The World of Tax Havens Americans and other residents of high-tax countries often find it hard to believe, but there are over 25 countries who derive substantial business from having either no income tax or special tax incentives, just as a few American states have no state income tax. But, unlike the benefits of going to a no-tax state in the U.S., using a foreign tax haven can mean no income tax, while the U.S. person moving to a no-tax state still has the federal tax to pay. Switzerland is an obvious haven, of course, but Swiss taxes are actually quite high, and Switzerland is more correctly thought of as a money haven rather than a tax haven. Even the Swiss are heavy users of other tax havens. They often use the neighboring Principality of Liechtenstein, which has a customs and currency union with Switzerland, and provides stricter banking secrecy than Switzerland. Liechtenstein specializes in being a tax haven for family fortunes, rather than multinational corporations. A number of special legal forms have been developed to cater to this business. Large and small fortunes receive equal respect. Personal and company tax rates are low, staying generally under 12% for local residents. Total exemption from income tax is granted to any company domiciled in Liechtenstein, which generates no local income. Unlike U.S. corporations, the shares of a Liechtenstein company do not have to disclose the name of the shareholder, but can simply be made out to "bearer". While some of the newer tax havens have made a point of promoting the use of bearer shares, this type of share is customary in Europe and is not a product of the tax haven industry. Many U.S. bonds were, until recently, in bearer form, but the custom for shares never caught on here. While Liechtenstein provides for an infinite variety of trusts, its concept of a foundation is quite unique. Ordinarily a foundation is thought of as being connected with a non-profit organization, but in Liechtenstein a foundation can be formed for any purpose. One of the more common uses is as a family foundation dedicated to the welfare of a particular family and its descendants. The best known Liechtensteinean legal entity is the "anstalt" which means "establishment", and is sometimes referred to as a cross between a corporation and a trust. An anstalt may have shares, but need not do so. Usually the control rests with the founder or his family;, either of which can then freely allocate the profits. The law regulating the formation of an anstalt is extremely flexible, allowing nearly any kind of charter to be drafted. The only other tax haven which uses the Swiss franc for its currency is Campione, which is an Italian enclave entirely surrounded by Switzerland. It is a town on Lake Lugano, across the lake from the Swiss city of Lugano, and is known for its large casino, which is rumored to have a larger turnover than the casino at Monte Carlo. There are no border controls so there is complete freedom to pass in and out of Campione. It uses Swiss banks, currency, post office, and telephone -- and even the license plates on the cars are Swiss -- but it is legally a part of Italy. Foreigners find Campione a useful back door for Swiss residence, since a Campione residence permit is comparatively easy to obtain, and this allows the holder free movement in Switzerland. As Swiss residence permits are now nearly impossible to obtain, this feature alone would make Campione attractive. But in addition, Campione has no income taxes and no local taxes -- all Campione's income is derived from the municipal casino. Campione is also a very pleasant place to live, in the heart of one of the Swiss tourist areas offering lakes, winter sports, and the cultural activities of Milan, Italy are only an hour's drive away. The Principality of Monaco was at one time a very popular tax haven, and still has no personal income tax, but is not as popular as it once was, due to efforts to achieve uniformity with French law. Because of not having a personal income tax, many wealthy Europeans maintain their residence there. Since their own countries only tax residents and not citizens, they find living in Monaco more beneficial than an American would. An often overlooked country is Andorra, about 200 square miles in the Pyrenees Mountains between France and Spain. It has been an independent country for hundreds of years, and has never had an income tax. The defense budget is a few bullets per year to fire on ceremonial occasions. The expense of maintaining a customs and immigration service is eliminated by not having any border control at all on the Andorra side of the border -- although France and Spain do maintain border controls on their sides of the border. One of the traditional Andorran industries has been smuggling goods between France and Spain. Banking services are good, very strict secrecy is maintained, and there are no currency controls. The tourist and skiing businesses have shown excellent growth, and the lack of customs duties made it an attractive shopping area for the highly taxed European tourist. As of 1991 it has signed a customs union agreement with the European Community, which will apply the same duty as the EC on non-European goods, but it will still be exempt from the value added tax. Residence permits have been easy to obtain, and it is a small but attractive residential and retirement tax haven. A relatively high standard of living may be achieved and maintained in Andorra at a low cost. Gibraltar has passed special legislation to give tax exemption to corporations headquartered there but not doing local business, and Gibraltar's entry