How do taxes work for perpetual travelers?

Question

Here’s a question (actually a bunch of related questions) that’s been a bit of a thorn in my side lately. I’ve already combed this forum as well as several others but would love some more insight from more knowledgable people.
So, here goes…
Background: I’m a perpetual traveler and haven’t stayed in a single country longer than 6 months for around 5 years now. I’m a non-US person so no IRS worries but my country of citizenship (Korea) has a residential tax system and since I haven’t claimed residency anywhere else, it seems possible for my government to claim me as a tax citizen.
Which brings me to my first question: At what point does forming a solid business structure to cover your taxable a** become worth the hassle? $100K/year? At $200K/year? I sort of feel like most governments wouldn’t bother with this because it’s relatively “small fish” - thoughts?
And that brings me to another question: If I’m not needlessly spending time worrying and I should finally pull the trigger and set something up that makes me more “legit” - even if it requires paperwork - what’s my best option? Here’s what I’ve come up with:
Set up an offshore company - I’m leaning toward RAK Offshore since it seems to have no paperwork requirements and has no taxes - and use that to hold and re-invest the income I receive while paying myself a nominal amount every month, like $3,000, which I then file Korean (income) taxes for. This makes sense in my head since that’s roughly the amount I spend every month anyway but would this qualify as tax evasion?
Last question: for all of you who are perpetual travelers and aren’t filing tax returns with your country of citizenship/last tax residency - what are you doing in terms of investing the money you’ve saved? From what I’ve read, banks will report accounts that hold over a certain amount to the country of the account holder and online brokerage accounts seem to be the same.
Oh, and is the money accrued (without being reported tax-wise) considered black money?!
Okay, I’m done for now. Apologies for writing a book - I’m not so learned on this topic. Would appreciate any insights. Thanks in advance!

flagtheory · Accepted Answer

Hi whirledover,
This is not tax advice, just general information regarding your questions.
Set up an offshore company and retain and re-invest profits through it, could not be effective from a tax minimization standpoint, because South Korea has “controlled foreign companies” regulation.
These regulations state that any Korean tax resident who owns at least 10% of a foreign entity with average income tax rate for the three most recent years 15% or less, its undistributed earnings will be deemed to be paid as a dividend to the Korean citizen and subject to tax in Korea.
As Miked said, to legally reduce taxes, the key is personal tax residency.
The first point is that in absence of tax treaties, if you have domicile in South Korea or own assets in the country you may be deemed to be tax resident there and pay tax on your worldwide income. If there is tax treaty, these rules may change.
One solution could be, if your goal is incorporate a company in UAE, set up a FZE at Fujairah Free Zone. Is the cheapest “onshore” option for UAE. This set up will allow you to get a residence permit, you can live there a significant period of time during the first year and claim your tax residency. Taxes in UAE are 0% both personal and corporate. With the permit you can live wherever in UAE (Dubai, Abu Dhabi…) UAE has tax treaty with Korea so you may check there what says regarding personal tax residency.
The main issue is that this option is costly, for incorporation+residency budget over $7-8K. The company registration fee is about $1,000 and annual government fees are about $2,000-$3,500 depends on activity. Note that no reporting fillings or audits are required. No minimum paid up capital required.
I am not sure if it is worth in your case.
There are other cheaper options that depending on your situation, that may be suitable.
Here you can find some countries where you can live potentially tax-free if you are a tax resident.
If you want to know about residence permits available it may be useful this site and this one to consult South Korean tax treaties.
Always before take an action, consult with tax advisors.
I hope this has been helpful. If you have any question don’t hesitate to contact us.
Kind Regards

miked · Answer

whirledover:

RAK Offshore

I went through a similar process and the first thing I did (and you should) is:

Find a really good local tax attorney in your current residency country, prefereably one who specializes in offshore structures, and consult. Every country has different tax laws. Do not take any serious steps or decisions until you’ve spoken to at least two experienced tax lawyers in your country so you get a good idea.

