Tax havens are generally offshore countries that offer foreign individuals and businesses little or no tax liability in politically and economically static environments. A tax haven, or offshore financial center, is any country or jurisdiction that offers minimal tax liability to foreign individuals and businesses. Tax havens do not require businesses to operate out of their country or the individuals to reside in their country to receive tax benefits.
Characteristics of tax haven countries generally include no or low-income taxes, minimal reporting of information, lack of transparency obligations, lack of local presence requirements, and marketing of tax haven vehicles.
Generally, tax havens do not require residency or business presence for individuals and businesses to benefit from their tax policies. Individuals and corporations can potentially benefit from low or no taxes charged on income in foreign countries where loopholes, credits, or other special tax considerations may be allowed in accordance with the law. That’s a key point to note since there can be no advantage in engaging in illegal activity. Tax havens may also offer advantages in the area of credit, since it may be less expensive for U.S.-based companies to borrow funds internationally. Also, they are discreet in that they share limited or no financial information with foreign tax authorities.
- Tax Haven Countries benefit by way of attracting capital to their banks and financial institutions, which can then be used to build a thriving financial sector.
- Individuals or Businesses benefit by saving tax, which in tax haven countries may range from zero to low single digits compared to high taxes in their country of citizenship or domicile.
- Tax havens are not completely tax-free. They charge a lower tax rate than other countries. Low tax jurisdictions generally charge high customs or import duties to cover the losses in tax revenues.
- Tax havens may charge a fee for new registration of companies and renewal charges to be paid every year. Additional fees may also be charged such as license fees. Such fees and charges would add up to a recurring fixed income for the tax havens.
- By attracting foreign individuals or businesses, even if they are only charged a nominal tax rate, the country may earn substantially more in tax revenues than it would otherwise. Also, the country may benefit from corporate investments in business operations that offer jobs to the country’s residents.