Establishing fiscal residence in a tax haven is a fascinating opportunity indeed. There are places on the planet where the state does not take away more than half of your earnings. You may hear some people say that paying taxes is an unavoidable obligation, but let us be honest: few people enjoy paying taxes. The same goes for corporations such as Pfizer or Google, for instance. They do not neglect the opportunity to save on taxes by conducting some of their operations via subsidiaries domiciled in tax havens. Everybody – from your dentist to noble aristocrats – uses tax havens to reduce their fiscal burden.
Companies known for their offshore operations include such giants as Alphabet, Microsoft, Apple, Cisco, and Oracle. One more advantage that a tax haven can give is the possibility to take out loans at reduced interest rates. By most conservative estimates, 21 trillion dollars is held in tax havens. 9.8 trillion of this amount belongs to the 100,000 richest people in the world.
What is a Tax Haven?
A tax haven is a country or a territory that charges low or zero taxes on incomes and/ or assets. This opportunity is attractive both for private individuals and for corporate entities. As you know, some countries charge a lot in taxes, and a person or company can save a large sum of money by relocating from a high-tax jurisdiction to a low-tax jurisdiction. Strong legislation and political stability are important for tax havens because these factors can guarantee the security of the investment capital. An efficient administrative system (i.e., strong administrative structures and low levels of corruption), together with low taxes, increases the chances for capital inflow, too. The country’s legislation can protect banking secrecy. In other words, tax havens offer legal opportunities to avoid paying too much in taxes.
Are Tax Havens Illegal?
No, they are not. Many HNWIs become residents of tax havens in order to reduce the amount of income tax that they pay. This is not illegal. At the same time, some corporations use shell companies headquartered in tax havens such as the Bahamas or Malta, for example, to manage their money flows. This practice is illegal if the corporations report a lower income than they actually receive. For this reason, tax havens are often criticized and sometimes sanctioned: the high level of financial secrecy that they offer may be misused by certain dishonest entrepreneurs.
Income Tax Rates in Different Countries
Different countries have different income tax rates. Here, we are talking about the personal income of any kind made by an individual. The highest income tax is payable in Ivory Coast: the personal income tax rate is as high as 60% in the African country. On the other hand, in such tax havens as the United Arab Emirates or the Bahamas, for instance, the tax rate is 0%. Below, we show the income tax rates in several countries so that you can realize how different the tax rates can be:
- Ivory Coast — 60%;
- Germany — 45%;
- Great Britain — 45%;
- USA — 21%;
- Bahamas, UAE, Caymans, etc. — 0%
Corporate Income Tax Rates in Different Countries
Corporate income tax is the tax payable by business companies rather than by private individuals. One way of reducing the corporate income tax is reinvesting the profit in the company. Another way of doing so is putting the company headquarters in a tax haven. Tax havens charge small or zero corporate taxes, and therefore, the companies headquartered there carry smaller fiscal burdens in comparison to the fiscal burdens carried by companies registered in high-tax jurisdictions. Puerto Rico charges the highest corporate income tax in the world: the rate is 37.5%. On the other hand, such tax havens as the Isle of Man, the UAE, the Bahamas, the Bermuda Islands, etc., charge a corporate income tax of 0%. Corporate income tax rates in several countries:
- Puerto Rico — 37.5%;
- Germany — 30%;
- USA — 21%;
- Great Britain — 19%;
- Bermuda, Caymans, etc. — 0%
Some of the Most Popular Tax Havens
An independent country can be a tax haven. Panama, the Netherlands, and Malta can serve as examples. In other cases, overseas territories (former colonies) of European countries or certain states of the United States can be tax havens. The Isle of Man, Jersey, the Caymans, and Delaware can serve as examples.
Caribbean Paradise in the Cayman Islands
Palm trees, blue water, and ultimate luxury are what you will find in the Cayman Islands. Officially, it is an overseas territory of Great Britain, but it will probably be correct to claim that the Caymans is one of the top offshore tax havens in the world. You can establish a company and keep your assets there without paying anything in taxes. Neither income nor profit nor inheritance, etc., is taxed in the Caymans. 40 largest banks in the world, and 40% of all hedge funds are based in the Cayman Islands. Wells Fargo and Pepsi, among other giant corporations, use the jurisdiction for tax optimization purposes.
- GDP: US$3.84 billion;
- Population: 63 thousand;
- Financial Secrecy Index (FSI): 3
- Corporate income tax: 0%
- Personal income tax: 0%
The Cayman Islands are located south of Cuba in Central America.
The Bahamas: one more paradise on earth
The Bahamas does not charge any income tax, capital gains tax, gift tax, or inheritance tax. Besides, the banking secrecy level is high, and tax evasion is not considered a criminal offense in the Bahamas. 5% of the companies found on the Fortune 500 list have divisions or subsidiaries in the Bahamas. There were times when you could find more than 400 banks on the islands. Things may change, however, because the jurisdiction has agreed to share its residents’ financial information with the fiscal authorities of their home countries.
- GDP: US$11.26 billion;
- Population: 394 thousand;
- FSI: 19;
- Corporate income tax: 0%;
- Personal income tax: 0%.
The Bahamas are located east of Florida and north of Cuba.
Malta: a paradise spot in the Mediterranean
Malta is probably the best tax haven in Europe. Admittedly, this status means a lot of pressure on the part of the European authorities. Both corporate and personal income tax rates are rather high in Malta, but the company profit tax is the lowest in Europe. Besides, the local Tax Code gives multiple opportunities for various tax exemptions and tax deductions.
- GDP: US$11 billion;
- Population: 441 thousand;
- FSI: 20;
- Corporate income tax: 35.0%;
- Personal income tax: 33.8%.
Malta is a tiny island between Sicily and North Africa.
Since tax havens are perfectly legal, why not use the opportunity to save on taxes? Sounds reasonable, does it not?