Navigating International Taxation and Residency: Common Scenarios Explained
AI-generated image.

Navigating International Taxation and Residency: Common Scenarios Explained

As global mobility and business opportunities expand, so too do the complexities of international taxation. Whether you're an individual working remotely, an entrepreneur with cross-border operations, or someone managing investments from various countries, understanding how taxes work in different jurisdictions is essential. Let’s explore some common scenarios faced by individuals and businesses and clarify the tax implications.

In this article, we explore various scenarios involving international taxation, with a particular focus on individuals residing or operating in Portugal.


1. Living in Portugal, Owning a Business in Dubai: Is This Tax Efficient?

A common scenario arises when individuals consider setting up a company in Dubai while residing in Portugal. Dubai offers a low-tax environment, which can be tempting. However, the benefits might not be as straightforward if you're a tax resident in Portugal.

Even if you establish your business in Dubai, you still need to meet certain conditions for the tax benefits to apply. For instance, the company must have a physical presence in Dubai, employ local staff, and engage in real commercial activities. But above all to have the effective management of the company in Dubai. Without fulfilling at least some of these criteria, the Portuguese authorities might treat the income as taxable in Portugal, subjecting you to corporate tax and a 35% tax on dividends rather than 28%.

Key Takeaway: Setting up a company in Dubai only makes sense if the business has a real presence there. Otherwise, you could risk facing penalties and higher taxes in Portugal.


2. Offshore Structures for Tax Reduction in Portugal: Are They Still Viable?

Offshore companies and trusts used to be a popular tool for tax minimization. However, recent changes in tax laws, particularly the implementation of Controlled Foreign Corporation (CFC) rules, have made these strategies less effective for Portuguese residents.

The introduction of higher taxes on income from tax havens and increased scrutiny means that simply placing assets offshore is no longer a guarantee of lower tax bills. Offshore entities can still work if they are backed by genuine commercial activity and proper corporate structures. In some cases, relocating tax residency to a country with more favorable tax policies may be a better solution.

Key Takeaway: Offshore structures might still be useful, but only with legitimate commercial activity. Relocating tax residency to a more favorable jurisdiction could offer better outcomes.


3. Taxation for UK Residents Earning Rental Income from Portugal

When it comes to individuals living in the UK and earning rental income from property in Portugal, both countries' tax systems come into play. In Portugal, non-residents must declare rental income, as non-resident, and pay taxes locally on that income. The income here is from real estate located in Portugal.

However, in the UK, you must report your worldwide income, including the rental earnings from Portugal. To prevent double taxation, the UK provides a tax credit for the taxes already paid in Portugal. Proper filing in both jurisdictions is crucial to avoid unnecessary complications.

Key Takeaway: Make sure to report rental income in both Portugal and the UK, and take advantage of tax credits to avoid double taxation.


4. Moving Tax Residency to Andorra: Does It Make Sense for Dividend Income?

For business owners in Portugal, the idea of relocating tax residency to Andorra to reduce tax on dividends is an interesting consideration. However, the benefits may not be as significant as expected.

Even if you move your tax residency to Andorra, your company in Portugal will still be subject to corporate tax there, and dividends distributed from the Portuguese entity will be subject to withholding tax. The overall tax saving may be minimal compared to the effort and resources required for relocating.

In some cases, it might make sense to move part of your business operations to Andorra if the commercial activity aligns with the local economy. In this instance, the move could justify the potential tax savings.

Key Takeaway: Moving tax residency to Andorra for dividends could be beneficial in certain circumstances, but only if there’s an actual business purpose behind the move.


5. Dual Tax Residency Between Portugal and Spain: What Are the Implications?

Holding Non-Habitual Resident (NHR) status in Portugal while spending significant time in Spain can raise questions about dual tax residency. In principle, NHR status provides tax benefits for foreign income, but it also locks you into Portuguese tax residency. For you to have the NHR status you must be registered as a Portuguese tax resident, so in this case you should not be registered as a tax resident in Spain as well.

While it’s possible to have dual residency, it is not advisable as both countries may seek to tax your worldwide income, leading to complicated filings and potential double taxation. The tax treaty between Spain and Portugal could clarify your situation since there are rules to establish competency in cases like this, but if you primarily reside in Portugal, you’re more likely to be taxed there.

As for the NHR, being a tax resident in Portugal, you need to declare your worldwide income and could have a tax reduction or exemption depending on the income type. However, the NHR does not exempt you from doing your tax declaration nor is it a global and absolute tax exemption.

