Offshore Tax Havens
Offshore Tax Havens: The concept of an offshore tax haven can mean different things to different people. There is a common misconception that offshore tax haven means that a U.S. person is seeking to skirt the IRS and illegally evade US tax by shifting their tax residence to a foreign country — but that is not always the case. For example, when a person wants to set up a foreign corporation, there is nothing inherently illegal about seeking to (legally) minimize their tax by setting up operations in one country as opposed to another. With some foreign countries, the US has entered into bilateral tax treaties that may include double taxation agreements, FATCA, totalization agreements, and estate tax treaties. With other countries, the United States has not entered into any tax treaty with them — which may have both pros and cons.
Which Offshore Tax Haven to Choose?
When it comes to offshore tax havens, a cursory Google search will identify the mainstays such as Switzerland or Panama — without identifying the inherent issues with these common tax haven countries. For example, over the past few 10-15 years, Switzerland has entered into several deferred prosecution agreements with the US — and a few years back, there was the debacle that was the “Panama Papers.”
Four (4) Tax Havens to Consider
In general, before determining whether a country is a suitable tax haven, it is important to determine whether the individual, the business, or both are relocating abroad.
Will they still have US person status?
For example, if it is an individual that has already expatriated or otherwise given up their US person status (nonresidents and visa holders), the world is their tax oyster. But, if the individual is still considered a U.S. person, many of the tax benefits may be rendered moot.
Here are four countries that are considered a good choice for their overall tax benefits — especially when the person is no longer a US person.
Singapore is an international hub for business. There is no specific tax treaty between the United States and Singapore, which limits the amount of reporting between the two countries (there is a FATCA Agreement in place). The reason why Singapore qualifies as a tax haven is because it has a lower corporate tax rate than many other countries and avoids taxation for most types of passive income. Generally, the tax rate maxes out at 22%, without any tax on capital gains and dividends from a Singaporean company.
Result: A high-income earner who relinquished their U.S. person status and earns significant passive income from a Singaporean company may fare well in Singapore.
Malta has many perks to it, with the most important being that nonresident corporations only pay very minimal tax on the income they earn. In addition, there are various tax offsets that are provided to the individual and business that can make Malta very alluring. Specifically, when a foreign resident of Malta becomes a resident of Malta, the income earned outside of Malta and remitted to Malta can escape tax in Malta. Moreover, Malta is part of the EU —
Result: When a U.S. company effectively relocates to Malta, with significant income being generated from outside the U.S. and no permanent establishment in the U.S., the company may enjoy great tax benefits.
Belize is a solid offshore tax haven for companies and individuals. One key benefit is that the government standards for sharing financial information with foreign governments is very strict and is limited primarily to disclosing information associated with criminal investigations. For U.S. persons, the tax rate is 25% but no income generated outside of Belize is taxable.
Result: Non-U.S. person individuals who earn their income from outside Belize and companies moving to Belize with foreign sourced income may derive significant tax benefits.
Saint Kitts and Nevis
Saint Kitts and Nevis is potentially one of the best available tax havens. First, there is no individual income tax, although short-term capital gains may be taxable. Gifts and inheritance escape tax as well. So far, so good. There are social security taxes which are paid by persons employed within the country and some associated real estate and business taxes — but significantly lower than a flat-rate corporate tax.
The country developed programs to promote citizenship, similar to the “Golden Visa or EB-5” which can be used to gain citizenship by investing into the economy.
Oddly enough, there is a FATCA agreement in place since 2016, which can minimize the benefits for those seeking to avoid reporting (unless the person gives up their U.S. status). St Kitts and Nevis is not currently part of Common Reporting Standard (CRS).
Result: For U.S. individuals who give up U.S. person status, residence in St Kitts and Nevis can significantly lower the tax rate they were chained to as a U.S. person.
Offshore Tax Havens that have Lost Some Luster
All good things come to an end. Here are some offshore tax haven countries to possibly avoid when deciding whether to open shop or relocate overseas.
Several Swiss banks and financial institutions have entered into deferred prosecution agreements with the United States. In addition, the Swiss government has provided the financial information of hundreds of thousands of its customers in accordance with CRS — to more than 70 countries.
For many years, Panamanian foundations where one of the more preferred ways to house offshore investments and assets. When the Panama papers hit and spread like wildfire, Panama lost some of its offshore clout. Still, a Panamanian foundation can be a solid way to conduct business depending on what your US person status is.
Luxembourg may still hold some weight when it comes to corporate taxes, but not so much for individuals. Financial institutions throughout Luxembourg directly (and indirectly) cooperate with the United States and neighboring countries. In 2020, Luxembourg further advanced the reporting requirement rules for institutions within its borders under both FATCA and CRS. When a country that is known for their financial secrecy has agreed to cooperate with foreign governments, you have to reconsider its position as a tax haven.
As recent as 2016, multiple financial institutions in the Caymans have pled guilty for offshore tax evasion and hiding client assets — and entered into deferred prosecution agreements. The Cayman Islands has seemingly transitioned from financial secrecy to financial transparency — and thereby reducing any alert of using the islands as a tax haven.
Strategize Before You Make Any Moves
Establishing individual or corporate residency abroad in an offshore tax haven has many components to it. For individuals, if they are still U.S. persons then they may lose some of the major tax benefits. For companies relocating abroad, the source of their income is crucial for pre-tax planning. It is important to speak with a qualified international tax attorney before making any significant tax moves.
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