Tax - A practical guide
Tax is never far from the minds of most expats, making it an essential part of money management. Along with a sunny climate and a good quality of life, the benefit of paying less tax on earnings (or even no tax, in the case of countries such as Dubai) can be a key reason for choosing a new country.
"Tax can be a significant driver in many people's decisions about where to settle," says Lee Hamilton, associate director, international assignment services, at accounting firm RSM Tenon. But he points out that it is vital that expats understand the taxes they are likely to be subjected to before making any decisions - getting it wrong could prove to be very costly.
Be aware of the local tax requirements
Types and rates of tax can vary dramatically between countries but as an expat you will, of course, be subject to the domestic tax laws of the country in which you are living and can typically expect to pay income, capital gains, sales and regional taxes. In addition, some countries require residents to pay a compulsory social security contribution towards the cost of medical care and other public services.
Understand the tax benefits of offshore banking
By banking offshore you may be able to manage your savings and investments to take advantage of any potential tax efficiencies. Depending on where you live, income from savings and investments may not be subject to tax in your country of residence, if that money is not remitted into your country of residence. And, depending on the jurisdiction, you may not be subject to inheritance and capital gains taxes or death duties.
Usually, interest earned on offshore savings and investment is paid without the deduction of tax, particularly if you're living outside the European Union (EU). Those living within the EU will be affected by the European Union Savings Tax Directive (ESTD) which is designed to ensure that European citizens who reside in one country in the EU, but earn interest from savings and investments in another, pay the right amount of tax.
At its heart, holding your savings and investments offshore allows you to manage the repatriation of your wealth tax efficiently on your return to your home country. "By holding cash offshore, ideally in an offshore bond, you may be able to shelter [income] growth from tax," says Philip Teague, an independent financial adviser at Expat IFA. "If you decide to return [to your home country] and bring back the money held offshore you may have an income tax liability on the gain, though it can be carefully managed by using tools like time apportionment relief to reduce the amount of tax payable."
Save with future moves in mind
David Kilshaw is chair of private client advisory for accounting firm KPMG UK and says: "Clients often ask me whether the salary they earn in, for example, Dubai, can be brought back tax free." But he warns caution. For example, if someone living in Dubai saves £100,000 from their tax-free salary, these savings shouldn't be taxed when the worker returns to their home country. However, if the same expat puts the £100,000 in a five-year bond while in Dubai but cashes in the bond when home, it will be subject to tax. "When coming back, make sure that you're not rolling up future [tax] problems," adds Kilshaw.
Seek expert financial advice
Expats often find that when they move abroad their tax situation can become more complicated, so it's important to seek expert financial advice on exactly what your tax obligations are and how managing your savings and investments offshore could help you benefit from potential tax efficiencies.
Visit our Global Tax Navigator
Get country specific tax information with our Global Tax Navigator.
HSBC Expat do not provide tax advice and recommend that you obtain professional advice from your tax adviser. It is your responsibility to disclose your income to the tax authorities. Tax rules could change and the value of any tax advantages will depend on your individual circumstances.
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