A
tax haven is a state, country or territory where, on a national level, certain
taxes are levied at a low rate or not at all.
It also refers to countries which have a system of
financial secrecy in place. It should be noted that, financial secrecy can be used by foreign individuals to circumvent certain taxes (such as inheritance tax on money, and
income tax of the interest on the money you have on your
bank account). Due to the fact that the requirement of paying taxes on these funds can not be transmitted,
as the funds themselves are invisible to the country the individual is from, such taxes can be avoided. Earnings from income generated from real estate (i.e. by renting houses you own abroad) can also be eliminated this way. Despite this occasional abuse, the countries themselves stand in their right to have a system of financial secrecy in place, and it is up to the individual to fill in the required paperwork (i.e.
double taxation forms). If the proper double taxation forms are filled in, and taxes are payed, companies can avoid much taxes, even if they hence pay their taxes legally. This is because the tax rates on income can be much lower than the tax rate in their own country. It should be noted that some taxes (such as
inheritance tax on the real estate,
VAT on the initial purchase price of the real estate -aka
Transfer tax-, annual immovable property taxes, municipal real estate taxes, ...) can not be avoided or reduced, as these are levied by the country the real estate you own is in, and hence need to be payed just the same as any other resident of that country. The only thing that can be done is picking a country that has the smallest rates on these taxes (ore even no such taxes at all) before you buy any real estate.
Individuals or corporate entities can find it attractive to establish
shell subsidiaries or move themselves to areas with reduced or nil taxation levels relative to typical
international taxation. This creates a situation of
tax competition among governments. Different
jurisdictions tend to be havens for different types of taxes, and for different categories of people or companies. States that are
sovereign or self-governing under
international law have theoretically unlimited powers to enact tax laws affecting their territories, unless limited by previous international treaties. There are several definitions of tax havens.
The Economist has tentatively adopted the description by Geoffrey Colin Powell (former economic adviser to
Jersey): "What ... identifies an area as a tax haven is the existence of a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage in
tax avoidance."
The Economist points out that this definition would still exclude a number of jurisdictions traditionally thought of as tax havens. Similarly, others have suggested that any country which modifies its tax laws to attract foreign capital could be considered a tax haven.
Image [sup]i[/sup] -
Map of tax havens, using the 2007 proposed "Stop Tax Haven Abuse Act", US Congress, list of tax havens
