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:
St Kitts and Nevis
Turks & Caicos Islands
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:
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.
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:
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.