The World’s Best Tax Havens: How to protect your business from their exploitation

Tax Havens

Tax havens, or countries with favourable tax laws and regulations, have long attracted businesses and individuals looking to minimize their tax liabilities.

Once only used by the ultra-wealthy, tax havens are now used by moderately wealthy families who want to protect their wealth from income, capital gains and inheritance tax. Some tax havens even offer dividends for those who invest their money there, so it is easy to see why they are so popular, especially for Brits.

Utilising a tax haven - either as an individual or a business – is perfectly legal, however, tax havens can be easily manipulated by bad actors, making them a target for money laundering and fraud.

In this blog, we will look at:

• What are tax havens?

• What are the best tax havens in the world?

• What are the benefits of tax havens?

• Why are tax havens attractive to criminals?

• How can robust compliance solutions enable businesses to work with customers located in tax havens?

What Are Tax Havens?

Tax havens are jurisdictions that offer low or no tax rates, along with financial privacy and legal protections.

These benefits make tax havens attractive to foreign businesses and wealthy individuals, however, the same features that make tax havens appealing also make them hotspots for illicit activities like money laundering and tax evasion.

Benefits of Tax Havens

• Low or No Taxes: Tax havens provide significant tax savings for individuals and corporations by having 0% - or very low – rates on personal taxes like income, inheritance and capital gains tax, as well as on corporation tax and dividends which appeal to businesses and other entities.

• Financial Privacy: Many tax haven countries offer stringent privacy laws, protecting the identities of account holders, meaning individuals and businesses are able to hide their wealth to a certain extent.

• Asset Protection: Tax havens can provide legal structures that safeguard assets from creditors and legal disputes.

• Business-Friendly Regulations: These jurisdictions often have streamlined regulations that make it easier to establish and operate businesses.

The Best Tax Havens in the World

There are a number of countries and jurisdictions across the world that are renowned for their favourable tax regimes. To take advantage of the benefits offered by a tax haven, you need for your income to be classified as being of that tax haven. This means living there for extended periods of time to be able to class yourself as a ‘non-resident’ of your home country.

Therefore, the decision about which tax haven to choose is based on more than just the tax rules- or lack of – as you will need to be happy living there too.

Below we look at the top 10 tax haven countries and tax haven islands in the world based on their attractiveness as a base, as well as their tax advantages:

1. Switzerland

Because of low rates, strong privacy, favourable tax treaties, stable politics, easily accessible financial experts and central European location, Switzerland has become notorious for being a place to avoid taxes. And while foreign individuals cannot live and bank in its borders tax-free, they can pay a low, lump-sum option on the money they bank inside Switzerland, and the government considers their taxes paid. It also taxes households rather than individuals, making it very popular with wealthy couples. Switzerland also offers huge tax breaks for corporations that hold shares in other corporations, making it a popular location for shell companies.

2. Bahamas

With no corporation, income, inheritance or capital gains tax as well as no tax on sales or gifts, the Bahamas has one of the lightest tax policies in the world, and offers a paradise location making it a preferred tax haven for individuals and businesses alike. It is also VISA friendly – most are able to get permanent residency after just a couple of years. 

3. Cayman Islands

The Cayman Islands don't have corporation tax so are a popular haven for multinational corporations looking to shield some or all of their incomes from taxation. The Caymans are also popular amongst wealthy individuals as there is tax on income or money earned outside the territory, which includes dividends earned on investments, making the Caymans especially popular among hedge fund managers.

4. Isle of Man

One if the more ‘above board’ tax havens. It is popular with Brits – particularly those looking to start businesses – as it has no corporation tax – and is an easy commute to mainland UK. It also has no inheritance tax or capital gains and ow income tax, making it popular with the super wealthy too.

5. Singapore

A leading financial hub in Asia, Singapore is one of the best tax havens in the world as, despite raising taxation on inshore corporations and individuals, there is still no tax for offshore accounts and income. This makes the economy stable, but the tax breaks inviable. It also offers affordable luxury accommodation although the weather is a bit unpredictable making it less popular than the Caribbean as a home from home.

6. Panama

Panama imposes no income, corporate, capital gains, or estate taxes on offshore entities that only engage in business outside of the jurisdiction. Offshore companies can engage in business locally, but will pay local taxes as a result. Panama also has strict banking secrecy laws designed to protect the privacy of account holders, making it popular with the uber wealthy.

7. Bermuda

Known for its 0% tax on corporate profits, Bermuda is a key destination for insurance companies. Located in the Caribbean and turquoise waters and sandy beaches, it is easy to see why this idyllic island is popular amongst the wealthy.