It’s often worth it even  below $100k per year in revenue, if you do not spend most time in your home country. Basically as long as the tax savings are substantially higher than the setup cost. But every country is different, also take into account what you can potentially lose if you change your residence oficially.
If you keep your main residency in Korea, set up an offshore company, keep some of revenues in it and do not report them in your home country, it will likely qualify as tax evasion. It’s not worth the risk: banks, countries share a lot of financial information these days and the tax evasion penalties can be high. Besides, you would not want to have to worry about this constantly.
There may be a way to legally avoid taxes on the money you keep in your offshore company (and report at home) and do not withdraw - depends on your local tax laws.
The best solution is usually to change your tax residency to a country with no taxation on offshore earnings (e.g. UAE), so you’re not legally liable for taxes in your home country. You will likely have to spend some time in that country as well, every year.

Something similar to the flag theory - get second passport, legal, permanent residency in a country with no taxation for offshore revenue, change your residency status in your home country and spend less than 6 months per year in it (or whatever the min residency requirement is). Invest in real estate, stocks, other venues internationally.

working_9to5 · Answer

Hey, thanks so much for the detailed responses, they’re really helpful! It’s making a bit more sense now - so it seems the best thing to do is change my personal residency (domicile) rather than incorporate since that wouldn’t change my tax situation anyway.

I think you need to think about incorporating somewhere as well (preferably not in the same country as your country of residence). Not sure what it is you are doing now in terms of work, but if not for anything else but getting less of a personal liability.
Either way make sure you qualify for residence somewhere (Dubai is a good one, so is Malaysia, not sure about Panama, but a lot of members here seem to favor it).
Setup an offshore company (and just as important but way more difficult an offshore bank account).
Now you are ready to pay less taxes. Do keep in mind that for all the money you’ve earned up until this tax year you still Korea taxes.

I sort of feel like most governments wouldn’t bother with this because it’s relatively “small fish” - thoughts?

Yes it’s downright illegal, not sure about the chances of getting caught, but I’d rather be on the safe side myself.

Last question: for all of you who are perpetual travelers and aren’t filing tax returns with your country of citizenship/last tax residency - what are you doing in terms of investing the money you’ve saved? From what I’ve read, banks will report accounts that hold over a certain amount to the country of the account holder and online brokerage accounts seem to be the same.
Oh, and is the money accrued (without being reported tax-wise) considered black money?!

So mind you I do my tax returns, but investing money can be quite hard without residence, pretty much all brokerage accounts will require you to show proof of residence, even the bigger crypto currency exchanges these days require you to do so.
And yes money that you’ve earned and which you should have paid taxes over but deliberately decided to hide from the IRS is considered “black” money. Although most governments allow you to back report these taxes sometimes with a small penalty fee, assuming you initiate it.
When you are talking about banks reporting assets, what you are probably referring to is the new common reporting standard, the exact scope is unclear right now but in theory any amount of money held in a foreign bank account by a non-citizen should be reported back to his/her home country. So let’s say you have a bank account in Singapore then the bank in Singapore should report your 2017 balance to the Korean government in 2018.

miked · Answer

whirledover:

choose

I did the  research earlier and picked Panama  as well (friendly nations visa), because most other countries require you to actually live there at least 6 months a year in order to get the residency, but in Panama you can get a permanent residency and maintain it with minimum staying requirements.
There is a lot of bureaucracy (make sure you get a really good lawyer), requires several visits and the process can be lengthy for the set up, but I think in the end it’s worth it. I’d estimate the cost is about $5-10K for the initial setup (you’d likely get lower estimates from firms who specialize in it, but there are often  some extra costs after), and up to $1k per year to maintain.

whirledover · Answer

Hey, thanks so much for the detailed responses, they’re really helpful! It’s making a bit more sense now - so it seems the best thing to do is change my personal residency (domicile) rather than incorporate since that wouldn’t change my tax situation anyway.
With a rough calculation, applying for a second residency is worth it but yes, I’ll hold off on everything until I get back to Korea and can get local tax advice. As of now, I’m leaning toward Panama.
@miked, out of curiosity, where did you choose to change your domicile to?

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