Tax-Free Income Scheme: Step-by-Step Guide

For Digital Nomads, Freelancers, and Remote Business Owners
Non US Citizens only
1. Set Up Your Tax-Free Business Entity
Step 1: Form a US LLC
Why? US LLCs are flexible, low-cost, and avoid corporate tax if structured correctly.
How?
- Choose a State:
- Wyoming (no state tax, privacy)
- Delaware (strong legal framework)
- New Mexico (cheapest, but less banking flexibility)
- Hire a Registered Agent: Required for compliance (cost: $50-300/year)
- Obtain an EIN: Apply for an Employer Identification Number (EIN) via IRS Form SS-4 (free)
Alternative Structures:
- UAE Free Zone Company: 0% corporate/personal tax, but higher setup costs (~$15k)
- Estonia e-Residency: 0% corporate tax until profits are distributed
2. Terminate Tax Residency
Step 2: Become a Tax Nomad
Why? Most countries tax residents on worldwide income.
How?
- Spend <183 days/year in any single country
- Sever ties to your home country (sell/rent property, close local bank accounts)
- Establish residency in a tax-free country (e.g., UAE, Georgia, Panama)
Example:
- Live in Thailand (180 days), UAE (90 days), and Mexico (95 days)
3. Open Business Bank Accounts
Step 3: Set Up Banking for the LLC
Why? To receive payments and avoid mixing personal/business funds.
How?
- US Business Account: Use Mercury, Wise, or Payoneer (supports non-residents)
- Non-US Account: Open a USD account in a tax-neutral jurisdiction (e.g., UAE, Singapore)
Tip: Use Wise to hold multiple currencies (USD, EUR, GBP) and avoid FX fees.
4. Invoice Clients & Receive Payments
Step 4: Bill Clients Through the LLC
Why? Income must be routed through the LLC to qualify as non-taxable.
How?
- Invoice as the LLC: Use tools like FreshBooks or Wave
- Payment Processors: Stripe, PayPal, or direct bank transfers to the LLC’s account
- Label Income as Non-ECI: Ensure services are performed outside the US for non-US clients
Example:
- A German client pays your Wyoming LLC $10,000 via Wise for freelance work done in Bali
5. Withdraw Profits Tax-Free
Step 5: Pay Yourself as the Director/Owner
Why? Owner’s draws are not taxed in the US if income is non-ECI.
How?
- Owner’s Draws: Transfer profits from the LLC’s account to your personal account
- No Salary: Avoid payroll taxes (15.3% in the US) by not paying yourself a salary
- Use a Tax-Free Personal Account: Withdraw funds to a UAE, Georgia, or Seychelles account (0% personal income tax)
Example:
- Transfer $50,000 from your Wyoming LLC’s Mercury account to your UAE personal account
- Tax Result: 0% US tax (non-ECI income) + 0% UAE tax (0% personal tax)
6. Compliance & Reporting
Step 6: Stay Legal
US Requirements:
- File Form 5472 annually (reports LLC transactions, even if $0 tax owed)
- Avoid creating a US tax nexus (no US office/clients)
Non-US Requirements:
- Report foreign accounts (e.g., FBAR for US citizens)
- Declare non-residency in your home country
Tools:
- Accounting: QuickBooks or Xero
- Tax Residency Tracker: Nomad Tax or Rovva
7. Advanced Tactics to Avoid Pitfalls
Avoid Taxation Triggers:
- No US Clients: Work for non-US clients only
- No Physical Presence: Perform services outside the US and avoid staying >183 days/year in any country
- No Passive Income: Focus on active income (services, consulting). Passive income (royalties, dividends) may trigger CFC rules
Example of Failure:
- Working 200 days/year in Spain ā Become a Spanish tax resident (global income taxed at 24-47%)
Alternative Tax-Free Structures
Option 1: UAE Free Zone Company + Residency
- Set up a Dubai Free Zone Company (0% tax)
- Invoice clients globally
- Withdraw profits to your UAE personal account (0% tax)
Option 2: Estonia e-Residency + Cyprus Non-Dom
- Bill clients through an Estonian OĆ (0% corporate tax on retained earnings)
- Withdraw dividends as a Cyprus non-dom (0% tax on dividends)
Option 3: Puerto Rico Act 60
- Move to Puerto Rico (183+ days/year)
- Pay 4% corporate tax and 0% federal tax on US-source income
Tax-Free Checklist
- Terminate tax residency in high-tax countries
- Use a US LLC/UAE company for invoicing
- Keep income as non-ECI (non-US clients, work done abroad)
- Withdraw profits via owner’s draws (not salary)
- File Form 5472 (US) and report non-residency elsewhere
Final Notes
- Tax Avoidance vs. Evasion: This scheme is legal if you follow residency rules and reporting requirements
- Consult Professionals: Hire a US tax attorney and international tax advisor to avoid mistakes
- Adapt as Needed: If your income or lifestyle changes (e.g., US clients), restructure immediately
By following these steps, you can legally retain ~100% of your income while living and working globally.
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