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🐧 Save thousands on taxes by living abroad (should you do it?)

INSIDE: 3 Tax Savings Scenarios, Portugal NHR, 2024 Tax Scheme
October 29, 2023

Last week, I attended a conference for financial creators.

One creator recently moved to Portugal with her husband. But Portugal just revoked the NHR Tax Scheme for New Residents, so her husband wasn’t able to qualify in time to get lower tax rates.

Instead, he’s going to be hitting Portugal’s 40%+ income tax bracket. 😰 

This got me thinking: Is it worth moving abroad for the taxes?

Today in 10 minutes or less, you’ll learn:

  • 🤔 How to Math Tax Savings
  • 🟰 3 (Realistic) Tax Saving Scenarios
  • 🇵🇹 What are Portugal’s Tax Schemes?
  • 🇦🇪 Dubai and Netherlands Tax Schemes

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🗺️ Save thousands on taxes by moving abroad (should you do it?)

🎯 Consider your goals

If you’re like most of my readers, you probably have multiple reasons for living abroad.

For example:

  • Financial
  • Family
  • Health
  • Lifestyle/travel

Most expats and professionals abroad I meet fit this category.

On occasion, I do meet a die-hard tax escapist, but that’s the exception.

🤓 How to calculate your tax savings

Even if your goal is financial, you have to run the full numbers (not only taxes).

Consider the following:

  • Salary
  • Bonus
  • Cost of living
  • Travel expenses
  • Your kid’s international school fees (this is a thing!)

Let me illustrate the impact of moving to a low-tax country using three variables:

  • Income tax
  • Capital gains tax
  • International school fees

First up is income tax:

💡 Scenario 1: New Country (15% income tax) vs Home Country (30% income tax)

Assumptions:

  • Gross income = US$150,000
  • Savings rate = 20%
  • New Country income tax = 15%
  • Home Country income tax = 30%

Calculations:

  • Annual savings = Gross income * (1 - income tax rate) * savings rate
  • New Country annual savings = $25,500
  • Home Country annual savings = $21,000
  • Net difference in annual savings = $4,500

While $4,500 might not seem significant, the kicker is when you invest this amount, continue contributing annually, and compound the balance over, let’s say, 10 years.

You’d gain an extra $67,372 by the end of the 10th year! 🤯

 Calculator Link - Try running your own numbers using this free tool

Here’s another scenario that focuses on investment tax, instead of income tax:

💡 Scenario 2: New Country (0% capital gains tax) vs Home Country (15% capital gains tax)

Assumptions:

  • Starting investment = $100,000
  • Average annual return = 7%
  • Investment period = 10 years
  • New Country capital gains tax = 0%
  • Home Country capital gains tax = 15%

Calculations:

  • Ending investment after sale = (Starting investment * ((1+Expected return)^Investment timeframe)) * (1 - capital gains tax)
  • New Country ending investment = $196,715.14
  • Home Country ending investment = $167,207.88
  • Net difference in ending investment = ~$29,500

This starts looking pretty enticing.

Finally, a third scenario that factors in 2 variables - lower income taxes + international school fees:

💡 Scenario 3: New Country (15% income tax + $20k/year international school) vs Home Country (30% income tax tax + free public school)

Assumptions:

  • Gross income = US$150,000
  • New Country income tax = 15%
  • Home Country income tax = 30%
  • School fees in New Country (international school) = $20,000*
  • School fees in Home Country (public school) = $0

Calculations:

  • Net income after tax & schooling = Gross income * (1 - income tax rate) - school fees
  • New Country net income = $107,500
  • Home Country net income = $105,000
  • Net difference in net income = $2,500

Yikes, school fees have canceled out most of your tax savings. This is why it’s critical to run the numbers holistically.