into the European Economic Community has helped to increase this business. It is also one of the best places in Europe to register a private yacht, since the registration fees are low and being a British Crown Colony any yacht registered there is under the protection of the British flag. The Isle of Man, between Britain and Ireland, and Guernsey, Jersey, and Sark, in the English Channel, are also tax havens. Except for Sark, they charge a low annual fee instead of an income tax on non-resident owned companies not doing local business. Sark does not have any companies at all, but a few people reside there to avoid the high British taxes. Malta is the newest major addition to the tax haven scene. A neutral island that has been fiercely independent for years, it only recently became a tax haven, passing legislation for holding companies, trading companies, trusts, and ship registration. They insist on rigorous screening of applicants, and do not accept mere incorporation on the island -- businesses are expected to have a real presence. The educational level is one of the highest in the world, and it is a quiet, multi-cultural tourist destination. The Netherlands is a prime example of a major country that is a tax haven for some purposes. Because of the centuries old Dutch tradition of trading and worldwide enterprise, there is a special tax exemption for holding companies. Any Dutch company that owns 25% or more of a foreign company is not taxed on the dividends received from the foreign company. In addition the Netherlands has double taxation treaties with dozens of countries around the world, so that in many cases little or no tax is withheld on the dividend before it is sent to Holland from the foreign country. Because of its developed commercial base, the Netherlands is also a very practical place from which to administer a multinational corporation. Since 1929 Luxembourg has been a haven for holding companies. In Luxembourg a pure holding company, which conducts no actual business but only holds shares of other companies, pay only a small registration fee and a small annual fee. Approximately 2,000 such companies are in Luxembourg, and the number is growing. A great many of the major multinational corporations have formed holding or finance companies in Luxembourg, and the Luxembourg Stock Exchange is used extensively for issues of Eurodollar bonds. A number of international banks have established operations in Luxembourg to handle this business, and recent legislation has been aimed at attracting investment companies. The Grand Duchy of Luxembourg is situated between Belgium, France, and Germany. It is a full member of the European Economic Community, with a population of about 350,000. Except for the special legislation, most taxes in Luxembourg are the same as those in neighboring countries. Greece and Jordan both have very attractive legislation to attract regional offices of major companies, and both have been rapidly gaining this business because of the boom in Middle East trade. Greece also offers these incentives for headquarters of foreign shipping companies. The package of incentives is quite attractive in both countries: complete exemption from income tax for the company, exemption from personal income tax for foreign employees brought into the country, work and immigration permits for whatever foreign employees are required, duty free import of office equipment, duty free import of employees' household goods, and one duty free car import per employee. Both countries offer attractive living conditions, and both have attracted a number of regional offices that used to be in war torn Beirut. Singapore has become a major Asian money center, but is not a tax haven. Hong Kong is the premier Asian tax haven, and like Holland, has a substantial commercial base which makes it a practical base from which to administer a multinational corporation, or simply a local trading company. The Hong Kong company income tax is 17%, but this is somewhat irrelevant since there is no tax on income earned outside Hong Kong, whether it be from investments or from trading. Thus in Hong Kong can be found a wide variety of commerce, aided by the fact that it is also a completely duty-free port, and is now becoming the gateway for much of the newly expanded China trade -- which is in some ways a revival of Hong Kong's historical role. Panama is similar to Hong Kong, in that it does not tax a Panamanian company on income earned outside of Panama, although taxes on local income run very high. Panama has been a traditional base for international trade activities ever since the Panama Canal was built, and the quality of the local services is quite high. Panama is a major ship registration center, as are Liberia and Hong Kong. Other western hemisphere tax havens include Puerto Rico, Barbados, British Virgin Islands, Netherlands Antilles, Bahamas, Bermuda, Turks & Caicos Islands, and the Cayman Islands. Puerto Rico is a tax haven in two ways. It does not tax the non-Puerto Rican income of a foreign company having an office in Puerto Rico. Thus a company can be incorporated in Panama but be able to take advantage of administrative services in Puerto Rico to manage its trading activities from its Puerto Rican office. The other major use of Puerto Rico is as a manufacturing base, as there are special tax incentives for the establishment of new factories, and many major American companies have set up factories in Puerto Rico. The Netherlands Antilles has long been one of the best known tax havens, used by many multinational corporations for holding and finance companies. These companies pay