Book Review: Capital Without Borders

Capital Without Borders: Wealth Managers and the One Percent by Brooke Harrington takes a very interesting and scholarly look at the ways in which wealth managers influence the world through their advice to the very wealthy in society. The book is not specifically related to citizenship by investment, or cash-for-passports, as Harrington describes it, but does relate to the finances of the same group of people.

Harrington took the unusual step of studying for and passing STEP examinations as a way to gain understanding and trust in her subject. STEP is the professional body that oversees and educates trust and estate planners: wealth managers. They play a very interesting role in global financial services because they only cater to the very wealthy and as such are involved in the decision making process the moves and places enormous capital flows.

Needless to say, wealth managers and their clients require privacy and discretion, which has made them a difficult profession to reach and research. The unusual nature of both her research and research subjects provided many interesting articles (such as this one) when her book launched.

Wealth managers have a very close and intimate relationship with their clients which leads to a very deep understanding of the issues and problems that they face. One problem is that the rest of us – the ninety nine percent – imagine that they cannot have any problems because they are rich. The reality, of course, that lots of money and assets brings a substantial set of responsibilities and new problems – including not knowing who to trust. The wealthy people that I have known have mostly had very similar sets of problems as everyone else – they just have nicer watches, cars and bigger homes and their children get a more expensive education.

One of the main reasons for her research was to investigate some of the ways in which the one percent has changed in recent decades. The reduction in borders for capital has made it easier for money to flow around the world looking for opportunities. However, people have also tracked that rise in globalisation, allowing people and families with substantial resources to move and seek locations that better suit their needs. One of these needs is often reduced taxes. This, of course relates to both residency and citizenship for these individuals.

The word that she uses for these people is transnational, which is a way of saying that they operate in a space above nation states. In the connected world in which we live, a family and it’s assets can be (almost) scattered globally, making it almost impossible to impose normal laws upon it. We may all imagine that the wealthy are looking for ways to grow their money and invest profitably. They are. However, at a certain level, their focus is also on defence. Their wealth managers are generally tasked with ensuring that as few things as possible can interrupt their wealth and it’s stability. Those interruptions might include taxation, divorce and estate taxes upon death.

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To be fair, when talking about the very wealthiest in the world, multi-billionaires for example, they do have more financial resources than a number of the smallest nation states. This really does make it difficult to impose rules or laws on them when they can literally fly away at a moment’s notice.

Harrington visited a number of the world’s tax havens during her research and it seems clear that some of the smaller island nations that make up the tax havens of the world have made changes to their laws solely to benefit the wealthiest investors on earth. This means that while nation states each have the right to do as they please, some are being used to distort reality for the benefit of the wealthy.

While this mostly relates to trusts and companies (IBCs) it also is directly related to citizenship by investment – which is mostly good for us. While it was not mentioned in the book, it is worth pointing out that lawyers and wealth managers use their connections in other countries to help introduce clients to specialised firms that handle citizenship by investment applications.

If as a reader of this website you are someone for whom assets, asset management and citizenship are issues in your life, then it is very likely that Capital Without Borders will be a very interesting read for you. Though it may be too academic for most people’s needs, there are parts of the book that discuss some of the practical methods used by wealth managers to aid their clients and protect their wealth. If this serves as a way to decide whether or not you need to take such steps, or have the asset base to justify taking them, then it will have been of value.

How To Use A Tax Haven?

An Offshore Jurisdiction

The reality is that most conversations relating to dual nationality, second citizenship or residency involve taxation somehow. Additionally, by definition these conversations are international in nature. And, human nature being what it is, we all want to pay less tax if we can.

When investigating these issues, it quickly becomes clear that national taxation policy makes some countries more desirable for business, residency and citizenship than others. At the top of many people’s lists will be a list of tax haven countries.

Therefore, rather than duck the issue, let’s take a look at it…

What Is A Tax Haven?

Firstly, a definition. When it comes to tax havens, a word that is often used is offshore. The word creates images of small islands with white sandy beaches, however, in reality it is much more general than that. Your home country of residence is considered to be onshore and everywhere else is offshore.

