Now that I run my own freelancing business, I’ve started to care a lot more about taxes and administration.
That’s because I have to. I’m buried under regulations and paperwork, all in German.
Maybe it’s just my adjusting-to-freelancing period, but so far I’m quite unhappy about all the work it takes to run a business rather than actually doing work that I can bill for (and thus, pay taxes on).
That’s the good thing about having a digitally-based job. I can go where I want, and where I’m treated the best. Which is exactly what I plan to do.
Nationality and where you are resident
Did you know that there are only two nationalities in the world that tax you based on citizenship no matter where you live? That is, the USA and Eritrea.
Everywhere else taxes you only if you live in the country. Meaning if you don’t live in the country, you don’t pay taxes to your country.
Right now I don’t pay tax to Canada, but we both pay taxes to Germany because we live here. Once we no longer live in Germany, we’re no longer obliged to pay tax to Germany unless we want to.
And we don’t want to!
When we go nomadic, I’ll be severing my tax residency with Germany and setting up my freelancing business in a tax jurisdiction that is far more favourable with a lot less maintenance.
There are different countries to choose from, but I started investigating the 2 other countries I hold residency in: Canada and Hong Kong. Here’s what I found.
Canada tax residency compared to Germany
At first I considered setting up my company in Alberta. Alberta is more tax favourable than my home province of Ontario, with no provincial sales tax and a whopping $18K personal tax exemption. For comparison, Ontario charges a sales tax of 8% and the personal tax exemption is only $10K. There is always a federal sales tax of 5% though.
- Alberta company: 0% provincial + 5% federal = 5% tax –> $18K income tax free
- Ontario company: 8% provincial + 5% federal = 13% tax –> $10K income tax free
- German company: 19% VAT –> 8K€ income tax free
From a sales tax perspective, it appears that changing my tax base from Germany to Alberta is more favourable. The German Finanzamt also restricts my income so that I can only earn a maximum of 80% yearly income from one client. Canada doesn’t care about this, which is SO much less stressful. Also Canada operates in English – a big bonus for me.
Hong Kong tax residency is the most ideal
This is where it starts getting interesting! At first I wasn’t considering Hong Kong because my ties to Hong Kong are not as strong (not that they need to be, we’re just doing business here!). However I do hold permanent HK residency through birthright as my Dad is born in Hong Kong.
When I started looking into it, my mind got blown and I realized I was onto something.
Hong Kong’s business tax rules are waaayyyyy more favourable than both Canada’s and Germany’s, and you don’t have to be a permanent resident to benefit.
The business tax rate is 0% on foreign income.
Let me say that again.
The business tax rate is 0% on foreign income.
Hong Kong charges only territorial tax, which means you are only taxed on income you earn within the country. They assume that if you earn money outside of Hong Kong, that they had nothing to do with it and therefore shouldn’t benefit from your tax money. Since my income will flow from Europe, my tax rate will be 0% if I operate out of HK. I will have to pay 16.5% income tax if I am resident in Hong Kong, which is a lot less than income tax in Canada and Germany. Plus I can lower my income tax by paying myself in dividends (which can also be done in Canada and Germany).
International tax havens
Hong Kong is not the only tax haven in the world, and not even the most preferred. There’s also Dubai, Malaysia, Panama, Seychelles, UK, Delaware (US) and other countries out there. Apparently basing your company in Hong Kong requires too much maintenance compared to some other jurisdictions. But I’m almost certain that I will choose Hong Kong for the sole fact that it just looks better. Less to explain to my clients about where I’m based and why. In terms of maintenance, Germany is probably at the top already so I doubt I’ll be phased by a once-yearly HK audit (in English!).
Benefits of changing my tax residency
Once I can focus on working and earning money, rather than dancing with the Finanzamt, I presume things will get better and cash flow will be more positive. Not to mention much lower or even NO taxes to eat away at my profits. Which is partly why I’m so confident that I will be able to support us once we move away. Imagine how much money you could put away if you didn’t have to pay taxes? Coming from 2 high tax countries myself, it’s like whoaaaa.
The ethics of not paying taxes
Not paying taxes is much more in-line with my moral and ethical stance. I don’t want to fund the war machine, or animal agriculture – two major industries that are heavily funded by our tax dollars. For the areas that aren’t as funded by tax dollars, I am in control of where my money flows and can contribute as I see fit.
Important takeaway message
If you earn an income online, or plan to earn your income online, consider setting up an offshore company in a tax favourable jurisdiction that charges territorial tax. Know that if you take up residency anywhere, you will be liable to pay taxes. However, if you float around as a nomad, you will be treated as a tourist which is the best way to be treated as you aren’t expected to pay income tax to any countries you visit.
Let me know if you’re as mind blown about this as I was when I first found out! There will be more blog posts like this as I set myself up offshore and discuss other options of being a true citizen of the world.