What is and Where are the tax havens?

A tax haven is any country that allows you to reduce the amount of tax you pay.

Let’s state at the beginning that there is nothing wrong with using tax havens provided you are careful not to break any rules in your country of residence.

Some people use tax havens to hide their money from the tax authorities in their home countries. This is not only illegal, it’s very stupid, because one day you will probably be caught and could end up with substantial fines as well as back-taxes and possible even a jail sentence.

Notwithstanding, if you have the legal right to use a tax haven you would be foolish not to take advantage of all the opportunities you can to maximise your wealth.

There are three principal types of tax haven:

Zero – Tax Havens

These are countries that do not have any of the three main direct taxes most of us are familiar with:

  • No income tax or corporation tax
  • No capital gains tax; and
  • No inheritance tax

Some of the nil tax havens, you have probably heard of or read about or even seen in films; you may even have been on holiday in some. Amongst others they include:

Anguilla
Bahamas
Bermuda
Cayman Islands
Dubai
Monaco
St Kitts and Nevis
Turks & Caicos Islands
Vanuatu

Although there are no direct taxes in these jurisdictions, the governments there still need to generate some income. What they tend to do therefore is to impose licence fees for company incorporation documents or annual registration fees for companies; these charges are usually fixed and relatively small. If you’re considering living in one of these territories, most of these charges won’t apply and you may be able to live with little state involvement in the way of taxes. The only tax charges that might then affect you would perhaps be import duties or local sales taxes.

Foreign Source Exempt Havens

These countries do charge taxes and sometimes they can be at a high level. However, they are tax havens by virtue of the fact that they only tax you on locally derived income.

In other words, if all your income is earned outside the tax haven, you will not pay any tax there. Please be aware though that you may incur a liability for tax in the country in which you actually earn the income. Some examples of foreign source exempt tax havens are:

Costa Rica
Hong Kong
Panama
Seychelles
Singapore

This type of tax haven exempts any income earned from foreign sources from tax, provided the foreign income source does not involve any local business activity.

Some of the other tax havens don’t even allow a company to conduct business of any sort internally if tax advantages are to be claimed.

Jurisdictions such as Panama and Gibraltar would require a company to decide at the time of incorporation whether it was allowed to do local business (and therefore be taxed on its worldwide profits), or only foreign business and therefore be free from taxation.

Low-Tax Havens

The final group of so-called tax havens are countries that do have a system of taxation and do impose taxes on residents’ worldwide income. You may well ask why these are still known as tax havens. There are principally two reasons:

  • Certain countries may grant concessions that offer tax advantages in specific situations (capital gains tax avoidance for example).
  • Appropriate use of double tax treaties that countries enter into with each other which may allow you to lower your tax bill.

Good examples of low-tax havens are:

Austria
Barbados
Belgium
Cyprus
Denmark
Switzerland
The Netherlands
The United Kingdom

Other Important Factors to Consider

When considering tax havens per se, whilst the amount of tax they levy is obviously important, it is not the only factor.

You may not for example, want to risk investing your money in an offshore account in a politically unstable country; particularly if there is a risk that your assets could be expropriated.

Tax planning therefore, is only one consideration. Other important considerations are:

  • Privacy. What is the level of confidentiality?
  • Ease of residence. Is it fairly easy to obtain permission to live in the tax haven?
  • Political stability. Is there a risk your cash could end up in the government’s coffers?
  • Communications. How good are telephone and broadband internet access?
  • How easy is it to travel to the country?
  • Lifestyle factors. What is the standard of living? Are schooling and hospitals up to standard?
  • Is the climate suitable?
  • How high is the cost of living?

Ultimately, it’s a question of what you want from life and from your tax haven; are you concerned only with the tax position or are other factors equally important?

About Turner Little

Founded in 1998 in Yorkshire, UK, Turner Little is a specialist UK and offshore company formation, banking and corporate services provider. Our services include company formation, UK and offshore banking, asset protection, trademarking and trusts. Other services include Internet services, mail forwarding, wills and probate. Turner Little’s vision is to offer the best possible service, together with market leading products.

New legislation to shake up offshore banking in Cayman Islands

The Government of the Cayman Islands unveiled three legal bills that will fundamentally alter its offshore banking legislation. The move comes just weeks before the European Union’s deadline of 31 December, after which the EU will release its latest blacklist.

A deadline has been implemented by the EU for all offshore financial centres to address measures over perceived ‘unfair tax practices’ in order to avoid the blacklist.

Offshore banking legislation changes

New legislation includes the International Tax Co-operation (Economic Substance) Bill as well as alterations to current company laws. All three legal changes must be debated and passed before the end of 2018 and will lead to a major shake-up in the offshore sector.

The changes will mean that offshore companies incorporated in the Cayman Islands will have to prove that they are carrying out tangible work there. If they can’t prove this or that they have some form of solid, economic presence, then they won’t be able to “satisfy the economic substance test in relation to any relevant activity carried on by that relevant entity”, as stated in the new bill.

Officials from the financial services ministry say that an “in-depth consultation” went ahead with commerce regulators and stakeholders, the Cayman Island’s financial industry, the European Union and the global Organisation for Economic Co-operation and Development (OECD) before the laws were completed. They say: “Since January 2018, many representatives from more than 15 financial services and commerce associations, as well as government stakeholders outside of the Ministry of Financial Services, have participated in the consultation. This breadth allowed government to ensure that our legislation is appropriate for both financial services, and local business.”

International financial centre

Offshore centres operate as global financial centres, which inevitably means that legislative changes take a lot of tine to be published. The new laws, and changes to current laws, are built on the Forum on Harmful Tax Practices (FHTP) by the OECD. This comes under the Base Erosion and Profit Shifting (BEPS) Inclusive Framework, that was joined by the Cayman Islands in 2017.

This framework outlines the global standards for tax structures developed to attract profit in jurisdictions where they don’t conduct real economic activities. The forum in turn supports the framework, by reviewing regimes that give better tax rates to these structures, as this can negatively affect tax collection in other jurisdictions.

European Union blacklisting

The EU also use the framework to identify harmful tax practices within jurisdictions it considers ‘non-cooperative’. As the Cayman Islands intend to implement the new laws by the deadline of 31 December, they will avoid being blacklisted by the EU.

Cayman has never been on the EU’s list of ‘non-compliant’ jurisdictions, however it is on a watchlist in terms of addressing economic substance. Officials say that the EU’s concerns “need to be addressed in order to correct the perception that our tax system provides an unfair tax advantage to any company operating in our jurisdiction.”

James Turner, Managing Director of Turner Little Limited says: “These kinds of legal changes will effectively usher in a new chapter for the offshore sector. Exempt companies will be allowed to do business locally but will have to follow the same rules as local businesses do. This will eliminate mailbox companies, who have just used the address in order to gain tax exemptions.

“The FHTP now covers more than 120 countries within its range, with the ultimate aim of making tax issues globally compliant. We are witnessing a real evolution of global standards within financial services. The changes for the Cayman Islands will be seen next year, as currently there are more than 106,000 exempt companies with barely any economic presence in the jurisdiction. It will be interesting to see how this change will affect the offshore sector and the wider economic impact it will have as we move towards a true global standard.”

About Turner Little

Founded in 1998 in Yorkshire, UK, Turner Little is a specialist UK and offshore company formation, banking and corporate services provider. Our services include company formation, UK and offshore banking, asset protection, credit correction, trademarking and trusts. Other services include Internet services, mail forwarding, wills and probate. Turner Little’s vision is to offer the best possible service, together with market leading products.