Therefore, even the biggest countries in the world, with a reputation for high(er) taxation can be offshore. Countries like the United States, Germany or Australia can be offshore if you are not personally located there.

As with any person or business, there are specialisations. Not every location is good for every need. For example, the British Virgin Islands are corporate and personal tax havens, while Belgium is one of the highest taxed countries in the world, but levies a rate of zero capital gains tax. Some locations are good for banking, such as Jersey, while it’s neighbour Guernsey has a reputation for fund management and insurance.

For these reasons, the wealthiest – families and corporations – among us are able to carefully select the location that best suits their needs.

What Are The Biggest Tax Havens?

As big a surprise as it will seem to most people, the largest tax havens in the world, in terms of money amounts, are not the jurisdictions you might immediately think of. The largest two are the United States and the United Kingdom!

Some years ago I read that the largest cities in the world for money laundering (a subject usually linked in the media to tax havens) were New York, London and Miami. Once again, they might not be where you first thought of. And interestingly, while many people might not wish to be associated with, for example, the Marshall Islands, very few people would consider any negative connection with New York or London.

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Who Are The Tax Haven Countries?

This all means that a tax haven can be almost anywhere if you have very specific needs and know what you are doing.

Some countries in the European Union that spring to mind include:
Ireland, Luxembourg, the Netherlands, Austria, Latvia, Estonia, Malta and Cyprus.

Geographically European but outside the EU:
Jersey, Guernsey, the Isle of Man, Gibraltar, Monaco, Andorra, Vatican City (yes! do a Google search about their banking and you will be amazed…), Switzerland and Lichtenstein.

From further away:
The Cook Islands, the Marshall Islands, Belize, the Bahamas, the Caymen Islands, BVI, Singapore, Hong Kong, etc etc.

This probably makes it clear why tax havens are unlikely to go away. No matter what governments may complain about them, they are not really a part of the system, in many ways they are the system! There are simply too many personal, corporate and political connections to see the offshore world overhauled or closed in the coming years and decades.

Why Do Tax Havens Exist?

There are many reasons, but perhaps the main one related to the history of the British Empire (and some other colonial powers too) and their global reach.

Once the empire of trading and staging locations was fading – in part because of the development of commercial aviation, making it less important to sail around the world – a number of governments found that they had to keep paying the bills for their small colonies. The UK went through a period of allowing independence for a number of small countries through the 1950s to 1970s.

One of the results was that these small countries were unused to surviving without aid and the British government wanted to end the subsidies. The result was that these countries were left with minimal industry and revenue generation capability. For many countries, financial services were actually encouraged by the British government as a revenue generation model.

Over the years, a wide range of depositors have come to rely on the services of the offshore world, from African dictators to Wall Street investment banks to international businesses to royalty. It seems that no matter who we are, we all share the desire to reduce our tax bill.

How Do Tax Havens Make Money?

There are several business models for these countries, but it is worth understanding that for a small geographic location, just a couple of successful business sectors might be enough to sustain the entire country.

If the country has low or zero rates of corporation tax, then there will be a sector for corporate services. This will include set-up fees and annual management fees, plus directors and secretaries, office space, annual filing fees and hourly admin rates. It can really mount up!

For banking and fund management locations, their sectors will need all the infrastructure of a global bank, especially technology, but the jobs being created will almost all be located in the country. This sort of work is rarely outsourced abroad.

Jurisdictions that specialise in other areas will usually have lots of law firms. Like corporate services, there are markets for ship, yacht and aircraft registration among others. Each needs specialist legal assistance and administration.

How To Use A Tax Haven

In early 2016 a data leak from a Panamanian law firm called Mossack Fonseca exposed millions of documents and thousands of people for using structures around the world for (mainly) nefarious means.

Britain’s Prime Minister, David Cameron, was dragged into the Panama Papers scandal. In his situation, he had previously owned shares in a structure established by his late father. He had sold his interest, declared it in his annual tax return and paid the proper amount of tax on the capital gain.

In reality, there seemed to be little wrong about his involvement. His father had been a stockbroker by profession and when the structure was established (when David Cameron was aged 15) it was very difficult to invest funds abroad – such as in the US – and this was a method of making it possible.

