Tax Haven - What it is

Tax Haven Definition

Tax haven is a place or area where particular taxes are fined at low or minimum rate or not at all. Mostly people show more interest in tax heavens, that is, they are easily attracted towards that area with minimum tax rates. This condition makes the competition situation between governments and different legal authorities predisposed to be havens for different kinds of taxes for different people or companies.

For getting privacy as well as getting local outward appearance the most common exercise is to use paper interface by creating a corporation in that legal authorities. By forming corporation in such legal authorities we become liable to pay taxes that are fined by the corporation on the earning of profits. We can operate our companies toward advantage who must pay 30%-40% rate of taxation if there is no tax fined.

If you are thinking about moving offshore then hold on there are well qualified offshore advisers which can provide legally correct financial structure. Once our business and assets are offshore then they can be so structured as to take good advantage of beneficial tax savings. They can also enjoy a degree of security from money hunters. Privacy is an important factor of being offshore but not all legal authorities give full protections to their client’s privacy.

ADVANTAGES


There are some basic advantages of tax havens

• Some existing level of freedom from taxation
• Banking, Corporation, & Transaction secrecy laws that protect both privacy and assets.
• An absence of exchange controls and other governmental handicaps to doing business

You can regularly move between half a dozen high tax countries without incurring major taxes, as long as you do not generate any sources of income in these countries, or overstay the minimum period to become a taxable resident there.

You should never stay for longer than the 182 days that normally entitles you to be considered a resident for tax purposes. For instance, if you spend less than 3 months a year in any of the developed countries, you would never qualify as a resident for tax purposes, yet you could enjoy the benefits of these countries whilst avoiding their associated tax headaches. To do this, you must first make sure that you are in a financial position to afford such a lifestyle.


CATEGORIES

Tax haven is divided into two categories


No-tax tax haven

A no-tax tax haven is a country or legal authority that has no income, capital gain, or wealth taxes of any sort and in which there are facilities and enacting laws under which we can incorporate and form corporations, foundations, and trusts. This type of tax haven is a pure tax haven.

The governments of these countries most usually earn their income is earned by charging fees on: documents of incorporation, the value of shares, registration fees, and so forth. We can operate a business from one of these countries without any income taxes on the money earned by our corporation; or by investments made into the stock market, banks, or the holding of income producing assets such as real estate or precious metals. There are some special considerations which must be observed, but for all intents and purposes the money we earn using a no-tax tax haven as our business base are tax-free.

It is not necessary to live in one of these jurisdictions to make use of their beneficial tax structure. It is possible to live in one jurisdiction and have one's corporate structure in another. In fact it may be preferable to separate corporate jurisdiction, business jurisdiction and resident jurisdiction. A fuller explanation of this will be explained in a subsequent article. In the use of more than one jurisdiction it is probably prudent to maintain an office presence in a jurisdiction where one does not earn an income.


The Low Taxation Tax Havens

Some countries establish fixed rates of taxation. These countries are called Low taxation tax-havens. They generally tax a small amount on corporate income and have double-taxation agreements with many high-tax countries that when taken in combination and structured correctly work to reduce the overall degree of taxation. This is best for individuals who are not going to become permanent expatriates, but may some day want to return to their home country.

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Money and exchange control

Most tax havens have a double monetary control system which distinguish residents from non-resident as well as foreign currency from the domestic one. In general, residents are subject to monetary controls but not non-residents. A company, belonging to a non-resident, when trading overseas is seen as non-resident in terms of exchange control.
It is possible for a foreigner to create a company in a tax haven to trade on an international basis; if so the company’s operations will not be subject to exchange controls as long as it uses foreign currency to trade outside the tax haven.
Methodology

At the risk of gross oversimplification, it can be said that the advantages of tax havens are viewed in four principal contexts:

Personal residency

Wealthy individuals from high-tax jurisdictions have sought to relocate themselves in low-tax jurisdictions. In most countries in the world, residence is the primary basis of taxation. In some cases the low-tax jurisdictions levy no, or only very low, income tax. But almost no tax haven assesses any kind of or inheritance tax. 

Asset holding

Asset holding involves utilizing a trust or a company or a trust owning a company. The company or trust will be formed in one tax haven, and will usually be administered and resident in another. The function is to hold assets, which may consist of a portfolio of investments under management, trading companies or groups, physical assets such as valuable chattels. The essence of such arrangements is that by changing the ownership of the assets into an entity which is not resident in the high-tax jurisdiction, they cease to be taxable in that jurisdiction. Often the mechanism is employed to avoid a specific tax. 

Trading and other business activity

Many businesses which do not require a specific geographical location or extensive labor are set up in tax havens, to minimize tax exposure. Perhaps the best illustration of this is the number of reinsurance companies which have migrated to other places over the years
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Financial intermediaries

Much of the economic activity in tax havens today consists of professional financial services such as mutual funds banking, life insurance and pensions. Generally the funds are deposited with the intermediary in the low-tax jurisdiction, and the intermediary then on-lends or invests the money. Although such systems do not normally avoid tax in the principal customer's jurisdiction, it enables financial service providers to provide multi-jurisdictional products without adding an additional layer of taxation.

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