When the term Tax Haven is mentioned, images of glamorous characters in evening dress depositing their money in exotic locations spring to mind. But, what is a tax haven and what different Offshore Tax Haven Locations are there? This is, actually, more complicated that it appears.
There are a number of tax haven benefits for both individuals and companies. Whether you are looking to protect your personal assets or are looking for a corporate tax haven, there are rules and regulations that must be followed. To ensure that you choose a tax haven that is best suited for your needs, The Offshore Company UK can help guide you in your decision. We can help you understand the four ways to identify whether an offshore jurisdiction is a tax haven or not. The levels of tax; consistency of taxation; information exchange laws or practices; and lack of a need for substantial activities all play a role in determining if a jurisdiction is a tax haven and whether it would be effective for the asset protection and avoidance of tax you require.
Tax Havens: Tax Level
The history of tax havens suggests that they will impose very little or no tax upon the individuals or corporations financially resident therein. This fact alone is not sufficient to indicate whether or not an offshore financial centre is actually a tax haven, and traditional tax haven myths relating to the jurisdiction will need to be verified. The other three measures have to be in play to fully categorise it as such.
Consistency of taxation
Also known as transparency, if an offshore jurisdiction does not have consistent tax laws for all those subject to its taxation system, it is perceived not to be transparent. If tax information and all relevant documentation are kept private, then the offshore location is considered not to be transparent.
Offshore Tax Havens can be divided into three categories: a zero tax haven, a low tax haven and a tax haven which has a ‘normal’ level of tax but which offers beneficial treatment in other financial areas.
A Zero Tax Haven is often a small economy, perhaps a former British Colony for example. This offshore financial centre will make up for the fact that it has zero tax on income by taxing in other ways, via indirect taxes.
A Low Tax Haven is also frequently a smaller economy. Again it may have been a British Colony in former times or a British dependency. The tax will be much lower than usual and this will be made up for by slightly increased indirect taxes, too.
Normal Rate Tax Haven. This sounds a little bizarre – almost a contradiction in terms. In fact, there are several offshore jurisdictions that charge the normal rate of tax but they give financial incentives in other ways, offering a form of tax competition. For example, in Ireland there are special tax advantages given to manufacturing operations to encourage manufacturers to relocate there. These organisations pay a reduced rate of tax and benefit in this way. Other offshore financial centres offer different taxation advantages.
Information Exchange Laws
Organisations such as the OECD encourage information sharing between nations’ governments. Where one government or governmental agency requests information about one of its residents or has a very specific enquiry concerning a (home) internal taxation situation then the other authority will provide this. This is very common practice throughout the world, except in offshore tax havens. In certain Offshore Financial Centres, known as Tax Havens, this information sharing is not possible due to strict legislation or practices which prevent it. This has the benefit to the investor of increasing their financial privacy.
If offshore financial centres do not participate in what are considered to be ‘substantial activities’ to generate revenue for the economy, it is presumed to be generating income from other streams. These streams would include from investors. This lack of activity suggests that the tax haven is endeavouring to attract depositors and investment due to lack or a low rate of tax.
It is essential for all of these four strands to be in place in order for a jurisdiction to be known as an offshore financial centre or Tax Haven.