In direct contrast, there were others caught in the trap, such a Malta’s Health and Energy Minister, Konrad Mizzi, who had only recently established his structure, whilst he was already a government minister. On behalf of his government he would soon be in the process of negotiating a gas deal that would be worth hundreds of millions. His circumstances seem much less savory because he had completed a form and ticked the box for “Secrecy”.

These examples highlight one of the core reasons that people use tax havens: secrecy. Although there have been a number of moves to limit secrecy and enable information sharing between governments, pushed by the FATF, there are a number of countries that take their secrecy very seriously.

In fact, when combining the government sanctioned low or no tax environments with expert wealth management it is possible to make offshore really work for you, if you want. However, it is important to understand that this mostly involves committing crimes on your tax forms back home if you do. This means that for the majority of people, banking havens are used by people that are willing to break the law.

At the most extreme end of the scale, tax havens are used to help process arms or drugs deals, or to launder the proceeds of crime. At the other end of the scale, they are used for completely legitimate purposes relating to fund management, insurance and banking. Obviously, we recommend that you use them only for legitimate means and are careful to declare any interests on your annual tax declaration.

Tax Havens And Citizenship

To get back on topic, for some people wishing to acquire a new citizenship, a tax haven is a very high choice. Why? Simply because tax havens have a habit of not taxing their citizens or residents either heavily or at all. If you happen to be a mega-millionaire looking to secure your fortune, selecting a government that is not very interested in your money must be quite a relief!

The business of selling passports has become quite an industry in its own right. Some of the nations that are willing to sell their rights are smaller tax haven type countries. While these may not be the best travel documents, they do have their purposes.

Why Is Your Country Of Tax Residence And Residential Status Important?

When it comes to trying to reduce taxes through internationalisation, many people take a wide range of steps but because of the complexity of the area, they tend to make bad choices and do things in the wrong order.

One of the reasons for this is that individuals and families tend to do the easiest thing first, but the easiest thing is not always the best thing. For many people, this easiest step is to open an offshore company to lower or remove the tax burden that their company – and also their primary source of income – faces.

In years past, that easiest thing would have been to open an offshore bank account in their own name, and then funnel some of their income into it, out of sight of authorities. This is both much more difficult to do now than it once was and a route that is much more likely to be found out, thanks to information sharing treaties. It was always illegal.

In most of the developed world, an offshore company or bank account must be reported in annual tax declarations, which means that not doing so is a criminal offence. People go to prison all the time for this kind of thing which seems to make the risk very high, unless you happen to like prison…

Instead, the best first step when internationalising yourself is to assess your current residential status and then potentially change your country of residence.

Why Change Your Country Of Residence?

With the exception of just a few countries in the world – most notably the United States – income and capital gains taxes are applied in the country in which a person is considered to be normally resident. In other words, you pay tax to the country that you spend the most time in.

However, all national tax codes are different. Even in the European Union where the key principle is harmonisation, member states retain the ability to set their own taxation rules.

This means that it is possible to change country of residence from a high(er) to a low(er) tax jurisdiction. At an extreme level, this might mean moving from Belgium to Monaco (from very high to zero taxes). Changes like this are unlikely because some very small locations, like Monaco, are incredibly expensive and really only the super rich can afford to move there.

Since we are all different and every situation is unique, moves like this need to be assessed very carefully.

For an example, I once met a couple that had moved to from the UK to Belgium for tax reasons! Belgium is considered to be one of the highest tax countries in the world, so this is not an obvious move to make. The husband had recently sold a business for several million pounds and left the company at the sale, so had received a large one-off amount of money and would have no earned income for the forseeable future. You may not know this, but there are no capital gains taxes in Belgium, which meant that he was able to reduce his capital gains tax bill in the UK to zero.

For this couple, moving from their home country and becoming tax resident in a new jurisdiction saved their family more than one million pounds in tax! At that level, I understand why people might make such a life changing decision.

It is for this reason that your personal situation needs to be closely assessed. Some countries are more suitable for you than others.

However, the real skill is in finding a new jurisdiction that you can call home and will be a favourable fiscal residence and like the balance that you and your family strike.

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Why Change Your Country Of Tax Residence First?

