What is a tax haven?

What is a tax haven?

A Tax Haven could be a territory where a tax is not levied or where tax is significantly lower than your primary country of tax residency. So, for tax purposes, it can be a jurisdiction that exempts all incomes like income tax, estate tax, capital gains, royalties, etc., or it can be a jurisdiction that only exempts one type of tax, like royalty tax, but levies the rest of taxes.

Technically, a tax haven is a jurisdiction where a tax is significantly lower than the tax rate charged by another jurisdiction. So, for example, if “Jurisdiction A” levies a 20% income tax rate, and “Jurisdiction B” levies a 9% income tax rate, before the eyes of “Jurisdiction A”, “Jurisdiction B” is a tax haven. 

A country does not need to levy a 0% income tax to be considered a tax haven. 

We used the full income tax exemption as an example, but if a jurisdiction has a 30% income tax rate but has 0% capital gains tax, this can also be considered a tax haven.  

Lets say Liechtenstein has a high-income tax rate but might not charge a royalty tax on royalty payments made or received, so Liechtenstein can be considered as a tax haven for Royalty Taxes. 

In the mere sense of the word, a tax haven provides tax benefits, but it can also be jurisdictions that in addition refuse to provide information about the ownership, directors, or beneficiaries of a company, jurisdictions that don’t implement economic substance requirements on resident companies, and also, in a less sense but also covered in the denomination, jurisdictions that have better business or investment law. 

Forming a company or offshore vehicle in a tax haven is not illegal at all, but countries have implemented laws or actions to counter the attractiveness or appeal of forming a company in a tax haven. Some of these actions are against the tax residents, like local or domestic laws requiring the owner of these offshore vehicles to disclose the ownership of these entities, or not allowing tax residents to deduct costs or expenses of transactions with companies situated in tax havens, etc. They also implement actions against the tax haven, for example, the OECD and European Union may add them to the Grey or Blacklist, and call them non-cooperative jurisdictions, or implement the OECD Action Plan on Base Erosion and Profit Shifting (BEPS). 

Nonetheless, a country can be a tax haven and not be black or grey labeled, which can be the case of jurisdictions like the USA, or the UK.  

In summary, a tax haven can be a jurisdiction from anywhere in the world, from the USA, Canada, UK, Isle of Man, Cyprus, Andorra, Malaysia, Monaco, to the most “notorious” ones like Cayman Islands, Bahamas, BVI, Belize, Panama, just to name a few. 

Pure Tax Havens 

When a jurisdiction levies a 0% tax rate on most, if not all, types of earnings, like income tax, capital gains, inheritance tax, property tax, sales tax., etc., they are usually denominated as “pure tax havens”.  

Low-Tax Tax Haven

As mentioned above, these are jurisdictions that levy a very low income tax rate, or its tax is significantly lower

Other connotations of Tax Havens

Besides the tax sense of the word, tax havens are also referred to justictions which:

• Have strong asset protection laws.

• Lower legal barriers, regulations, or less licensing requirements, for carrying certain business activities.

• Strong Privacy Laws.

How do tax havens change? 

It is important to note that tax havens can change some features that might affect your original purpose of forming an offshore entity in that jurisdiction. These changes can be announced 1 year in advance, to 5 years in advance.  

For example, the BVI before the year 2023 did not disclose who the director of the Entity was/were, but starting year 2023 it started disclosing who the director of the company is/are on its public records, and by 2025 it is now a requirement that the Shareholder or BOI be reported to the Registry.

The UAE before the year 2023 did not levy income tax on onshore companies, and did not require Free Zone companies to file tax returns, and from the middle of 2023 Onshore companies will pay income taxes (low, but no longer tax-exempt), and offshore companies will still be tax exempt but will pay taxes on transactions with UAE onshore companies, and will have to submit tax returns even if there is no tax due. 

Belize changed the tax treatment of Offshore LLCs, and now they might be subject to taxes, when they used to be 100% tax exempt. 

They can do this for several reasons, one of them being pressured by the aforementioned organizations or countries.