International Tax Havens

There is almost no company with international commercial ties seeking to be competitive, that does not take advantage of the tax benefits available through the offshore option. Offshore havens are no longer the domain of the rich, and more and more businesses and companies are discovering their advantages. Businessmen from numerous countries are registering companies and investing their assets in countries with low tax rates, or in tax exempt zones.

Definition: Tax havens – countries where no taxes are levied, or where the tax rates are lower than those in other countries. Such countries attract investments and income from other countries with higher tax rates than those in the tax havens. A country decides to become a tax haven mainly in order to attract investors, to encourage income flow, to supply employment to its citizens, and to offer itself additional solutions on the macro level.

The main characteristics of tax havens:

Taxation – tax exempt, or low tax rate.
Political stability.
Physical & legal accessibility
International tax treaties for tax havens – These treaties regulate recognition of countries that have contacts with this country as a tax haven, and prevent sanctions being taken against organizations that operate from these tax havens.
Free trade in foreign currency.
Availability of work force – including a good infrastructure of service givers executing the tax benefits, including: Lawyers’ & Accountant Firms, company registrations, all at a relatively low cost.
Why tax havens?
Tax havens enable the owners total control on their property, with full privacy. All the businesses, including various financial investments, receive total immunity, without revealing the owners’ identity (revealed only in cases mentioned by law).

Companies incorporated in Panama, the Bahamas, the Virgin Islands, Costa Rica and other jurisdictions not subject to regulation requirements, enjoy most flexible legislation, comfortable activity free of  tax, and political stability.

Usually, tax havens are used to maintain investments, bank accounts, private property, protect assets or conduct various businesses.

When choosing a tax haven, the factors influencing not only the incorporation, but also other company activities, if such exist, should be taken into consideration.

There are three groups of countries:

The developed industrial countries, where a substantial portion of the businesses’ profits is transferred as tax payment, with many aspects of the business activity being strictly regulated.
Countries with a moderate tax system & foreign currency control, such as: Canada, Britain, Hong Kong, Iceland, Ireland, Malaysia, Lichtenstein, Luxembourg, the Madeira Islands, Malta, Mauricius Islands, Holland, the Antilles, New Zealand, Uruguay, Singapore, Switzerland, Astonia, and in the USA: Arkanso, California, Delaware, Florida, New York, and other states.
Countries where the incorporation process for legal entities is a simple one, and minimal or zero income tax. The “offshore” concept is based on the fact that the company takes its activity outside its country of incorporation. To take maximal advantage of tax havens, it is suggested for entrepreneurs to establish corporations in the following countries: The Bahamas, Belise, Virgin Islands, Cayman Islands, Kook Islands, Cyprus, the Dominican Republic, Granzie Islands, Isle of Man, Jersey, Marshall Islands, Mauricius Islands, Nevis, Panama, Saychelle Islands, St. Lucia, St. Vincent and the Grandines, Tracks & Kaikus Islands, and others.

Companies incorporated under the third group are characterized by the following:

Low expenses.
Simple incorporation at minimal time, availability of companies ready for purchase.
Usually, no taxes except for duty on tax exempt.
No requirement for personal attendance for company incorporation.
Names and addresses of stock-owners and directorates not recorded in the company files, with only company papers being declared.
Opportunity to use services of directorate candidates and stock-owners, a fact that enables avoiding revealing the beneficial company owners.
Makes a complete business activity possible, except for a special license, requires a special license to manage bank, insurance and trusteeship activity.
Ownership on real estate and activities with tax haven zone resident are limited.
Requires presence of registration agent at the country of incorporation.
Approved company’s stock capital, with no requirements regarding payments commitment and minimal nominal price and minimal margin.
Possibility for issuance of nominal value and no-par-value and stocks for the bearer.
No requirements for directorates and stock-owners’ citizenship, nationality and professional qualifications.
Directorates’/stock-owners’ meetings can take place anywhere in the world. It is possible to conduct the meetings anywhere, using telecommunications technology.
No requirement for accounting books, no requirement for preparation of annual reports and auditing.
No supervision on foreign currency.
Confidentiality on information regarding the company and bank activities.

Main popular tax havens today worldwide:

A country’s wish to promote the advantages involved in being a “tax haven” makes quite a few countries join other countries defined as such; therefore, the number of tax havens is steadily increasing.

To date, the estimate is that approx. 80,000 companies are registered in the Caribbean Islands, 250,000 companies in the British Virgin Islands, and 25,000 companies are incorporated every year in Hong Kong, in order to take advantage of the local tax benefits.

