How Tax Havens can Save Tax

Tax havens are useful in lots of different ways, including: Emigration If you fancy living abroad, one option is to live in a tax haven. Fortunately many tax havens have extremely high living standards and are beautiful places to stay. If you choose the country wisely, you may be able to completely avoid income tax and other taxes. Emigrating to one of the nil-tax havens such as the Bahamas, St Kitts and Nevis, the Cayman Islands or the British Virgin Islands would be ideal for this purpose. US citizens cannot do this, however, because they are subject to US tax wherever they live (although there are limited tax exemptions for US citizens living abroad that can exempt the first $82,400 of earned income). Another option may be to establish yourself in one of the foreign source exempt havens and put your money in an offshore bank account. In this way you will also not pay one penny in tax. Finally, you could go and live in a low-tax haven if it offers concessions that suit your particular circumstances. For example, you could go and live in South Africa or New Zealand if you have a big property investment portfolio and want to escape capital gains tax. Diverting Profits Tax havens are often used to divert profits from a country with high tax rates to a country with low tax rates. They're also used to divert interest, royalties and management charges. Unfortunately this is not very easy to do in practice -- the country where the income is sourced is likely to have rules that prevent you from doing this. However, it is possible in certain circumstances. Double Tax Treaty (DTT) Manipulation Low-tax havens are often used to take advantage of double tax treaties. Using double tax treaties to avoid taxes can result in big savings and this makes some of the low tax destinations that have lots of double tax treaties very popular. Capital Gains Tax (CGT) Planning In recent years many individuals have moved abroad to escape capital gains tax. Most are property investors who have made huge profits during the global real estate boom of recent years. If they sold their properties without moving they'd see a large chunk of their profits going to the taxman in their country of residence or the country where the property is located. Avoiding a big tax bill is particularly important where properties have been heavily remortgaged to enable the investor to withdraw the equity (paper profits). Investors with large debts over some properties may actually end up with insufficient cash to cover their capital gains tax bills. Therefore they look for any opportunity, including moving overseas, to escape paying tax. Tax havens are also used to escape CGT by entrepreneurs who've had enough of the rat race and want to sell their companies. Using offshore company arrangements or emigrating to countries that don't charge CGT on overseas disposals can drastically reduce the tax liability. Inheritance Tax (IHT) Planning If there's one tax people resent above all others it's inheritance tax. Paying 40% tax on your assets is much worse than paying 40% tax on your profits. Furthermore, your assets will, for the most part, have been built up out of after-tax income -- meaning that they are effectively taxed twice. The good news is there are ways that tax havens can help you reduce your inheritance tax bill. By transferring some of your wealth into an offshore trust or company you can escape the tax in certain circumstances because the trust/company becomes the new owner of the assets. Your estate will then have fewer assets to tax. Many countries don't subject offshore trusts and companies to IHT and, if they do, it's usually an amended form of tax. Hence the correct use of offshore entities can maximize your wealth and minimize your taxes. Asset Protection Tax havens aren't just used by people who want to pay less tax. They're also very important for the purposes of asset protection. The idea of asset protection is to make your assets extremely difficult to trace and, if they are traced, extremely difficult to get hold of.