Choosing Tax Jurisdictions

How Tax Jurisdiction is Determined

While tax jurisdiction almost always depends on residency, where if you live in a country you will pay tax there, this is not always the case. The United States for instance doesn’t care where you live, if you are an American, the government sees you as subject to paying taxes to them regardless.

If you are outside a country’s legal jurisdiction though, this may not matter, in some cases anyway, and if you are immune from double taxation, it’s not as if you will be extradited, and this doesn’t really happen from people merely relocating. Extraditing is generally limited to those who commit very serious crimes, or at least crimes that are seen to be, such as major drug lords.

Of course if you go back home, you are subjecting yourself to potential arrest and conviction of tax evasion, so this event needs to be considered and if you walk away from such a situation it is wise to be aware that you may not ever be able to go back without facing potential consequences.

There may be other issues involved related to tax treaties between countries, and just because you left doesn’t necessarily mean that the long arm of the tax man won’t reach you. This is a situation that does require professional advice to be sure, taking into account the tax treaties involved and the potential tax consequences of the move.

The United States and Eritrea are the only two countries that operate this way though, so people from other countries are basically free to pick up and leave and cut off ties with their original countries provided that they no longer reside there. You can come home to visit but the country where you reside the most will become your tax jurisdiction of record.

If you own a business and are looking to relocate its jurisdiction, this can be a little more complicated, or much more complicated depending on the countries involved. In this case it is important to get sound professional advise prior to considering such an option, as you want to be fully appraised of the situation and especially avoid mistakes or misunderstandings.

There are also rules relating to intent, where jurisdictions look upon things other than how much time you spent in a certain country, in an effort to determine where you actually reside. If your home is for instance in one country and you visit another country and spend more time there, the time spent in the other country may be viewed as a visit, similar to a tourist, if it is decided that your more permanent residency is elsewhere.

In order to clarify this, those seeking to change their tax jurisdiction should actually leave it, selling any residential property they have there, or if that’s not feasible or desirable, at least establish what should be construed as more permanent residential property in the new jurisdiction. If you own in the original country and just rent a place in the new country, this might not be seen as relocation.

Of course, obtaining permanent residency in the new country is what you are after, which may also require that you renounce your residency in the original country to some degree, and perhaps even renounce your citizenship should that be required.

It is important that this is all clarified to avoid the risk of remaining in the original tax jurisdiction, and especially to avoid double taxation, where both countries claim a stake.

Tax treaties can be a good thing in some cases though, as they do tend to look to avoid this double taxation, which is the worst fate. In practice though, without a tax treaty, your owing the other government tax money may not really be enforceable, but it is always critical to understand how this will all play out even if one is merely considering the move.

Relocation is Easier Among Retirees

When you are retired, it generally will not matter where you live, and therefore once one has retired, they are often free to pick up and relocate if desired, and if they can find a suitable place to relocate which will accept them as new residents.

Those who are working will usually find it more difficult to relocate to other countries. One must first find a suitable occupation there, and then get approval from the new country to not only live there but work there as well.

Countries tend to be pretty protective of the jobs they have, and while they may admit certain types of workers, those who have expertise for instance that may be in short supply in their country, it does tend to be a lot more challenging to get permission to work in a country than it does to merely live there.

Should one obtain this permission though, and taxation is the driving force behind the relocation, there are a number of factors to consider beyond just the taxation rate to justify such a move.

Not all tax money is raised by income tax, and one must look at other taxes that may be in effect, especially those that affect the price of goods and services. Some countries for instance have very low or even no income tax, but generously tax goods and services, especially imported ones. In these smaller jurisdictions, pretty much everything is imported, and one must look at the entire tax picture to get an idea of what the economic benefits of the move may be.

If you are retired, you will generally need a fairly substantial amount of wealth to be admitted, and this is not for people on a fixed income who are looking to stretch it out more, at least not if one is looking to move to a different country.

Countries are looking for those of real means, those who have assets, and you often will be required to purchase property there of several hundred thousand dollars, or make similar investments in the new country.

These are the folks that tax reduction will benefit the most though, who will see their after tax income go up in a meaningful way by moving somewhere where income tax rates are a lot lower.

Relocating Within a Country

Another option is to move to another area of the country that may have lower tax rates, whether this be lower income tax rates, lower sales tax or other consumption taxes, or both.

One is still subject to the same federal taxes, but tax rates may differ by state or province, and can differ a fair bit in some countries.

You still have to justify the move though, meaning that if you are still working you are able to find suitable employment in the new jurisdiction, or if you are retired you really aren’t constrained by such considerations.

Cost of living does factor into all of these decisions, whether it be moving to another country or another area of the country, and if the cost of living is higher but the tax is lower this may take away or even eliminate any tax advantage present.

If you are looking to maximize the economic benefit of such a move, ideally you’d both pay less in tax and move to a place with a lower cost of living, although we do need to account for all economic factors in these decisions, these plus whatever others may be present.

Money isn’t everything though, and people often relocate within a country for other reasons, such as being closer to family or seeking out a better climate. Much of the relocation in retirement in the United States and Canada is driven by climate concerns, where people often move to warmer climates after retirement, especially since they usually become less tolerant of the cold in their advanced years.

Moving offshore so to speak is less popular, but is something that many people consider doing in order to lessen their tax burden. If we can pull this off and come up with a solution that adds to our happiness as well, this can go a long way to preserve the lifestyle we have saved up for and also stretch it out for longer.