How to Research International School Fees (and Cost of Living)

• International School Fees → International Schools Database publishes school fees in 70+ countries

• Cost of Living Comparison → Expatistan Cost of Living Calculator

Here’s the crux:

If all else is equal and the only difference between your Home Country and New Country are the taxes, then your savings compounded over time can generate significant net worth.

But be sure to factor in your cost of living changes (like international school fees).

OK now you’re probably wondering:

Which low-tax countries are these scenarios modeled after?

To be clear, it’s not 1 country, but multiple countries.

For example, Singapore has 0%-24% income tax brackets and 0% capital gains tax. (We published a previous edition on Singapore’s expat tax benefits.)

Let’s deep dive into a popular alternative these days:

🇵🇹 Portugal — Non-Habitual Residency

❌ Bad news. Unfortunately, Portugal’s government has recently discontinued their NHR program. They’ve replaced it with a program for “Incentive to Scientific Research and Innovation,” which targets a special category of high-skilled workers.

✅ Good news. In 2024, Portugal plans to introduce a new tax incentive for new residents, which I’ll explain below.

Created in 2009, the NHR program was designed to attract professionals, retirees, and foreign residents with stable incomes.

NHR granted the following benefits for a period of 10 years.

Benefits

  • 20% flat income tax on income for “high value-added” professionals who work in Portugal or are self-employed in Portugal (without NHR: 14.5% to 48%)
  • 10% flat income tax on foreign pension payments (without NHR: 14.5% to 48%)
  • 0% tax on dividends, interest, royalties, capital gains, income from rental of property abroad, income from employment and self-employment in another country (without NHR: 14.5% to 48%)

Downsides

  • You also pay a social security tax on top of this income tax (11% for employee, 23.75% for employer)
  • Your work must fit the high value-added list of professions—even if you’re self-employed

New Tax Incentive Coming in 2024

As mentioned earlier, NHR will be discontinued next year.

However, Portugal government has drafted a new tax incentive that’s still pending amendments:

  • 50% personal income tax exemption for employment and freelance income will apply for 5 years (applies to any profession)
  • This exemption is capped at 250,000 EUR per/year of annual income. Above this threshold, you’ll get general tax rates (which range between 14.5% - 48%).

All in all—not as generous as the NHR tax regime, but still helpful for new expats and remote workers.

Sunny beaches, fine wine, and low taxes. Sounds like a good deal.

🇦🇪 Next Edition: Dubai, Netherlands, and more!

This newsletter post is getting a bit long, so I’m wrapping it up here.

Tune in next week to learn:

  • Why expats are flocking to Dubai (can you guess the reason?)
  • How to cycle, find drugs, and save taxes in the Netherlands
  • Lesser-known low-tax countries that expats will overwhelm in 5 years (so get there first)

🌐 Beyond your borders

🤔 How much income do you need to be considered rich? (link)

🇱🇰 Sri Lanka approves free tourist visa for 7 other countries (link)

🇺🇸 81% of Americans did not increase their emergency savings in 2023 (link)

💳️ If you’re expanding your business overseas, you’ll want a fast, easy international business account.

Wise Business offers a multi-currency account that holds 10+ currencies and local bank account details in USD, EUR, GBP, SGD, and more. Join now → (link)*

*this is a sponsored link

🤩 Words from the waddle

👉️ How I can help

That’s all for today!

Whenever you’re ready, here’s how I can help you:

  1. Work with me 1:1 - Book a coaching session for your next career transition.
  2. Work with my tax team - Get personalized US expat tax help.
  3. Join my investing course - Learn how to avoid costly mistakes with expat investing.
  4. Sponsor this newsletter - Promote your business to 5k+ professionals & founders.


Dexter Zhuang

Dexter is the founder of Money Abroad, a weekly newsletter and website that help professionals build wealth overseas. Over the last decade, he's been building and growing internet products across Silicon Valley and Asia at top companies like Dropbox and Xendit. His work has been featured in global publications like Business Insider, CBS, US News & World Report, and Tech in Asia. He graduated from Dartmouth College.

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