THE USES OF TAX HAVENS Tax havens are one of the most important subjects for an international entrepreneur or investor, yet few understand and use them properly. One group discount them as hiding holes for dirty money, which is not a legitimate use for tax havens. Others think they are only for banking money after you have made it. Not true either. Money grows much faster if a tax haven is part of your business planning, and almost any international business has an opportunity to use tax havens. It is the purely domestic business, confined to one country, that cannot benefit from the international fiscal loopholes. Switzerland is a major financial center, but not generally a tax haven. Called a paradis fiscal by the French, a rifugio fiscal by the Italians, and a Steureroase by the Germans, it obviously means a place where the fiscal grass is greener than in your own particular backyard. But an effective tax haven is not determined simply by geography; it all depends on what particular asset or transaction you are trying to defend from the tax collector. Simply stated, a tax haven is any country whose laws, regulations, traditions, and, in some cases, treaty arrangements make it possible for one to reduce his overall tax burden. This general definition, however, covers many types of tax havens, and it is important that you understand their differences. No-Tax Havens. These are countries that have no income, capital gains, or wealth (capital) taxes, and in which you can incorporate and/or form a trust. The governments of these countries do earn some revenue from corporations; "no-tax" means that what you pay is independent of income derived through a company. These states may impose small fees on documents of incorporation, a small charge on the value of corporate shares, annual registration fees, etc. Primary examples are Bermuda, Bahamas, and the Cayman Islands. No-Tax-on-Foreign-Income Havens. These countries do impose income taxes, both on individuals and corporations, but only on locally derived income. They exempt from tax any income earned from foreign sources that involve no local business activities apart from simple "housekeeping" matters. For example, in such a haven there is often no tax on income derived from export of local manufactured goods. The no-tax-on-foreign-income havens break down into two groups. There are those that allow a corporation to do business both internally and externally, taxing only the income coming from internal sources, and those that require a company to decide at the time of incorporation whether it will be one allowed to do local business, with the consequent tax liabilities, or one permitted to do only foreign business and thus be exempt from taxation. Primary examples in these two sub-categories are Panama, Liberia, Jersey, Guernsey, Isle of Man and Gibraltar. Low-Tax Havens. These are countries that impose some taxes on all corporate income, wherever earned. However, most have double-taxation agreements many the high-tax countries that may reduce the withholding tax imposed on income derived from the high-tax countries by local corporations. Cyprus is a primary example. The British Virgin Islands is another, but no longer has a tax treaty with the U.S. Special Tax Havens. These are countries that impose all or most of the usual taxes, but either allow special concessions to special types of companies (such as a total exemption from tax on shipping companies, or movie production companies) or allow very special types of corporate organization, such as the very flexible corporate arrangements offered by Liechtenstein. The Netherlands and Austria are particularly good examples of this. To understand the precise role of tax havens, it is important for you to distinguish two basic sorts of income: (1) return on labor and (2) return on capital. The first kind of return is what you get from your work: salary, wages, fees for professional services, and the like. The second kind of return relates, basically, to the return from your investments: dividends on shares of stock; interest on bank deposits, loans and bonds; rental income; royalties on patents. It is the second kind of income, income from an investment portfolio, that tax havens are useful for. Forming a corporation or trust in a tax haven can make the second form of income totally tax free, or taxed so low that you will hardly notice. Certain types of businesses can be effectively based in a tax haven. If you publish a newsletter, for example, you might be able to set up the entire operation in a totally tax free country such as the Bahamas or the Cayman Islands. If your income comes from copyright royalties, perhaps on the computer program you invented, the Netherlands is famed as a base for sheltering royalty income. Tax havens are a very complex subject, but the hours you spend studying their use will probably pay you more per hour than the hours you spend directly earning an income -- an unfortunate commentary on the confiscatory taxation policies of most governments. For the best detailed information on tax havens, order The Tax Haven Report, from Scope International Ltd., Box AS125, Forestside House, Forestside, Rowlands Castle, Hants., PO9 6EE, United Kingdom. The price is $125, including airmail postage worldwide, ($100 if you want it by slower surface mail) and they accept Visa or MasterCard. They will send a free catalog on 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. Yet another is Using Offshore Havens For Privacy & Profit, available for $19 from Paladin Press, Box 1307, Boulder CO 80307. (Credit card orders may call 1-800- 392-2400). 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 most popular investments for U.S. investors in recent years have been mutual funds and insurance products. For the internationally minded investor, there are offshore versions of these products available. In many cases, they offer even more benefits to U.S. investors than do their domestic counterparts. The IRS and other elements of the U.S. government apparently do not believe in offering international opportunities to U.S. citizens, however, so in some cases these investments are less attractive to U.S. investors than to residents of other countries. The main obstacle standing in the way of many foreign opportunities is the U.S. securities laws. Any "investment contract" sold in the United States must be registered with the Securities and Exchange Commission and with its counterpart in each of the states. This is a very expensive process. U.S. securities laws require far more disclosure than do those of most foreign countries and also require different accounting practices. Therefore, many offshore mutual fund companies decide that whatever income they might eventually earn would be inadequate compensation for the time and expense involved in attempting to comply with U.S. securities laws. In fact, several of the mutual funds and hedge funds with the top performance records are run from the United States by U.S. residents but do not accept investments from U.S. residents. To reduce registration costs and avoid other restrictions, the funds are made available only to foreigners. That doesn't mean that there is something dirty or illegal about it -- it merely means that the fund is not registered for sale in the U.S. Successful foreign funds don't need the American market and see little reason to pay the outrageous fees of our litigious society. (Some of the best foreign cars cannot be purchased in the U.S. for a similar reason -- the makers of $100,000 custom cars are not about to give the federal government ten free cars per year for destruction testing.) Some of the funds cannot meet U.S. legal requirements because they charge investors a performance fee rather than a management fee based on a percentage of assets. But many investors would actually prefer a fund manager whose only compensation is a share of the profits instead of a fee based on the total investments in the fund. The manager's goals are different. Fortunately, U.S. citizens can get around the obstacles through bank accounts or trusts. Basically, you can travel overseas to buy the shares in person, you open a foreign bank account and invest through the account, or you can establish a foreign trust. Only then will these opportunities be open to you. It is not illegal for Americans to buy offshore mutual funds (called unit trusts in some countries) or any other security that is not registered for sale in the United States. Creating a foreign irrevocable trust which in turn owns a foreign corporation has proven a viable solution in some circumstances. Recently revised Securities & Exchange Commission regulations also make it legal for such a corporation to purchase foreign shares and funds which could not be purchased by an American directly. Regulation S now defines circumstances in which such purchases may be made by a corporation indirectly controlled by an American shareholder (such as control through an asset protection trust). In many cases such a trust and corporation structure can be created in a way that provides both asset protection and fully-legal income-tax exemption for the trust or corporation. Just stop and think for a moment how much faster your money can grow if you are not paying out an average of 40% to a taxing government somewhere.