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Your time spent living abroad as an expat can lead to some of the most exciting and fascinating experiences of your lifetime. The level of independence you feel when you step outside your comfort zone doesn’t have to be limited to your personal life. In fact, many expats have either brought their business abroad with them or started entirely new ventures overseas.
That said, setting up a new business abroad can be far more difficult than back in the U.S. No matter what sector your business is in, there are a few ways to go about transferring your ideas and expertise to another country. In my many years abroad, I’ve had personal experience setting up my own business as well as assisting entrepreneurial expats in finding their way. In this blog, we’ll cover some of the concepts you’ll need to know, how to decide which country is best for your business, how to become a tax resident, and much more.
Self-Employment vs. Incorporation
Once you know which industry you want to set your business in abroad, the next consideration you should make is what kind of legal foundation you create. This may seem like a pretty daunting situation that perhaps only a lawyer can answer, but the basics can be summed up with the following question: do you want to work alone or with employees?
If you plan on working by yourself and hiring only other freelancers at the beginning, self-employment is likely the way to go. It’s much easier and cheaper to start as a freelancer than to incorporate a business. Though there can be significant tax advantages to incorporating a company, your business would likely need to generate in excess of $100,000 to benefit from them, so it’s also better, to begin with self-employment if your initial revenue expectations are on the lower side.
If you want to aim bigger in terms of revenue and number of employees from the outset, however, you may want to go ahead and incorporate. Though your business may start small, incorporating your business will set it up for future expansion. In addition to being able to issue shares to founders, employees, and investors, incorporating will also provide you with more legal protections than you would have as self-employed. Incorporation can be a lengthy legal process, but it’s a necessary step for most entrepreneurs when they want to bring on more talent and expand the capabilities of their business.
On the other hand, in addition to the costs and time required to incorporate and dissolve a company, a potential downside to incorporating is having to pay corporate tax on your profits. While it depends on the tax system of the country it’s incorporated in, you may have to pay corporate tax on the company’s earnings and then pay personal taxes on the profits you distribute to yourself as a business owner. However, there are some “pass-through” structures that enable you to pass the income from the business directly to you as the business owner, so be sure to investigate the tax implications for all of the options you consider.
Deciding Where to Incorporate
If you’ve decided to incorporate your business, your next big question to answer is where to set up shop. Each country has different regulations when it comes to incorporation, taxes, liability, employee rights, and much more. Simply put, some countries are better to incorporate businesses in than others, particularly when it comes to taxes.
There are countries with lower tax rates that apply to all businesses incorporated there. Here is a glimpse at some of the countries with the lowest corporate tax rates:
- No Corporate Tax Rate: Bahamas, Bahrain, Vanuatu, various territories of the United Kingdom (Anguilla, Bermuda, Cayman Islands, Guernsey, Isle of Man, Jersey, Turks and Caicos Islands)
- Low Corporate Tax Rates: Hungary (9%), Montenegro (9%), Andorra (10%), Bosnia and Herzegovina (10%), Bulgaria (10%), Gibraltar (10%), North Macedonia (10%), Moldova (12%), Cyprus (12.5%), Ireland (12.5%), Liechtenstein (12.5%)
Even better for online entrepreneurs, there are numerous countries that only charge “territorial tax” on corporations and individuals. This tax system means that the countries only tax income generated within their borders, so if your business is incorporated in such a country but your income is generated outside of the country, then you may not have to pay corporate tax on that income in that country!
Establishing Tax Residence
Regardless of whether or not you decide to incorporate your business, you will have to establish your personal tax residence in a certain country. This will coincide with where you spend the majority of your time, usually defined as at least 183 days of the year.
In order to establish your tax residency, you will need to go through all the necessary measures of obtaining your visa. Of course, this can only be done by proving that you have the finances necessary to sustain yourself through income streams such as pensions, dividends, rental income, self-employment, or working for a company.
As we explained in the previous section, there are certain territories that only charge corporate tax on the income generated by your business within the country. While you maintain a residence within the country of your choice, you may be obligated to pay both personal and corporate income tax in one or more countries.
One thing you’ll definitely want to avoid is a situation where you are taxed on the same income by two different countries. For example, no matter which country where they live, American citizens and Green Card holders are required to file their income taxes in the U.S. every single year. In order to attract foreign expats, many countries have adopted special tax reduction programs that eliminate double taxation. One such program is Portugal’s Non-Habitual Resident (NHR) tax system, which basically states that you do not need to pay tax in Portugal on certain types of foreign-sourced income if you are paying tax on that income in another country. This beneficial tax system lasts for the first 10 years of your residence in Portugal. Many other countries such as Spain, Italy, and Mexico have similar expat-friendly tax programs, so be sure to use our Expat Tools to research the countries that can provide you with the best possible tax situation!
Incorporating Back Home in the United States
As we’ve just mentioned, U.S. citizens abroad are often put into tricky tax situations depending on where they live. In fact, the majority of our clients happen to be Americans who either already live abroad or plan to do so in the near future. Regardless of any finessing done by our tax partners and legal advisors, there is simply no getting out of filing taxes back home for U.S. citizens.
To simplify an often complicated situation, many expats choose to incorporate their companies in the U.S. while they gallivant around the world and work in between. There are plenty of benefits to starting up a company in the U.S. over another country. Of course, American citizens are more familiar with the legal systems back home, a convenience that makes establishing a business much easier. Even better, the U.S. offers a system of relatively low corporate tax rates, especially when compared to most European countries.
For the majority of our U.S. clients, setting up an LLC back in the U.S. is the most common route for those that want to run their business and live abroad. We recommend working with Firstbase and Business Anywhere to both setup and run a company completely online.
Firstbase, for instance, provides services for solidifying your business name and company structure. From there, you can manage your certificate of incorporation as well as maintain your ongoing compliance with U.S. business regulations. Once your business is running smoothly, you can also manage mail, apply for insurance, and set up banking, all from your phone or computer.
Meanwhile, Business Anywhere lets you register your business and set up a registered agent to maintain corporate status in the U.S. They also specialize in virtual mailbox services as well as online notary services that can keep your business moving while you work remotely from around the world.
Getting the Support Your Business Deserves
At Expat Empire, we know full well the kind of struggles that our clients go through on a daily basis as they start their life abroad. With all those struggles and triumphs, it can be quite difficult to divert attention toward a business as well. Since there are always plenty of things in motion, we want to be the ones that help you get to where you want to be.
Aside from our consulting services and local expert connections, we have developed a free online tool to help you find ways to reduce your taxes abroad. Check out our content and services and let us know how we can help you achieve your personal and professional international goals!
Disclaimer: David McNeill, Expat Empire, and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. We have not undertaken to independently verify whether this information is complete and accurate as of any particular date or dates. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning, or investment decisions.