Some estimate the total sum of companies incorporated in tax havens as more than 100,000 a year.

1. The Bahamas:

Islands in the Atlantic Ocean – close to Florida, USA. Their proximity to the USA has encouraged their development as a tax haven, at the same time as they were developed as a tourist site for Americans.

A company’s registration in the islands takes a few hours (costing up to Bahamian $1,000). The legal system is based on common law, with a system of rules for a company’s activities, comprised mainly of the need to maintain a local agent, who is registered by the Companies’ Registrar.

There are no taxes at all in the island, including income tax, company tax, capital gain tax, and inheritance tax. The government’s revenues are due only to low rates of registration and stamping duties, tourism and gambling taxes, collected at tourism sites and casinos.

The island has a wide infrastructure of service givers, including law offices and accountancy offices. Working permits for foreign professionals are granted relatively easily.

2. The Bermuda Islands:

Islands in the Atlantic Ocean – some 1,000 kilometers east of North Carolina, USA. The islands constitute an autonomous colony in the British Commonwealth, with the internal law based on the common British Law.

Only large international companies that present recommendations from bank corporations from their domicile, are allowed to incorporate at the Bermuda Islands. Therefore, the number of companies registered locally is relatively small, but qualitative (all the Who’s & Who’s in the world of business).

Companies, partnerships and trusteeships are entitled to full exemption from direct taxes and from currency control, as long as at least 40% of the companies’ ownership is non-Bermudan.

3. The British Virgin Islands:

Islands in the Atlantic Ocean – east of central America. The islands are under British rule, with an autonomous legislative council.

Individuals are exempt from taxation on their income that does not result directly from the isles themselves. Company tax stands at 15% of the chargeable income. However, if the income is not produced from the isles and is not transferred to the isles, a company tax of only 1% applies. Dividends and interest paid to foreign residents are exempt from deduction at source. There is no tax on capital gains and presents, and there is no inheritance tax.

There are tax treaties with Britain, Japan and Switzerland. There is no control on currency movements.

4. Hong Kong:

It has become part of China, but its economic independence has not been affected, as per an agreement between Britain and China, for the duration of 50 years – with a chance for an extension.

Individuals and companies in Hong Kong are exempt from tax on their income, from sources outside of Hong Kong. The tax on income produced in Hong Kong amounts to 15%, with company tax on such income at the rate of 17.5%.

The interest on foreign currency deposits is tax exempt. In addition, capital gains, dividends and royalties are tax-exempt. Hong Kong has one tax treaty only with the USA, regarding income from shipping income. Therefore, its weak spots are the political uncertainty, and the absence of double tax treaties.

5. Luxembourg:

Luxembourg is situated between Belgium, France and Germany. Its convenient location caused extensive development of its financial system.

The tax benefits are given to holding companies only, whose sole purpose is participating with other companies. These companies are exempt from company tax on their revenues from dividends and royalties, exempt from capital gains tax and from deduction at source on dividends distributed by the companies. These companies are obliged to pay tax at the rate of 1% only.

6. Cayman Islands:

Islands at the Atlantic Ocean, about 700 kilometers south of Miami, Florida. Since 1959, the islands are an independent, autonomous British colony.

The banking system in the Islands is extremely developed: There are more than 500 banks, including branches of banks from the USA and Japan.

Companies and trusteeships in the islands are exempt from every tax. There is no income tax, company tax, capital gains tax, deduction at source tax and inheritance tax.

The islands have a treaty with the USA on information exchange and reporting regarding exploitation of the islands for criminal offenses, including drug traffic. This has improved the image of the islands in the eyes of the American government and the world, compared to the state of affairs prior to the treaty.

Beyond that, the islands are not bound by any double tax treaties with other countries.

7. Cyprus:

An island in the eastern Mediterranean, about half an hour’s flight away from Israel. Companies not being managed or controlled from Cyprus, are totally exempt from income tax. Other companies, under foreign ownership and registered in Cyprus, are obligated to pay income tax, at the rate of 4.25% for a period of 10 years, with an option for an extension.

Following Cyprus’ joining the European Common Market, the tax rate will be raised gradually up to 10% by 2010.

Foreign employees in these companies must pay personal tax at the same rate, on condition that they are not employed in Cyprus and their salary is being paid at a Cypriot bank.

Foreign employees employed in Cyprus must pay 20% tax. The double tax treaties that Cyprus has, do not apply to companies in Cyprus, owned by foreigners. The local company law is similar to the British company law.

