Simply stated, a tax haven is any country whose laws, regulations, traditions,
and, in some cases, treaty arrangements make it possible for one to reduce his
overall tax burden. This general definition, however, covers many types of tax
havens, and it is important that you understand their differences.
- No-Tax Havens - Countries that have no income, capital
gains, or wealth (capital) taxes, and in which you can incorporate and/or form
trust. The governments of these countries do earn some revenue form corporations;
"no-tax" means that what you pay is independent of income derived trough
a company. These states may impose small fees on documents of incorporation, a
small charge on the value of corporate shares, annual registration fees, etc.
Primary examples are Bermuda, Bahamas, and Cayman Islands.
- No-Tax-on-Foreign-Income Havens - Countries that
impose income taxes, both on individuals and corporations, but only on locally
derived income. They exempt form tax any income earned form foreign sources that
involve no local business activities apart form simple "housekeeping"
matters. For example, in such a haven there is often no tax on income derived
form export or local manufactured goods.
- The no-tax-on-foreign - income havens break down
into two groups. There are those that allow a corporation to do business both
internally and externally, taxing only the income coming form internal sources,
and those that require a company to decide at the time of incorporation whether
it will be one allowed to do local business, with the consequent tax liabilities,
or one permitted to do only foreign business and thus be exempt form taxation.
Primary examples in these two sub-categories are Panama, Jersey, Guernsey, Isle
of Man and Gibraltar.
- Low-Tax Havens - Countries that impose some taxes
on all corporate income, wherever earned. However, most have double-taxation agreements
many the high-tax countries that may reduce the withholding tax imposed on income
derived from the high-tax countries by local corporations. Cyprus is a primary
example. The British Virgin Islands is another, but no longer has a tax treaty
with the U.S.
- Special Tax Havens - Countries that impose all or
most of the usual taxes, but either allow special concessions to special types
of companies (such as a total exemption form tax on shipping companies, or movie
production companies) or allow very special flexible corporate arrangements offered
by Liechtenstein. To understand the precise role of tax havens, it is important
for you to distinguish two basis sorts of income: (1) return on labor and (2)
return on capital.
The first kind of return is what you get from your work: salary, wages, fees
for professional services, and the like. The second kind of return relates, basically,
to the return from your investments: dividends on shares of stock; interest on
bank deposits, loans and bonds; rental income; royalties on patents. It is the
second kind of income, income from an investment portfolio, which tax havens are
useful for. Forming a corporation trust in a tax haven can make the second form
of income totally tax free, or taxed so low that you will hardly notice. Certain
types of businesses can be effectively based in tax haven. If you publish a newsletter,
for example, you might be able to set up the entire operation in a totally tax
free country such as the Bahamas or the Cayman Islands. If your income comes form
copyright royalties, perhaps on the computer program you invented, the Netherlands
is famed as a base for sheltering royalty income.
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