Since the Panama Papers scandal, the world’s attention has focused on tax havens and tax optimization.
If you are considering setting up an offshore company, it is important to understand what the term tax haven really encompasses.
Definition of a tax haven
A tax haven is a territory where taxation is very low or even nonexistent, particularly in terms of VAT, corporate income tax, or inheritance tax.
Offshore companies are generally registered there without necessarily having a significant physical presence in the territory.
Two characteristics frequently recur: highly advantageous taxation and a high level of banking confidentiality. These jurisdictions may also offer offshore financial services, particularly for non-residents and multi-currency accounts.
Who uses tax havens?
Hedge funds
Hedge funds are among the entities that may use this type of jurisdiction.
Multinationals
Large companies can establish subsidiaries there and organize their international operations among different group entities.
High-net-worth individuals
Individuals with substantial assets are also among the users of low-tax jurisdictions.
And free-zone companies?
A company in a free zone may offer certain benefits traditionally associated with low-tax jurisdictions, while being confined to a specific administrative area.
Depending on the local framework, these benefits may include customs duties, taxation, or certain tax caps.
Some examples
British Virgin Islands
Flexible regulations, a modern banking system, and tax exemptions for offshore companies.
Luxembourg
Luxembourg is a financial center with an attractive tax regime, particularly for certain financial activities.
Delaware
Delaware is particularly known for the flexibility of its corporate law, the speed of company formation, and access to banking solutions such as e-banking.
How is a tax haven regarded by the OECD?
The OECD uses several criteria to identify jurisdictions considered problematic for tax purposes.
The 4 OECD criteria
No or negligible taxes
Very low or nonexistent taxation compared with other countries.
Lack of transparency
A lack of transparency in the application of tax legislation.
No exchange of information
Insufficient cooperation with other tax administrations.
Tolerance toward fictional activities
The possibility for certain companies to operate without genuine economic activity or sufficient substance.
OECD, European Union and the fight against tax evasion
The OECD and the European Union have implemented policies aimed at combating tax evasion and identifying non-cooperative jurisdictions.
It is therefore important to carefully choose the jurisdiction used for an international structure and to favor legal and transparent means.