8. British Virgin Islands

The BVI is one of the most popular for offshore companies as has 0% corporation tax and no tax on income, inheritance, sales or gifts. Thanks to its blue skies, tropical climate and gorgeous beaches, it again offers more than just financial benefits, making it a popular choice for those looking to protect their wealth.

9. Monaco

The sovereign city state of Monaco has no income, capital gains or property taxes and is located on the French Riviera, so attracts high-net-worth individuals from across the globe, with celebrities from the world of sport and entertainment – including Bono, Lewis Hamilton and Ringo Starr calling it home. Individuals have to stay longer than three months a year to be considered a resident, and, given it is easily accessible by plane, boat, or train, it is common for residents to work and even live in other countries in Europe for 90 days of the year and still enjoy the tax benefits. There are also no taxes on dividends and there’s no corporate income tax, making it a popular base for companies too.

10. Jersey

Jersey is one of the ‘original’ tax havens; in the early 1900s it had no tax at all. However, over the years it has introduced and subsequently increased income tax, meaning it is not as popular as it once was. However, with no inheritance tax or capital gains tax, and a maximum income tax of 20% wealthy individuals still use this 45-square mile Channel Island to protect their assets. 

Challenges and Risks

While tax havens around the world offer numerous advantages, they also pose challenges and risks, particularly related to compliance with international regulations. Here are some of the most common ways businesses and individuals use tax havens to commit financial crimes such as money laundering and fraud.

Businesses:

• Shell Companies: One of the most common ways tax havens are used to hide financial crime is through shell companies which can be used to disguise the true ownership of assets and hide illicit funds.

• Offshore Accounts: Businesses making money through illegal activities utilise offshore bank accounts to move money across borders undetected, making it difficult to trace the original source of the funds.

• Complex Structures: Criminals create complex corporate structures involving multiple businesses across numerous jurisdictions to obscure the paper trail and confuse regulators.

• Invoice Fraud: Business use false invoicing practices (over-invoicing or under-invoicing) to transfer illicit funds across borders under the guise of legitimate business transactions.

Individuals:

• Anonymous Trusts and numbered accounts: Taking advantage of privacy laws, individuals set up anonymous trusts or foundations in tax havens, or numbered accounts, to conceal the ownership and control of assets,  making it easier to launder money.

• Real Estate Investments: Individuals purchase high-value real estate in tax havens using illicit funds, which enables them to clean – and increase the value of - their dirty cash

• Art and Luxury Goods: By purchasing – and storing -  high value art, antiques, and other luxury goods with illicit funds – individuals are able to conceal where the money came from, legitimise it and avoid taxation.

How can businesses protect themselves when working with customers in tax havens?

Despite a huge number of ‘exposés’ of tax havens being used by money launderers and other financial criminals – for example, the Pandora Papers, the Panama Papers and the Paradise Papers  – it is unlikely that the laws in these ‘tax havens’ are going to change any time soon.

We previously looked at the key ways in which individual and businesses can abuse tax havens – one of the most significant of which is hiding the identity of an individual – or the ultimate beneficial owners of a business – and hiding the original source of the funds.

While it is not illegal to use a tax haven – or to work with customers that do -  it is a legal requirement to carry out robust due diligence on any customers based in – or associated with – tax havens to ensure they are legitimate.

How SmartSearch can help?

SmartSearch provides comprehensive compliance solutions that help businesses mitigate the risks associated with tax havens. SmartSearch has a range of highly advanced verification solutions that enable its customers to identify, verify and screen individuals, businesses and the ultimate beneficial owners of businesses.

• Individual checks - SmartSearch utilises global data from the three largest credit reference agencies in the world—and the Dow Jones Global Watchlist, to identify, verify, and screen an individual or business in seconds. If a potential risk is identified, SmartSearch automatically performs deeper background checks, full financial analysis, and adverse media and social media checks to ascertain the risk. All checks are hosted on the system which is monitored in real-time to ensure any changes to a customers risk level is known immediately. 

• Business checks - SmartSearch’s international business reports provide comparable and hard-to-find company information, and extensive corporate ownership structures. Each business check obtained registration details, director information and the identification of Ultimate Beneficial Owners and consolidated financial information. to ensure the business is a legitimate operation and not a shell company set up to hide illegal activity. Once the directors and UBOs have been identified, they are then verified, screened and monitored in the same way an individual would be with enhanced due diligence on any matches

The consequences for enabling money laundering are severe – financially, legally and reputational – and ignorance is no excuse. So, if your business is looking to work with individuals or businesses located in a tax haven, it is vital that you understand the risks associated with that and put the proper procedures in place to protect your firm.

Speak to an AML and compliance expert today to discover more.