Tax havens: what are they, and how do they work?
This article will take you through what you should know about tax havens, including what they are, how they work, and if you can legally retire in one.
Summary
A tax haven is a country or territory that offers foreign corporations and individuals no or low tax liability to attract external investment.
Some of the most well-known tax havens include Bermuda, the Cayman Islands, and Switzerland.
While tax havens offer benefits to their users, they are a legal grey area that many disagree with.
Whether you need to develop a tax strategy or transition toward retirement, a financial advisor can help you create a plan that can help you meet your goals.
What is a tax haven?
A tax haven is a country or territory that offers foreign corporations and individuals no or low tax liability to attract external investment.
Traditionally, tax havens impose special tax rules that entice wealthy businesses or people to deposit money in a bank in that country.
There are several common factors that help identify tax havens, as initially stated by the Organization for Economic Cooperation and Development (OECD); including:
No, or nominal, tax on relevant income
Lack of effective exchange of information
Lack of transparency
No requirement of substantial activities – profits can be gained from certain mobile activities without corresponding economic activity.
According to the Tax Justice Network, tax havens are also sometimes known as “secrecy jurisdictions” as they often specialize in enabling individuals to hide their wealth and financial affairs from the rule of law.
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What are the problems with tax havens?
Tax havens are a legal grey area, with many believing they create financial injustices.
Some of the main issues surrounding tax havens include:
Loss of tax revenue: If a citizen or corporation does not pay tax in their home country, the government misses out on tax revenue, which can have a knock-on effect on funding for vital services and infrastructure.
Increased inequality: Tax havens are typically used by the wealthy, who have the resources to research and utilize tax loopholes that others do not. According to the Tax Justice Network, tax havens “fuels inequality, fosters corruption and undermines democracy.”
Instability: According to the International Monetary Fund (IMF), as a tax haven’s main purpose is tax avoidance, this activity generates very little investment in tangible assets; therefore, tax haven business is extremely volatile.
In recent years, more pressure has been placed on tax havens to curb their activity and reduce the incentives they offer.
This pressure comes from countries such as the US and those within the EU, as well as advocacy groups, including Tax Justice Network.
Following the publication of the Panama Papers – a collection of documents that disclosed how members of the worldwide superrich used tax havens to conceal their wealth, escape public scrutiny, and avoid paying taxes – this pressure intensified.
Who benefits from tax havens?
While many disagree with the use of tax havens, they are beneficial to those who use them.
Some of the main players who benefit include:
Wealthy individuals: Those who use tax havens can enjoy reduced or no tax liability, keeping hold of more of their money.
Corporations: Companies that use tax havens also enjoy reduced tax rates. For example, Apple uses Ireland as a tax haven, which has saved them upwards of $65 billion in taxes, according to the Corporate Finance Institute (CFI).
What countries are tax havens?
Tax havens can be found in almost every corner of the globe.
Some of the most well-known tax havens include:
British Virgin Islands
The Caribbean is home to some of the most popular tax havens in the world, including the British Virgin Islands (BVI).
According to the World Population Review (WPR), BVI has 36,000 residents, but is home to over 400,000 companies and holds approximately $1.5 trillion in assets.
Offshore BVI companies are exempt from corporate income tax, capital gains tax, or value-added tax (VAT).
BVI international companies also pay no income tax or capital gains. The territory also has no tax treaties with other nations, protecting the financial privacy of bank account holders.
Cayman Islands
Alongside no corporate tax, the Cayman Islands does not impose direct taxes on residents, including property, income, and payroll taxes.
This has made the British Overseas Territory popular with both individuals and corporations alike, with Fortune 500 companies such as Pepsi, Marriott, and Wells Fargo having subsidiaries there, according to WPR.
Bermuda
This British Overseas Territory in the North Atlantic is a well-known tax haven for companies worldwide.
According to PWC, Bermuda does not impose taxes on profits, income, dividends, or capital gains, has no limit on profit accumulation, and does not require dividend distribution.
However, under the new Bermuda Corporate Income Tax Act 2023 (CITA 2023), a 15% corporate income tax will apply to Bermuda businesses that are part of multinational enterprise groups with annual revenue of €750 million or more. This will take effect in 2025.
Switzerland
Well-known as a haven for financial secrecy, Switzerland has low taxation for both foreign corporations and individuals.
According to the Swiss Federal Department of Finance, foreign nationals who live in Switzerland but are not employed there can pay a low, lump-sum option on the money they bank inside the country, and the government considers their taxes paid.
For corporations, the Swiss government offers significant tax breaks to companies that hold 10% shares of other corporations.
However, it’s worth noting that while the wealthy can take advantage of the country’s low tax rates, its once-famed financial privacy laws have been weakened due to pressures from both the US and European Union (EU).
Luxembourg
According to Global Finance, Luxembourg was the richest country in the world in 2024, with a gross domestic product (GDP) of over $143,000 per capita.
In addition to being home to the richest country, it is also one of the most well-known tax havens in the world.
Its favorable low tax rates and impenetrable tax secrecy have resulted in the tiny European country becoming home to a large percentage of US Fortune 500 companies and individuals looking to reduce their tax liability.
Can you legally retire to a tax haven?
As they are predominantly countries and territories with their own laws, tax havens are legal, meaning you can move to a tax haven if you wish.
However, the specific actions and the laws of both the tax haven and the US will determine the legality of how you use them.
It’s also worth noting that while you can move to a tax haven, you will still have to pay US taxes as an expat. This could lead to double taxation and end up being more expensive than if you stayed put.
Within the US, there are several states and territories that can provide tax relief for retirement.
Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming do not impose state income tax, meaning your retirement income will be tax-free.
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Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.