low rates of tax, usually under 5%. One of the islands, Aruba, has become separate, but its tax haven position has remained the same as the other Antilles, and all of the are a part of the Kingdom of The Netherlands. The Cayman Islands are a British Crown Colony near Jamaica, and have been heavily promoted in the U.S. as a tax haven. But the prices of local services supporting the tax haven industry are quite high. The islands have never had income taxes, and have developed special corporation and trust laws to help attract business. They also have some vacation business, and are especially popular with divers because of their clear waters. The Bahamas is geographically the closest tax haven to the U.S., but political instability and a sharp increase in the annual company registration fee drove away a lot of the tax haven business. The tourist and convention industries are booming again after a decline of several years, and the islands are known as a retirement haven for the very wealthy. The country is now trying to regain some of the lost business with a very cheap incorporation fee. Forming a part of the Bahamas chain, but not legally or politically a part of the Bahamas, are the little known Turks & Caicos Islands. The population is only a few thousand (no accurate census has been attempted) and there is very little local industry. There has never been an income tax, and in recent years there have been efforts to attract a serious tax haven business. This has led to the passing of new company and banking laws. There are still few support services, but one of the international banking groups has recently established a trust company in the islands. The islands use the U.S. dollar as their official currency. The British Virgin Islands is another little known but excellent tax haven. Although having a low income tax -currently 15% -- it also has international business companies which are exempt from even this tax. It also has favorable tax treaties with Switzerland and Japan (the one with the U.S. was canceled). The islands are suitable for forming both trusts and companies, and are a popular location for yacht registrations, since the physical facilities for keeping a boat are as good the legal facilities. The islands have some of the best diving and sailing in the world, and the underwater scenes for the movie " The Deep" were filmed there. The islands make an ideal residential haven for those liking quiet living, and are only a short ferry ride from the U.S. Virgin Islands. Unlike the U.S. Virgin Islands, there is almost no crime in the British Virgin Islands. Barbados has high local taxes, but has passed special tax exemption legislation for retired foreigners wishing to settle in Barbados. Living conditions are pleasant, with one of the highest literacy and educational levels in the West Indies. Special legislation has been passed to attract international companies and major banks to establish headquarters in Barbados, and this follows the typical pattern of granting an income tax exemption. Bermuda is one of the best known havens, and is only a 90 minute flight from New York. It is a quiet, conservative haven, popular for international insurance companies. There is no income tax, and trusts and companies can both be formed there. An investigation is required of anyone wishing to form a company, and this has helped keep out the unwelcome elements. While a very pleasant residential haven, property can be very difficult to buy because of the small size of the island, and residence permits can be difficult to obtain. Extensive details of each of the tax haven countries, including legal, historical, and political information on them, is contained in The Tax Haven Report, published by Scope International Ltd., Forestside House, Forestside, Rowlands Castle, Hants. PO9 6EE, Great Britain. They will send a free catalog upon request. Another source of information is Eden Press, which publishes a series of special reports on different havens and techniques by which Americans can use them. You can obtain their catalog free by writing to them at P. O. Box 8410, Fountain Valley CA 92728. (This report is carried by Eden Press under the title "The Offshore Loophole.") If you want to gain a good understanding of how the government views tax havens, University Microfilms International, through its Books On Demand program, is now making available Tax Havens and Their Uses by United States Taxpayers by Richard Gordon. Frequently referred to as "The Gordon Report," this was a 1981 U.S. Treasury Department study prepared at the request of Congress. It gives considerable detail and examples of the uses of tax havens. It is available from University Microfilms for $67.30 softbound, or $73.30 hardbound. Out of print for over a decade, anyone interested in tax havens who has not studied the work will find much still useful information in it. Copies can be ordered through booksellers, or directly from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Michigan 48106-1346; telephone 800- 521-0600 or 313-761-4700. The UMI catalog number of the book is AU00435, and UMI accepts Visa or MasterCard. (The catalog number is important as UMI has over 100,000 titles.) Every tax avoider is a special case, requiring a particular kind of tax haven, but with this wide a choice something can be found for almost anyone. Many international tax planners suggest having one country for your citizenship, a different one for your residence, and a third one for your assets. Then you are never at the mercy of one country, and well protected from revolutions, wars, confiscations, and similar international events.