Tax haven

A tax haven is a place where certain taxes are levied at a low rate or not at all. Among tax havens, different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies.

One way a person or company takes advantage of a tax haven is by moving to, and becoming resident for tax purposes in, the tax haven (USA citizens see below). Another way for an individual or a company to take advantage of a tax haven is to establish a separate or subsidiary legal entity (a company or a common law trust) in the tax haven. Assets are transferred to the new company or trust so that gains may be realised, or income earned, which otherwise would be realised or earned by the beneficial owner.

Whether all this is tax avoidance or tax evasion is not always entirely clear and depends upon the legislation of the countries involved and the particular circumstances of the companies or individuals.

Many countries (particularly OECD countries) have laws that make it difficult for their residents to own a company (or have an investment) in a tax haven without paying tax either in the tax haven or where they are resident. For example, income or gains arising to the offshore company or investment may attributed for tax purposes to the owner or investor under CFC or other laws. Although many countries also have bilateral double taxation treaties to prevent their residents from paying tax twice (although, typically, the higher rate of tax charged in the two countries is due), few countries have tax treaties with tax havens.

Table of contents

1 USA Citizens
2 Examples of Tax Havens
3 See also
4 External links

USA Citizens

The United States is unlike other countries in that its citizens, in whatever country they are resident, pay US tax on their worldwide income. US citizens therefore find it difficult to take advantage of personal tax havens. Although there are some offshore bank accounts that have been advertised as tax havens, U.S. law requires reporting of income from those accounts and failure to do so constitutes tax evasion.

Non-resident US citizens may exclude up to US$80,000 of income earned overseas as well as housing expenses if they physically reside overseas.

Examples of Tax Havens

The UK is a tax haven for people of foreign domicile, even if they are UK resident (residence and domicile being separate legal concepts in the UK), in that they pay no tax on foreign income not remitted to the UK. Similar arrangements are to be found in a few other countries including Ireland.
Switzerland is a tax haven for foreigners who become resident after negotiating the amount of their income subject to taxation with the canton in which they intend to live. Typically taxable income is assumed to be five times the accommodation rental paid.
Monaco does not levy a personal income tax and nor does Andorra. The Bahamas levies neither personal income nor capital gains tax, nor are there inheritance taxes.
In the various Channel Islands, and in the Isle of Man, no tax is paid by corporations or individuals on foreign income and gains. Non-residents are not taxed on local income. Local taxation is low.