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Before speaking about offshore territories and its pros and cons for a physical person looking for assets protection or businesses whose goal is tax saving and international growth, we have to ask ourselves: what does a term offshore mean in finance and economics?
Offshore is a territory or a country, other than the country of residence of the final beneficiary, with favorable tax regime where the resident and non-resident companies are subject to zero or very low fiscal obligations.
The most commonly used tax free territories are Panama, Costa Rica, Belize, Virgin Islands, Cyprus, Andorra, Ireland, St. Vincent and the Grenadines and Seychelles. All these countries fulfill the main criteria of tax havens that is favorable tax regime for non-resident companies.
So now since we know what is offshore, you might ask me: but is it legal to invest offshore? The answer is: Yes. Any physical or legal person can make tax haven investments, open bank accounts abroad or register a company for international trading.
Even though what we see now is an anti-offshore policy adopted by the governments of many countries, it is completely legal to move your funds to tax haven, register a company or to open a bank account. The thin line that separates legality and illegality of moving your funds to tax free territories are tax evasion and tax avoidance.
What is tax avoidance? Tax avoidance is tax planning that involves taking advantage of legal and fiscal lagoons as well as legal resources with the objective to save on tax payments, lower tax burden and increase the anonymity of beneficial owner.
What is tax evasion? Tax evasion is an illegal and dishonest behavior of a taxpayer whose goal is to escape from his tax obligations in an illicit way.
As we can see, opening a bank account and registering an offshore company are the examples of tax avoidance. Another examples of tax avoidance are changes in company’s structure or deduction of expenses unrelated to business activity.
A global crisis that we all try to overcome has made it obvious that tax havens and its favorable tax regimes have been used abusively by some large companies or individuals. Therefore, new anti-offshore measures were developed.
Anti-offshore measures are laws, protocols and policies created with only one purpose: to eliminate this kind of jurisdictions and, as a result, to prevent taxpayers from opening offshore accounts and registering companies, foundations or Trusts.
Tax evasion and tax free operations have caused large financial damages to many developed countries where the income tax rates of individuals or companies are higher than 30%. Since the human nature is based on constant search for better options, it is obvious that any taxpayer will choose an option of tax saving and usage of offshore jurisdictions that will always seem more attractive and logical. Therefore, in order to limit the flow of capitals to these territories the governments of more than 100 countries have signed an Automatic Exchange of Financial Account Information Agreement. The main purpose of this agreement is to increase the recollection of taxes and to eliminate the criminal activities from the banking sector.
The agreement affects only personal and corporate bank accounts opened in a jurisdiction that have signed a bilateral agreement with the country of fiscal residence of the beneficial owner of the mentioned account. That is, if your country of residence is a member of automatic exchange of account information treaty but did not sign an additional bilateral agreement with a country where you have opened an offshore bank account, St. Vincent and the Grenadines, for example, than the information about the existence of your account and its balance wont be reported to the fiscal authorities of your country of residence.
Therefore, in order to achieve maximum anonymity, it is very important to learn more about the list of the countries that have agreed to exchange mutually the banking information of its residents.