Thanks ,it was an interesting post .i did not get the point about "Territorial basis taxation",once you said foreign sourced income is tax free in these countries and in another place you said , if you open a foreign brokerage account , you have to pay tax ... would anyone please clarify this ?
The source of your income is usually not the country where your bank account is located. If you're actively trading in a country then your trading income is sourced from that country. Consequently territorial tax countries are useless for traders but useful for investors. Let's see an example of both: - Joe is a Canadian citizen and decides to relocate to Hong Kong. Hong Kong doesn't tax capital gain regardless of its source and it doesn't tax foreign sourced income either. Joe wakes up in the morning and logs into his account with his UK broker and he opens and closes positions within the day. Since Joe is actively involved in the process of making the money, it's considered active income & trading income & income from self employment activities. Consequently the money he makes by opening and closing positions with his foreign broker account is taxable in Hong Kong. - Tom is a Swedish citizen and decides to relocate to Malta where he opts for the non domiciled taxation which means that his foreign sourced income and capital gains is not taxable in Malta. He then logs into his brokerage account in Luxembourg and buys 5,000 shares in Amazon, 100 ounce of spot gold, 150 options on DXY and 50 contracts of oil on the ICE futures exchange. He gets dividend from his investment in Amazon that he lives of in Malta which is considered a foreign sourced income and it's tax-free. After 8 months the market turns and he decides to sell his investments and sells his shares in Amazon, his options on DXY and his oil future contracts on ICE. The proceedings of his investments are tax-free. He then decides to reinvest his profits into gold because he predicts a bear market and thinks that most people will run into gold so he uses 90% of the proceedings to buy spot gold and some options. As you can see he is not actively trading, he was not actively involved in the process of making money but he gained money with his investment. There isn't any tax authority which could define what is trading and what is investing from tax point of view so if there is a doubt they'll analyze your case individually and they use common sense. I think you must clearly know whether you're trading or investing. The latter is tax-free in countries where foreign sourced income is not taxed.
Thanks for your reply. what if someone trades actively as well as investing ?.(trading intraday futures as well as holding positions for weeks) . in this case he should pay tax on his trading income (short term) and not pay tax on his long term income .so still countries like Panama ,Netherlands may work for this purpose.please correct me .
PS, There are some countries with Free Trade Zones which there is no tax or tax is very low (something like 3 to 5 %) ,in that case is it possible to establish a corporation on those FTZs? i guess trading via a corporation account in FTZ would not be possible , because FTZ usually deal with manufacturing ,repacking and etc. duties .
Exactly. You can avoid taxes on your investments but you have to pay taxes on your trading income even if both is being done on the same account. Well, it's not that simple. The free trade zones in most jurisdictions are being offered for certain industries only however there are countries where you can do pretty much anything in a free trade zone, for instance the UAE. Using an FTZ in Europe won't work. Even worse I heard about cases where the tax authorities said to a trader that you're using a company only to lower your taxes, the company is effectively an extension of you thus they gonna disregard it and you have to pay self employed taxes (income tax + social security) on your entire trading income... this is extremely rare and happened in Western European countries only. So, the lesson is clear. If you make a decent amount then follow the laws, strictly. Even the anti avoidance laws. Here in Europe the tax authorities may say that if there is no real business reason of your structure then they can reclassify or disregard it altogether. I'll get back to your PM in a few mins. Btw I should seriously consider forming an advisory company for traders and investors
Only lowering taxes is indeed handled with what they call “transparancy”. This means that the benificiary of the money will be taxed personally and the company will be considered as non existing. Things change completelly if the company is managed in the country where it is established, because that is considered as a real activity. In that case the company will be taxed. The place where the management in reality happens is the place of taxation. Following link is interesting but not exactly the same as it is about mother-daughter companies and tax avoidance. It shows the logic followed by European Courts: http://curia.europa.eu/juris/liste.jsf?language=en&num=C-196/04 Most important: there should be economical activity. Letterbox companies have no economical activity. I think it is a bad idea as 99% of those who ask you information have no money and make no profits that are big enough to worry about taxes. People with real tax issues go to professional advisors or try to find people who have already such a construction operational. They will not be found on ET.
It was a joke. What I said is there were cases where the tax authorities in European countries has disregarded domestic companies. I have no information whether the taxpayer has challenged them.
I know a few who already paid or are still negociating a deal with the tax authorities. Bit by bit all doors get closed. Want to pay lower taxes? Move to that place, don't fake or you will pay. All constructions without real activity will be considered as non existing.
if 95% of traders lose money, this thread only applies to the 5% that have profit. Out of the 5% I wonder how many have enough investment earning to pay taxes that really affect their income. And would consider the expense of offshore setup. Let's be realistic folks ...
Yes, that's true. What I said though in those cases the tax authorities argued that he could had been trading on his own name as a self employed person rather than using a legal entity and they concluded that he had been using the company only to lower his tax bill because the entity had no employees, no office, nothing. He was trading from home through his company's brokerage account. I've just shared this because I'd bet there are plenty of people who are using an entity to lower the total effective tax rate. Nowadays the Western European authorities are just like the IRS where they say that you can only take your profit out of your entity without paying social security taxes if you pay yourself a high wage on which you pay social security taxes. I guess the guy could have avoided all this if he would have paid $5-$10k / month in salary to himself.