It shouldn’t be surprising to hear that more and more people are earning foreign income these days. New technologies are continuing to connect people around the world in an increasing number of ways. Nowadays, you can invest in assets that are in a completely different country. Or, you may be servicing clients that live beyond your nation’s borders. Regardless of what the situation may be, it’s important to understand how foreign income differs from the money you’ve earned in your home country.
What is considered foreign income?
Foreign income refers to income that is earned from sources outside of your country of residence. In the case of dual citizens, the nation that you spend the most time living in is considered your country of residence. Those who typically earn foreign income are people who work abroad, or may have temporarily resided outside of their home country.
How might someone earn foreign income?
There are many different methods in which you could go about earning foreign income. Here are some of the most common examples:
Financial investments in foreign stock markets. Investing in foreign stock markets will hopefully provide you with investment income through capital gains, interest or dividends. All subsequent income from investing in foreign stock markets is considered foreign income.
Real estate investments in foreign markets. Another option is to purchase property in a foreign country. Any income generated from the property will be considered foreign income.
Personal income from foreign companies. If you are on the payroll of a company that is based outside of your home nation, any income will also be considered foreign income. However, this differs from servicing clients or selling products to customers outside of your home nation – we will clarify shortly.
These are just three common examples of the different ways someone could earn foreign income. But if you think about, any income coming from outside your home country’s borders will be considered foreign income. So what does this mean for businesses that sell their products to international markets? You’ll find out next.
Is the income from selling products and services abroad considered foreign income?
Before we get into this, there is one clarification that must be made. It requires the assumption that your business is registered in your primary country of residence. If so, all your sales to foreign customers will not be considered foreign income. Instead, it is considered a foreign purchase on their behalf. While this may not sound like a big difference, here’s what it means. When a customer purchases from your business, the transaction occurs in the country where the company resides. Since we assume your business resides in your home country, it is not considered foreign income.
How foreign income affects your personal finances.
When it comes to earning foreign income, there are many things to be aware of to ensure you receive all of the earnings you are entitled to. Consider the following:
Income tax treatment. You will want to understand the legislation around income taxes in both your home country and the relevant foreign nation. For the former, you will want to know the provisions addressing foreign income. As for the latter, you will want to know any provisions related to withholding taxes on income earned by foreign individuals.
Reporting and filing processes. You need to know any important reporting or filing processes when it comes to declaring foreign income. This also includes providing the necessary forms to receive any income taxes that a foreign country may be withholding on behalf of your home country’s government.
Tax rulings and exemptions. This involves any tax credits, deductions or special rates offered by your home nation, as well as any tax treaties that may exist. Some countries have special policies in place when it comes to foreign income. At times you may be eligible for certain tax credits or reduced rates on this type of income. It’s essential that you refer to any tax treaties which may exist between your home country and the foreign country where you generate this income. Doing so may help you avoid double taxation on your income by either nation – or at least enjoy a reduced rate.
If you’re earning foreign income, it’s important that you understand the factors we’ve mentioned above. Doing so will help to ensure that you receive all of your hard earned money.
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