The best tax optimization

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Many large multinationals take advantage of tax benefits to achieve a better tax optimization that annually sums up into millions in tax saving. 

In order to carry out the best tax optimization, we have to choose well the destination country of our investment. Whether we are a company or a private individual, we must analyze in depth the opportunities, in terms of tax optimization, provided by tax havens and other territories free of taxes within the framework of current international legality. Although in the past we perceived tax havens as hidden islands that attracted great fortunes, some of which of uncertain origin, and "kept safe" the wealth far from the tax controls of developed countries. Today we see that this concept has evolved and we see how territories so close to us, such as Monaco or Gibraltar, are still considered as tax havens according to the parameters of the OECD. However, a multitude of large multinationals take advantage of these tax benefits to achieve a better tax optimization that annually means millions in taxation savings. Before delving into the types of tax havens that exist and kinds of companies that can be opened there, let's start by asking: what we call tax optimization? 

What is tax optimization?

When we speak of tax optimization, we refer to the fiscal plan used by companies and, in some cases, by individuals with the large personal assets, to obtain tax benefits granted by certain offshore territories and that guarantee considerable tax savings when compared with the tax rates in countries such as Germany, the United Kingdom, Italy, Spain or the United States, where corporate tax rate is about 30%. In other words, the objective of tax optimization is to find the best way to reduce tax costs by choosing those offshore countries whose taxation regime is more favorable. And how it can be achieved? 

There are three types of companies that move to tax havens or other territories of developed countries with tax exemption in search of a better fiscal optimization: financial companies, collective investment institutions and Holding companies. Each of them takes advantage of a specific business structure to benefit from the tax reductions of the chosen tax haven. Thus, financial companies choose to create subsidiaries in tax havens for the issuance of debt under the guarantee of the parent company, collective investment institutions such as the SICAV, which do not need to turn to tax havens for a fiscal optimization post that already have an advantageous tax burden in many countries of origin, take advantage of the facilities at the time of their creation and escape the strict control of their management by the state. Finally, the figure of the Holding is used to create subsidiaries that exercise activity outside the country of origin of the parent company to take advantage of the tax savings in each of these territories. 

Now that we have seen what we could do in tax havens to improve our tax optimization, we will see what territories could be considered as tax havens according to the different classification criteria. This will help us to understand better the possibilities that each one of them can offer when making the decision of where to invest our capital to obtain a better tax optimization.

Learn more about tax havens for better tax optimization 

To evaluate the suitability a tax haven in terms of tax optimization of our investments, we must first know what is a tax haven and what territories are considered as such. First, we must point out that there is no international standardization to classify tax havens, so we will refer to the standards used by the OECD and the Tax Justice Network (TJN) in this regard. Secondly, we must note that the reason why a tax haven is classified as such may be due to criteria of tax competition or obtaining resources to attract foreign capital. At this point we note that there are tax havens with a tax burden virtually non-existent, tax havens that maintain banking secrecy unless required by the authorities, tax havens that do not exchange information and tax havens with a specific regulation for non-residents, each of them with its advantages and disadvantages to improve the fiscal optimization of our money. 

If we start with the European Union, the only considered criteria when it comes to including a territory in its list of tax havens is the fact that the country has signed the information exchange agreements or not. For its part, the OECD is guided by the implementation or not of fiscal transparency standards with the signing of at least 12 agreements on the exchange of tax information. Thus, today in the list of tax havens of the OECD only 4 countries are listed as tax havens: Bahrain, Panama, Vanuatu and Nauru. Although the reality is different because most of the signatory countries of these agreements still maintain a parallel tax system for non-residents with the same tax advantages as always and faithful to bank secrecy. Finally, the list of the TJN incorporates those territories with a deficient and insufficient tax system, and it may be surprising that countries such as the Netherlands or Ireland appear on this list. 

Now that we know what types of tax havens exist and if they can be considered as such depending on which organization´s classification is used, we will be one step closer to improving our tax optimization. Let's continue, then, with the list of the best and worst tax havens to which we can move our funds to optimize our tax plan. 

The best and worst territories for tax optimization

A tool that can help clarify which could be the best and worst tax havens to improve the tax optimization of any company is the index of tax optimization. This index can be developed based on the parameters related to tax havens that are considered relevant and then weighted according to the importance of each parameter. For example, if we consider it relevant that the chosen tax haven: 

  • is politically stable;
  • fiscally more favorable than other countries of the European Union;
  • has a high per capita income;
  • Has practices of concealment of information within the law; points 2 and 4 being the most important.

If with prioritize these parameters when analyzing tax havens one by one, the resulting tax optimization index will show that the territories of Panama and Bahrain are the best two jurisdictions to go to, while Dominica, Santa Lucia and Liberia would be among the worst ones. 

However, the tax optimization index can be elaborated according to the parameters that the company or adviser consider most relevant. There are companies to which the fact that a tax haven is at the limit of legality in terms of the exchange of information with the corresponding authorities is irrelevant. Whatever is the criterion that is taken into consideration, the use of this index of fiscal optimization can be useful in a certain way to help us in decision making.

What happens in practice with large companies? 

If we look at the companies that make up the Wall Street stock exchange market, we see something quite different from what the tax optimization index tells us: Panama is not the preferred destination of the subsidiaries of these companies. Neither is it for other North American multinationals, such as Google, Amazon, Apple. Why does this happen? In the case of the subsidiaries of American companies they have mostly opted to settle in the state of Delaware, Ireland and the Netherlands. Google and Apple, for their part, use their subsidiaries in Ireland and the Netherlands to transfer their profits to tax havens

What benefits these three territories report to improve our fiscal optimization? Registering an offshore company in Delaware exempts completely the payment of corporate taxes to those companies that do not perform any activity on the territory of the United States. Ireland, on the other hand, has a fairly lax fiscal legislation and allows the distribution of dividends before taxes and lodging benefits in subsidiaries settled abroad. Holland, for the Holding companies, exempts from the total payment of taxes to the dividends and profits of the subsidiaries. With this we see that it is not necessary to go too far or to a hidden island to take advantage of the tax benefits that some countries of our environment report to us, and that using their advantageous conditions we will achieve an adequate tax optimization for our company.

Tax optimization big companies