Since personal taxes are governed by the country in which you reside, changing your home country and moving to a new jurisdiction with friendlier rules changes the playing field.

For example, many smaller nations have few or no rules about international banking for residents that are not citizens. The costs to try and monitor every bank account that a resident might have around the world is too much for small countries. Larger countries can afford the infrastructure and staff that comes from such efforts and monitoring, but small nations generally cannot.

Therefore, the offshore bank account that would be illegal if you opened it whilst resident in a high tax country, might be completely legal once you are legally resident in a different country.

Changes like this can be very helpful to people with an international or virtual income source, or the self-employed, but of little or no help to a salaried employee. Your personal situation is very important in this calculation, which is why you are reminded once again to take individual advice.

How To Define Country Of Residence?

Every nation has different rules in place, rules that have been developed and tested in court, over decades or centuries. However, almost every country will define residence based on a few key principles:

– where were you resident in the previous tax year?
– how many days (or nights) did you spend in the country during the tax year?
– where is your principle location of income or employment?
– where are your dependents and / or family located?

The combination of answers to these and similar questions will help a government to define residential status for an individual.

How To Change Country Of Residence?

The simple rule is to alter the conditions that impact your residential status for tax purposes from the questions, like those above, that your country asks.

This means that you may need to sell your primary residence, for example, or spend a certain number of days (or nights) outside the country.

In most nations, there is a number of days, usually around 180, which if you spent that or number or greater days in the country, you are ordinarily resident no matter what. At the other end of the spectrum, there is usually also a lower number of days, anywhere from 0 to 30, where if you spend that number of days in the country you are non-resident no matter what.

Your task will be to change your behaviour and lifestyle to ensure that you have taken the correct steps to legally change your residential status.

Could You Leave Your Home Country?

The reality though is that it is difficult to move away from your home and start a new life abroad. Most people cannot do this. If that includes you, second citizenship is really something of a dream and is unlikely to become a reality.

To add internationalisation into your personal finances and remain within the law, it will almost certainly be necessary to physically move to a new country and legally become non resident for tax purposes.

Back in the 1980s there was something of an underground movement which has changed and morphed today, called PT. The general concept was that people could live between multiple countries and pay zero taxes. I’m sure that the concept was sound – though I did not try it myself – but there were a number of court cases where people were claiming to be a nomad and live nowhere, but were actually still at home! Needless to say, they failed. Governments tightened up their laws with the result of making it harder to fake moving abroad.

Please do not fall into the trap of thinking that you can outsmart the tax department – they have had thousands of situations to learn from and hundreds of years of experience. It is best to play within the rules.

Can I Just Drop-Out And Become A Nomad?

There is a new breed of internet entrepreneurs, calling themselves “digital nomads” that can run their business from their laptop and live where they want. Many of them choose to travel and see the world.

There is a trend amongst this group to leave their high-tax home country and just go. They think that because they have left, their home government simply forgets about them.

Your author happens to know a few people like this and several have found themselves with tax bills in their home country – generally sent to their parents family home.

There is a key reason for this. Western governments consider an individual that was ordinarily resident to remain a resident unless they have taken the specific steps required to change their residential status to a new country. This means that a person could be away travelling for several years, but their home government considered them to be resident the entire time, because they did not take the required steps to officially change. Do not fall into this trap! Take your situation seriously and do everything legally and officially.

How To Change Country Of Residence And Gain A New Passport

If you plan to obtain a second or dual nationality, you will almost certainly need to change your country of residence first.

For some people, they may have an existing relationship with a country – perhaps their parents are citizens – and so they may not need to establish residency to naturalize.

However, under most circumstances, whether a person is pursuing naturalization by spending the required number of years in a location, or through investment, it is required to spend some time in the new country.

Some of the citizenship by investment schemes require very little actual physical time in a new country, but they do still require some presence (and usually the rental or purchase of real estate).

While spending the requisite amount of time as a resident in a new country is the “cheaper” option, it will generally take between five and ten years in total. There is a very real time commitment. Citizenship by investment shortcuts this process and the applicant’s residential status may not actually be very real, but the cost then becomes financial. For some people time is more valuable than money.

