Monaco (though it might not be high enough to offset the high purchase prices, as Monaco generally has a low rental yield). Furthermore, capital gains on your property investment is taxed at a hefty 33% — not quite the haven you imagine it is.
Monaco has, however, eliminated dividend taxes that are paid by local companies. With no corporation tax too, you might be in with a chance of some healthy dividend payouts. Generally, Monaco is a great place to invest because of having no capital gains tax (except with property).
Like with many other high cost of living countries, Bermuda is an attractive tax-free destination. It’s not just popular because of the lack of taxes, but also because it can be deemed illegal for bankers who use this offshore location to “disclose the identities of investors to third parties”, as Ravi Ramnarai once pointed out.
Over a quarter of Fortune 500 companies have subsidiaries in Bermuda because it levies no corporate tax. Bermuda doesn’t have a ton of options on its own Stock Exchange, but you will find HSBC and some others listed there. Zero taxes on dividends, capital gains or on corporations.
Luxembourg is a small, business-friendly European country that is popular with many companies, such as Amazon, for its tax laws. Although it’s not quite the haven for expats and retail investors as you might think. If you were to earn € 30 000 there, say as a self-employed expat, your take home salary would be €24 770. Such tax also includes other net income such as capital gains, investments and income from property rent.
Whilst income tax isn’t that low, and neither is domestic corporation tax (17%), there are some foreign tax incentives to funnel money into the country in which you may find yourself only paying 1% whilst avoiding your previous tax residency’s corporation tax. This is a more popular destination for larger companies as opposed to small retail investors.
The Cayman Islands are possibly the ultimate tax haven. There is zero direct taxes on residents, such as capital gains, payroll, property or income tax — nor is there corporation tax. Importantly for investors, there is no tax on interest or dividends either, making this a popular country among fund managers.
Isle of Man
Isle of Man shares a similar outlook as Cayman Islands, with no corporation, capital gains, stamp duty or inheritance tax. Given its close proximity to the UK, it’s extremely popular for Brits. The highest rate of income tax is 20%, which is capped at £120k. This is the place where many companies decide to hold pensions.
Whilst there are many so-called tax havens, some have different purposes and advantages. For example, many are trying to attract large amounts of capital to their economy, so tax laws are advantageous to high-revenue companies, but not so much to expats or retail investors. Likewise, others cap personal taxes too in order to attract individuals, not just capital.
My name is Winterberg and I started this investment blog to share my journey towards financial independence.
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