How Do Tax Havens Work |
Posted: November 26, 2018 |
There are many ways to protect your wealth. Usually, anonymous banking solutions by CS&P and similar wealth management consultancies involve opening bank accounts and other financial vehicles in Tax Havens and offshore financial centers. We hear the term ‘tax haven’ a lot, but do you really know how they work? Here we discuss the basic things you need to know about tax havens. What is a Tax Haven?In the simplest terms, a tax haven is a jurisdiction or country that offers the least tax liability where foreign businesses and individuals can preserve their wealth. In tax havens, the individual doesn’t need to reside in the jurisdiction to open and operate a business to enjoy tax perks. Some of the common factors of a tax haven jurisdiction are: a lack of transparency, very low tax on relevant income, no substantial activities and lack of effective information exchange. Countries with laws, regulations and financial practices that enable these criteria are considered as tax havens by the Organization for Economic Cooperation and Development (OECD). How do Tax Havens work?Basically, tax havens are used by individuals and businesses to skirt the tax laws in the country where they earned their wealth. The money is channeled to an offshore entity, a person or finance in the tax haven. In contrast with most other countries, where corporate taxes go as high as 55% such as in the US, taxes in these jurisdictions can go as low as a few percent to zero percent. The same very minimal taxes also apply with personal tax and estate tax. The amazingly lax taxation in these countries attracts businesses to open up offshore corporations and anonymous bank accounts where they can transfer portions of their profit. Affluent individuals can also channel their assets to a trust that is based in a tax haven jurisdiction to avoid the stringent taxation rules in their home country. Basically, the individual transfers or registers his assets to a trustee and enables it to manage his assets. It operates under an agreement between the two parties wherein the owner becomes the beneficiary. So, if you own a substantial asset, you can place them under the name of an offshore trust who then enrolls you to become its beneficiary who has full control of the same assets. Since the asset is registered in a different jurisdiction, your home country’s tax laws would not prevail on it. As a result, you get to pay the tax haven’s minimal taxes while using your assets freely. How does Tax Havens earn?Contrary to what many people think, tax haven countries are not completely tax-free. While they may charge lower tax rates, the sheer volume of assets channeled by businesses and individuals to these jurisdictions allows them to earn. Furthermore, they usually charge high import or customs duties to offset the losses in corporate taxes. These countries also earn from registration and renewal fees that are required from businesses. There are also additional fees, such as for license fees, which add up to the recurring fixed income tax. Not to mention, tax havens also earn from corporate investments in business operations that offer employment for locals. Some of the top tax havens in the world are: Bermuda, Netherlands, Luxembourg, Cayman Islands, Singapore, The Channel Islands, Isle of Man, Mauritius, Ireland, and Switzerland.
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