Cyprus has a well developed banking system, with especially comfortable transportation to Europe and Asia.

8. Switzerland:

At this European country, there are three taxation systems: Federal, Cantonial and local.

The federal tax on companies is 4-10%, according to the company’s profitability. Federal tax on individuals ranges up to 13.2%, according to level of income. Companies’ capital gains are taxed with the regular federal tax, while individuals’ capital gains are tax exempt.

A federal deduction at source applies for dividends and interest, at the rate of 35%, unless there is a lower rate, determined in one of the numerous double tax treaties that Switzerland has signed.

The Cantonial and local taxes on companies’ income, vary according to the Canton where the company seat is located – between 12-36%. For individuals, the rate is 2.4-29%.

Holdings companies and companies with a permanent seat outside Switzerland, enjoy additional tax incentives. In Switzerland, bank confidentiality is protected by the criminal law as well as the civil law. It is also permitted to open numbered accounts, without a  name, in the bank.

Switzerland’s neutrality and political stability hold an additional attraction for business organizations and individuals, seeking a safe and accessible tax haven, even during a world war.

The negative attitude towards tax havens:

While double taxing treaties are made and signed acquiescently between the contracting countries, and the treaties become valid only following their ratification, according to the accepted internal law of every country, tax havens act against most countries’ wishes and agreement, being a tool for smuggling income and taxes from the country to the tax haven.

Therefore, countries with a high tax rate make it difficult for companies from tax havens, among other things, by setting high rates of tax at source for payments being paid to companies located at tax havens, and by setting transfer prices for transfer among the countries to tax havens for the given merchandise and services, in order to prevent profit flight, followed by tax flight from the country.

The “control and management” tests help these country in preventing transfer of profits to tax havens. In order to determine the location of a company’s or business’ “control and management”, it should be checked who is the authorized factor that actually controls and manages the company or the business, where the company/business business policy is determined, and where the essential strategic decisions are made.

To determine this, the company or business should be asked to present, among other things, the following information:

The company’s incorporation papers.
Information regarding the company’s stockowners.
Protocols from the directorate meetings.
Correspondence and documents related to essential and strategic decisions made.
Management agreements within a group of companies and/or with external factors, related to the company, and additional essential contracts (attention also to the authorized signatories).
Engagement agreements with various service givers (attorney, accountant, etc.).
Details regarding the company/business bank accounts, and who are the authorized signatories for the bank accounts.
Proxies given to various factors in the company/business or to external factors in contact with the business or company activity.
Details regarding the whereabouts of the business/company accounting books, and their management.
A list of the company workers, their roles, where their work is being done, and their seat (emphasis on seniors).
Expected legislation changes for tax havens:

Lately, new multi-national initiatives for fighting international tax plans and tax havens are being “born”. Among the significant initiatives regarding this matter are the following:

1. The OECD organization initiative:

The organization includes most western countries, among them European countries, USA, Canada and others. These are the principles taken by the organization in fighting tax havens:

The principle of information exchange – Exchanging information on any subject to prevent tax evasion.
The principle of transparency – used to locate the real beneficiary from various rights.
Canceling foreign residents preferences – avoiding a situation where countries give preference for companies owned by foreign residents.

Three ways were determined for applying the above principles:

Identifying tax havens – according to absence of tax, or minimal tax rate, absence of effective information exchange regarding the tax regime, absence of transparency on the tax regime; according to the possibility for existence of organizations and companies, without essential local presence. In July 2001, a list of countries suspected as being tax havens according to the above criteria, was published.
Identifying harmful tax preference regimes within the OECD – the same characteristics mentioned in sub-section A above were determined for their identification.
Involvement of countries who are not members in the OECD organization – this, in order to let as many countries in the world as possible participate, even if they are not members.

2. the G7 Conference – special treatment for off shore tax havens – Dozens of countries are members in this body, whose aim is to fight money laundering on the international level.

3. The European Union – Instructions to impose supervision and taxation on savings and deposits, and in the meantime through imposing a duty of deduction at source on companies and individuals conducting their business in various tax havens.

4. The American Plan – A supervision system in the USA to prevent a situation where American tax-payers invest using off shore structures in bank accounts in the USA, that are exempt from interest in the USA.

In summary:

The advantages of countries known as “tax havens” cause quite a lot of headaches for the other countries, who try to fight this phenomenon as much as they can. Ultimately, it seems that quite a few countries apply the rule: “If you can’t beat ‘em – join ‘em”. Thus, by reducing the tax rate, they enjoy the flow of money and investments of international investors, at astronomical sums.

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