The reality is that most conversations relating to dual nationality, second citizenship or residency involve taxation somehow. Additionally, by definition these conversations are international in nature. And, human nature being what it is, we all want to pay less tax if we can.
When investigating these issues, it quickly becomes clear that national taxation policy makes some countries more desirable for business, residency and citizenship than others. At the top of many people’s lists will be a list of tax haven countries.
Therefore, rather than duck the issue, let’s take a look at it…
What Is A Tax Haven?
Firstly, a definition. When it comes to tax havens, a word that is often used is offshore. The word creates images of small islands with white sandy beaches, however, in reality it is much more general than that. Your home country of residence is considered to be onshore and everywhere else is offshore.
Therefore, even the biggest countries in the world, with a reputation for high(er) taxation can be offshore. Countries like the United States, Germany or Australia can be offshore if you are not personally located there.
As with any person or business, there are specialisations. Not every location is good for every need. For example, the British Virgin Islands are corporate and personal tax havens, while Belgium is one of the highest taxed countries in the world, but levies a rate of zero capital gains tax. Some locations are good for banking, such as Jersey, while it’s neighbour Guernsey has a reputation for fund management and insurance.
For these reasons, the wealthiest – families and corporations – among us are able to carefully select the location that best suits their needs.
What Are The Biggest Tax Havens?
As big a surprise as it will seem to most people, the largest tax havens in the world, in terms of money amounts, are not the jurisdictions you might immediately think of. The largest two are the United States and the United Kingdom!
Some years ago I read that the largest cities in the world for money laundering (a subject usually linked in the media to tax havens) were New York, London and Miami. Once again, they might not be where you first thought of. And interestingly, while many people might not wish to be associated with, for example, the Marshall Islands, very few people would consider any negative connection with New York or London.
Who Are The Tax Haven Countries?
This all means that a tax haven can be almost anywhere if you have very specific needs and know what you are doing.
Some countries in the European Union that spring to mind include:
Ireland, Luxembourg, the Netherlands, Austria, Latvia, Estonia, Malta and Cyprus.
Geographically European but outside the EU:
Jersey, Guernsey, the Isle of Man, Gibraltar, Monaco, Andorra, Vatican City (yes! do a Google search about their banking and you will be amazed…), Switzerland and Lichtenstein.
From further away:
The Cook Islands, the Marshall Islands, Belize, the Bahamas, the Caymen Islands, BVI, Singapore, Hong Kong, etc etc.
This probably makes it clear why tax havens are unlikely to go away. No matter what governments may complain about them, they are not really a part of the system, in many ways they are the system! There are simply too many personal, corporate and political connections to see the offshore world overhauled or closed in the coming years and decades.
Why Do Tax Havens Exist?
There are many reasons, but perhaps the main one related to the history of the British Empire (and some other colonial powers too) and their global reach.
Once the empire of trading and staging locations was fading – in part because of the development of commercial aviation, making it less important to sail around the world – a number of governments found that they had to keep paying the bills for their small colonies. The UK went through a period of allowing independence for a number of small countries through the 1950s to 1970s.
One of the results was that these small countries were unused to surviving without aid and the British government wanted to end the subsidies. The result was that these countries were left with minimal industry and revenue generation capability. For many countries, financial services were actually encouraged by the British government as a revenue generation model.
Over the years, a wide range of depositors have come to rely on the services of the offshore world, from African dictators to Wall Street investment banks to international businesses to royalty. It seems that no matter who we are, we all share the desire to reduce our tax bill.
How Do Tax Havens Make Money?
There are several business models for these countries, but it is worth understanding that for a small geographic location, just a couple of successful business sectors might be enough to sustain the entire country.
If the country has low or zero rates of corporation tax, then there will be a sector for corporate services. This will include set-up fees and annual management fees, plus directors and secretaries, office space, annual filing fees and hourly admin rates. It can really mount up!
For banking and fund management locations, their sectors will need all the infrastructure of a global bank, especially technology, but the jobs being created will almost all be located in the country. This sort of work is rarely outsourced abroad.
Jurisdictions that specialise in other areas will usually have lots of law firms. Like corporate services, there are markets for ship, yacht and aircraft registration among others. Each needs specialist legal assistance and administration.
How To Use A Tax Haven
In early 2016 a data leak from a Panamanian law firm called Mossack Fonseca exposed millions of documents and thousands of people for using structures around the world for (mainly) nefarious means.
Britain’s Prime Minister, David Cameron, was dragged into the Panama Papers scandal. In his situation, he had previously owned shares in a structure established by his late father. He had sold his interest, declared it in his annual tax return and paid the proper amount of tax on the capital gain.
In reality, there seemed to be little wrong about his involvement. His father had been a stockbroker by profession and when the structure was established (when David Cameron was aged 15) it was very difficult to invest funds abroad – such as in the US – and this was a method of making it possible.
In direct contrast, there were others caught in the trap, such a Malta’s Health and Energy Minister, Konrad Mizzi, who had only recently established his structure, whilst he was already a government minister. On behalf of his government he would soon be in the process of negotiating a gas deal that would be worth hundreds of millions. His circumstances seem much less savory because he had completed a form and ticked the box for “Secrecy”.
These examples highlight one of the core reasons that people use tax havens: secrecy. Although there have been a number of moves to limit secrecy and enable information sharing between governments, pushed by the FATF, there are a number of countries that take their secrecy very seriously.
In fact, when combining the government sanctioned low or no tax environments with expert wealth management it is possible to make offshore really work for you, if you want. However, it is important to understand that this mostly involves committing crimes on your tax forms back home if you do. This means that for the majority of people, banking havens are used by people that are willing to break the law.
At the most extreme end of the scale, tax havens are used to help process arms or drugs deals, or to launder the proceeds of crime. At the other end of the scale, they are used for completely legitimate purposes relating to fund management, insurance and banking. Obviously, we recommend that you use them only for legitimate means and are careful to declare any interests on your annual tax declaration.
Tax Havens And Citizenship
To get back on topic, for some people wishing to acquire a new citizenship, a tax haven is a very high choice. Why? Simply because tax havens have a habit of not taxing their citizens or residents either heavily or at all. If you happen to be a mega-millionaire looking to secure your fortune, selecting a government that is not very interested in your money must be quite a relief!
The business of selling passports has become quite an industry in its own right. Some of the nations that are willing to sell their rights are smaller tax haven type countries. While these may not be the best travel documents, they do have their purposes.