What is a territory of low taxation?

  • Posted By : Admin
  • Tax havens
  • 01-03-2017

The key to saving taxes abroad is to have a company or bank account in a territory with low taxes. Territories of low taxation are known also by many different names: offshore, offshore territories, offshore jurisdictions or tax havens.

A territory of low taxation is strictly a country or jurisdiction, that charges low or 0% taxes on individuals or companies within its borders. They are usually small countries or islands, whose tax regime attracts capital and power to its business and finance. Usually these are not banana territories with a high degree of legal uncertainty, but rather are places with fairly sophisticated financial services. The financial centers that are already established and consolidated, such as the Channel Islands or the Channel, mainly Jersey and Guernsey and the Isle of Man, possess first-class banking services. The same could be said about other Caribbean islands such as Cayman Islands or Hong Kong. All these jurisdictions are of low or no taxation.

The low taxation may come from the existence of reduced taxes, if any, to residents or non residents, or be the result of the application of double taxation agreements, which reduce the tax burden on individuals or companies that work on its territories. In the country where there are no taxes, local authorities derive their income from different types of fees unrelated to the earnings of individuals or companies, usually indirect taxes, especially on imports and trade. The current is the absence of taxes for individuals and companies that make profits overseas and have no financial relationships with individuals or companies in the country, except those arising from its registration and annual fees, which are normally very low. Another method, the most common one, is that the income earned abroad is not taxed and only locally obtained benefits are taxed. 

In its original meaning the term offshore refers to the economic characteristics of continental islands ("offshore islands"). Then there were low-tax island territories receiving money from countries with high tax burden. The term Offshore has also been applied by extension to countries such as Andorra, Austria and Luxembourg without any seacoast but with a peculiar tax situation that, under certain conditions, confers unique characteristics of low-tax territory. As we said, it now became very common also among developed countries, the existence of "tax holes", which convert these countries in authentic tax havens in certain circumstances.

It is important to add that there is a broader concept of offshore enclave if this is understood as the financial market that handles funds from other countries. Thus, the City of London is the world's largest offshore center. 87% of offshore transactions take place in London, New York and Tokyo. 

The principle that underlies the existence of these enclaves is linked to the principle of national sovereignty: a country is free and sovereign to establish the taxes that a company or a resident person must or should not pay. Likewise, it is free and sovereign to decide whether non-resident persons or companies must pay or not, and in what amount, for commercial operations that they carry out in their territory or outside it. The concept of non-resident includes those companies whose effective management is not carried out in the offshore territory or those in which their effective managers are residents in their territory.

Many of these tax havens are exotic places and recognized tourist/holiday centers. Its occurrence is attributed to the colonies of the United Kingdom that before the Second World War developed a fiscal protection for millionaires and expatriates in their continental islands. However, in the beginning were the bank accounts in tax-free currencies that were offered in London to individuals, countries and institutions. Some trace their existence to the formation of the first captive insurance company in 1927.

In some of the offshore low tax territories, local residents do not pay taxes or pay more taxes than the non-residents who have their accounts or businesses domiciled there. Local authorities strive to protect the client and their deposits, with the basic purpose of attracting more investors and businessmen from other countries with the incentive to pay very little or no taxes. The non-resident clients must not have commercial relations with the residents, except for the administrative tasks derived from the territory where their funds or companies are located.