What Are Double Taxation Agreements?

Both individuals and companies can use double taxation agreements and treaties to reduce their taxes. However, they are only applicable when there is an international element to the situation.

Before writing anything else, it is very important to highlight that the double tax arena is very complex and specific personalised advice should be obtained before taking any implementation steps. Your situation and the countries involved may be unique and so any advice must be tailored to your exact situation.

Why Do Double Taxation Agreements Exist?

The accepted answer and the real answer to this will be different from each other.

Firstly, to the accepted answer. Every country has it’s own set of unique rules to tax personal and corporate income. Those rules have developed over many decades and are designed to ensure that each nation state can raise enough revenue to function.

However, some companies and individuals have business and financial interests in more than one country. Double tax treaties exist to ensure that they pay the appropriate level of tax in the correct location and are not made to pay taxes on the same revenue sources in more than one country.

The real reason that double tax treaties exist is because large corporations and wealthy individuals lobbied for them. Let’s be clear, most governments are not interested in whether or not we pay the correct amount of tax to the right country, they are concerned that we pay to them.

Without the lobbying pressure of wealthy groups, we would probably all owe all our money to every government forever!

How Double Tax Treaties Work

For the lay person, it is easier to think about the result of these treaties. Therefore, from here onwards, please think of them as double no taxation treaties, because that is how most major corporations and the 1% actually use them.

If you have read anything in the news between 2012 and 2015 about major technology corporations – such as Apple, Google and Facebook – it will have been difficult to have missed information about their taxes.

These are companies that generate tens of billions in revenues around the world but have structured their finances to legally minimise their tax bills.

Please note the use of the word legally, it is very important.

There are a wide range of terms that are used by the press for these deals, “sweetheart deals”, “a double Irish”, “a Dutch sandwich” and more. The result is a complex structure that moves revenue from one location to another to ensure that it ultimately is received free of most or all taxation. For this reasons, there are lots of financial services jobs available in smaller jurisdictions where it is difficult to recruit great staff.

Just as there are jurisdictions and formations used by companies, there exists a similar range that is used by private individuals. These include trusts for wealth planning, banking havens, asset allocation havens, low or no tax personal residency jurisdictions and on and on. The global super rich play with regulatory arbitrage just as international businesses and hedge funds do.

The reality is that a second citizenship would be a very small part of this concept, but it is a part of this concept, which is why I am writing about it for you.

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Double Taxation Agreement Countries

The modern globalised world means that most countries have agreements with most other countries. Not all agreements will cover all laws, this all comes down to negotiation between the nations, but they will have some agreements.

The few countries that will be hard to find agreements to will be those that can be guessed – nation states that are outside of the global community or have failed in some way. Therefore, countries such as North Korea, Iran, Yemen, Somalia will likely have none. Then there will be other nations that will have a few because of their relationships with the US, such as Iraq and Afghanistan, but they are also undeveloped in this area.

At the other end of the spectrum, most fully developed nations will have a wide range of agreements with dozens of other countries. A good example is the European Union. At the time of writing, the EU has 28 member states, which means that there are lots of agreements in place. Many of these agreements are with each other, but when countries negotiate with the EU as a block, they will put deals in place with most or all of the countries. Therefore, it will be quite common for even very small European Union members to have reached agreement with more than 100 countries.

For an example, this page lists the countries that the United Kingdom has tax treaties with. From Albania to Zimbabwe, it is not easy to think of a country that is not on the list.

Double Taxation Agreement For Pensions

For people at the end of their working career that have achieved some level of financial independence, how their pension is taxed is very important. Yes, many countries do have agreements that stop their pensions from being taxed twice.

There are many individuals that retire to another country to reduce the level of taxes applied to their pension income. If the new country has a lower average cost of living, this can be a double win for the retiree (their pension is taxed left and the remaining income buys more goods and services than it would do at home).

What To Think About

When planning your move to a new residence or citizenship jurisdiction, it is important to investigate how the type of income that you generate is taxed and at what rates. It might prove that the location you are investigating is a good fit, but it might not be.

Therefore, there is a great deal of value to be had in assessing this situation closely and designing your new legal circumstances to fit in with your existing income and wealth situation.