Key Takeaway: Dual residency is not recommended. Clarify your tax residency with tax authorities in both countries to avoid complications.


6. Exit Tax for Cryptocurrency When Leaving Portugal

If you’re considering leaving Portugal and you hold cryptocurrency, it’s essential to be aware of the exit tax rules. Portugal does impose an exit tax on cryptocurrencies, meaning you could be taxed on your crypto holdings even if you haven’t sold them before leaving the country.

The key question is whether the exemption for holding assets for more than 365 days applies to cryptocurrencies. While some believe it does, tax authorities may interpret this differently in the future.

Key Takeaway: Be prepared to face exit taxes on crypto assets when leaving Portugal, even if no sale has occurred. Seek clarification from local tax authorities.


7. Declaring US LLC Income in Portugal

Many Portuguese residents hold investments in US LLCs, especially in real estate. Assuming the LLC is treated as a transparent entity for tax purposes (i.e., it is not taxed as a corporation in the US), the income must be declared in Portugal.

The income would fall under IRS Annex J in Portugal and is subject to a 28% tax rate. It’s critical to ensure that the LLC is properly classified for tax purposes in both the US and Portugal to avoid misunderstandings and penalties.

Key Takeaway: Declaring income from a US LLC in Portugal involves declaring under IRS Annex J with a 28% tax rate. Always confirm the tax status of your LLC.


8. Working in Luxembourg but Tax Resident in Portugal: How Does It Work?

If you work in Luxembourg but remain a tax resident in Portugal, your income and social security obligations in Luxembourg will still apply. However, as a Portuguese tax resident, you will need to declare the income in Portugal as well.

Portugal provides a tax credit for the taxes already paid in Luxembourg. You will only pay the difference if the tax rate in Portugal is higher than in Luxembourg. It’s essential to verify your residency status in both countries to ensure proper filings.

Key Takeaway: Double-check your tax residency and file taxes in both countries to avoid penalties, ensuring you benefit from tax credits.


9. Investing in Funds via Revolut as a UAE Resident: Are Taxes Due?

Let’s say you’ve become a tax resident in the UAE, where personal income taxes don’t apply, and you’re investing through platforms like Revolut. While the UAE doesn’t impose income taxes, there may still be taxes due in the country where the funds originate.

If the investments generate income from other countries, withholding taxes might apply at the source. Confirming whether the correct non-resident tax rate is applied can help you avoid unnecessary overpayment.

Key Takeaway: Verify the correct withholding tax rates are applied to your investments from the country where the income is sourced.


10. Using Artificial Intelligence for Tax Inspections in Portugal

With much of the conversation around artificial intelligence (AI) focusing on its potential risks, one of its practical uses will be seen in tax inspections in Portugal. The tax authority (AT) plans to use AI to streamline inspections and reduce tax fraud.

From previous experiences with digitalization at the tax office, many problems have arisen, especially for cases that don’t fit neatly into standard categories. These often require human intervention, and AI’s role could further complicate issues if not properly managed. It’s hoped that AI will not increase the problems citizens face when dealing with the tax office, where systems often appear opaque and difficult to navigate.

Key Takeaway: The use of AI by Portugal’s tax authority will be a real test. If AI can interpret the complexity of the Portuguese tax system, it might just be able to do anything.


11. Best Countries for Independent Workers From a Tax Perspective

If you’re an independent worker or digital nomad, where should you base yourself for the best tax benefits? The answer depends on several factors, including your income, your preferred lifestyle, and the type of work you do.

Some countries, like Andorra, are ideal if you’re a high-earner looking to start a business, as they offer a business tax rate that starts at 10%. Cyprus has a similar 12.5% tax rate for businesses, and Cape Verde offers tax advantages if you're eligible for their 10% tax activity. For those with lower income (less than €70,000), Italy might offer a favorable tax environment. Asia and South America are also options with digital nomad visas, while the UAE offers 0% tax for freelancers but beware of their 9% business tax even on freelancers.

Depending on your income and the origin of your clients, it may also make sense to establish an LLC in the US or another country, while living abroad to benefit from flexible international tax strategies.

Key Takeaway: Explore options like Andorra, Cyprus, Cape Verde, Italy, or the UAE depending on your income and business structure. You may benefit from incorporating abroad while living in a different country.

要查看或添加评论,请登录

社区洞察

其他会员也浏览了