Expatriates and taxes: When investing overseas, what tax implications apply to you?
Here’s a guide for expatriates on how tax rules generally apply to income earned abroad
Dubai: Tax affairs for expatriates can be complicated if you are unsure on what tax you’ll have to pay when you invest abroad or unclear about how becoming a tax resident applies to you.
Tax has been recognised as being a key factor in decisions on where to invest globally, and while it is not the main determinant, it’s still important to know how much is levied on your hard-earned money.
Here’s everything an expatriate needs to know about how taxes are applied to your investments, particularly when you are residing outside your home country.
It can be a challenge to identify a suitable retirement solution as an expatriate. As with any financial product, there is no ‘one-size-fits-all’ answer.
How are stock investments of expats taxed?
Particularly when investing in different stock markets or investment products worldwide, understanding how your funds are taxed is important.
Generally, the gains derived from disposing of the foreign stocks would be subjected to tax as capital gains in the hands of the investor.
For the purpose of tax treatment, foreign stocks are treated at par with unlisted equity shares in most countries.
Expat investments options themselves can take many guises and for expats can be either onshore or offshore, although for expats, the offshore investment option is considered more favourable due to the tax benefits.
How are offshore bond investments of expats taxed?
Is investing in offshore investment bonds beneficial for tax purposes? An offshore investment bond is essentially a life insurance policy which acts as a tax wrapper containing a number of investment funds.
While onshore bonds are available to residents, expats and non-residents have access to offshore bonds which are typically based on the Isle of Man, Jersey, Gibraltar and Guernsey - among others.
Offshore bonds provide a tax efficient investment option for expats as the bond will not be subject to capital gains tax and income tax deferred. This means that the investment grows free of tax, substantially increasing the value of the investment itself.
Even if the investor returns to their home country, the investment will continue to grow free of tax, providing the correct offshore bond is in place.
For example, some highly personalised bonds can incur income tax as high as 45 per cent on drawdown when the investor returns home. For this reason it is vital to seek independent advice from someone who can analyse your full situation, including where you are likely to live in the future.
While investment bonds can offer some excellent advantages, it is important to understand the charges, fees and, potentially, commissions which will be charged. The minimum investment for an offshore bond will depend greatly on the providers.
The recommended provider will depend on a number of factors, including the level of control and diversification required, as well as the level of acceptable risk against an investment. In all cases, it is important to seek independent advice before making any decision on provider and investment amount.
The costs associated with investment bonds are likely to occur when the investment is originally made, while there is also likely to be an ongoing annual fee. You may also be charged a management fee by the adviser, which may be fixed or a percentage of the investment amount under management.
How are overseas pension schemes, retirement funds of expats taxed?
A pension scheme is a tax efficient savings plan which often forms a fundamental part of an investment portfolio and are designed to provide an income for an expatriate in later life.
An overseas pension scheme is considered a foreign pension when it’s based outside your home country. You would typically get one from a foreign employer or foreign government.
Pensions themselves come in a number of forms and, like mentioned above, may either be managed by an employer or the investor themselves.
In almost every country – unless the country where you earn your retirement income doesn’t levy taxes – unless your taxable income falls at or below the standard deduction level every year, you probably will.
How much you’ll pay is another story. There are numerous increasingly complex strategies to help retirees minimise their tax burden.
While how each strategy plays out varies with each country, the overall aim is to pay less in taxes by assessing the overall portfolio and trying different strategies, such as the size and timing of withdrawals in retirement and making most of income-splitting opportunities that may arise.
You can leave the pension in the original country and have regular payments transferred to an account in the country where you’ve retired. Some pension providers might not transfer money to a foreign bank account or, if they do, may charge high fees.
You may be able to move the whole pension to your retirement country and either take a lump sum payment or invest it in a new pension scheme within that country. However, some countries will tax a pension payment, while others may tax based on how you decide to receive your pension i.e. as a lump-sum or an ongoing income (annuity).
If you have more than one source of retirement income, you may wish to transfer one as a lump sum while leaving the other as monthly payments.
How are annuities of expats taxed?
Annuities grow tax-deferred and are taxed depending on the type of annuity, how the annuity was purchased and its term, and how withdrawals are made.
Because of annuity taxation complications, you might want to consult with a financial professional. A qualified annuity is mostly purchased with money from a pre-tax or tax-deferred account. Withdrawals are then made at ordinary income tax rates.
Conversely, a non-qualified annuity is purchased with money that comes from a taxable bank or brokerage account. Only earnings will be taxed.
The term of the annuity (period or lifetime) also plays a factor. A period annuity comes with a set term length whereas a lifetime annuity is what it implies — a regular amount dispersed over someone’s lifetime.
Early pay-outs and lump-sum distributions are generally taxed at ordinary income tax rate instead of the benefit of capital gains.
How are property investments of expats taxed?
Much the same as a pension scheme, investment in property is a common feature within an investment portfolio. Often for expats, this may include the primary residence as well as additional properties which are used to generate a regular rental income.
Investment property income tax issues can be rather complex, especially to an investor who is just getting started.
The taxation of rental income isn’t entirely straightforward, there are some big and complex deductions that investment property owners are entitled to, as well as some other potential income tax implications that are important to know before you buy your first rental property.
If you sell an investment property for more than you paid for it, you have what’s called a capital gain. There are two types of capital gains - short-term and long-term - and they’re treated differently at tax time.
Short-term capital gains happen when you sell an investment property you held for one year or less. These gains are taxed as ordinary income. That means you pay the same tax rate on short-term gains as you would on wages from your job.
How are expats taxed on investment platforms?
An investment platform is an online service the enables individuals and advisers to invest in financial products. Operated by a variety of financial institutions, they can typically offer a wider range of investment options than would normally be available for the average investor.
Even through investment platforms normally charge administration fees, the costs of managing investments through a platform can normally be reduced, while also increasing the flexibility of your investment options.
Due to the complexities around tax and financial regulations, expats and non-residents will have limited options when it comes to choosing between investment platforms and by working with an adviser you are likely to increase the options available.