The Compass Group - Tax Planning for Retirement Abroad


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Tax Planning for Retirement Abroad

Many countries tax on the principle of territoriality, which uses the concept that a country taxes only income that originates or is from a source within that country, or is taxable to that country by a treaty. Foreign source income is excluded.

For countries that tax on the basis of worldwide income, as opposed to territoriality, another basis for income taxation is residency. In this case, worldwide income is taxable in the country of residence of the taxpayer. Countries that tax on the basis of residency may differ in how they determine residency. For instance, Canada determines residency in either of two ways: days spent in the country or residential ties.

The US is unusual in the major countries of the world, as it taxes based upon citizenship and residency. For instance, the US taxes the income of its citizens from sources anywhere in the world, even if the citizen is residing in another country. Short of expatriating, a US citizen can never escape his or her reporting obligation to the US

A US citizen living or working abroad is known as an expatriate. These individuals have different income tax considerations from those living in the US. A US citizen who thinks it would be desirable to work in a zero tax jurisdiction outside of the US must consider the rules of the US tax system, which reach anywhere to tax the US citizen on those foreign earnings.

A US citizen working and earning money in a foreign country may elect to exclude some of those foreign earnings from gross income. This is known as the foreign income exclusion.

The amount of the exclusion is $80,000. After 2007, the $80,000 amount will be increased by a cost-of-living adjustment. There are a number of detailed rules under this exclusion, but the basic premise is that the individual must have a tax home in the foreign country and satisfy either a bona fide residency test.

The issue then becomes if the type of income that is earned qualifies for the exclusion. Income qualifying for this exclusion includes wages, salaries, fees, and other compensation received for personal services rendered during the period the individual qualifies. Income earned as an artist or writer, or self-employment income also qualifies. The services must be performed outside of the US.

In general, U.S. social security and Medicare taxes do not apply to wages for services
performed as an employee outside of the United States unless one of the following exceptions applies:

the taxpayer performed the services on or in connection with an American vessel or aircraft,
worked in one of the countries with which the United States has entered into a binational social security agreement,.
worked for an American employer, or.
worked for a foreign affiliate of an American employer.

If the US taxpayer is self-employed, the rules for paying self-employment tax are generally the same whether living in the United States or abroad. Hence, from the perspective of withholding taxes, its better to be an employee than self-employed when working abroad.

Choosing the “right” place to earn this Foreign Earned Income is the real planning strategy. The goal is to find a foreign location that will not tax you on the income earned. How about an English friendly, warm weather location like Belize? Established its independence form the United Kingdom over 20 years ago and has excellent laws based upon English common law.

Belize offers a special incentive to individuals from Canada, the United States or the United Kingdom. (Note, the UK is the best of all places from which to depart or leave your tax status behind. The UK taxes on residency and domicile. No citizenship claims for taxation. You can leave the UK without an exit tax and not be subject to their tax laws thereafter). It is known as the Retires Person (Incentives) Act. A person who is a legal resident from one of these jurisdictions, and who has attained the age of 45 years old, may reside in Belize income tax free as a Qualified Retired Person. To qualify, he or she must show that they will have an annual income of at least $24,000 per year. The person or his/her dependents may not engage in any gainful employment in Belize. However, nothing prevents the person from carrying on business from within Belize if such business relates to activities carried on mainly outside of Belize and is conducted exclusively with persons non-resident in Belize. Further, persons accepted are allowed to bring into Belize, without duty, the following items: A motor vehicle, a boat, or a light aircraft. The purpose of the act is to encourage and promote the inflow of foreign capital into Belize by offering certain tax exemptions and incentives to Qualified Retired Persons.

A Qualified Retired Person is exempt from the payment of all taxes and levies on all income or receipts which accrue from a source outside of Belize or from a person resident outside of Belize, and from work performed or investments made outside of Belize, whether such income is earned or passive income and whether or not such income is remitted to Belize.
Qualified Retired Persons shall be deemed to be non-residents for the purposes of the Offshore Banking Act, the Exchange Control Regulation Act, the International Business Companies Act, the Trusts Act, the Immigration Act, and the Belizean Nationality Act and any other Act which relates or may hereafter relate to international financial services, directly or indirectly. This gives the Qualified Retired Person access to these Belizean offshore opportunities that are not available to residents of Belize.

A US person retired in Belize can be working for a foreign company and exclude that income both from Belize and US taxation. How does one find this foreign company to work for?

There are international executive leasing companies that can help a person find a job, either as an employee or as an independent contractor. Further, there are several forms of tax-deferred transfers approved by the IRS that may be utilized by an individual to transfer ownership of his or her US based assets to a foreign company for which the person may become employed or act as an independent advisor.