Tax Haven Countries

Normally, the entrepreneur makes the choice of a tax haven on the basis of geographical convenience. But other factors should weigh in the balance:

* The haven's physical resources and legal situation
* The haven country's political stability
* The quality, in a potential host country, of the specific services required
* In some cases the availability and reliability of labor
* Existing personal and other relationships, including those with lawyers, partners, bankers, special contacts, and so on.

Just as importantly, of course, the entrepreneur has to know what he wants to do from the outset. He may research heavily before deciding that question. Immediately afterward, he may want to establish in his or her own mind how the profits are going to be distributed and to whom -- if more than one person is involved. If he is a citizen of the United States, he will want to ascertain what his citizenship will require of him. He will find, for one thing, that he stands at a slight legal disadvantage visa vis his foreign counterpart. The latter may become a non-resident for tax purposes if he simply moves to a tax haven and takes up residence there, but Americans are subject to worldwide tax regardless of where they live.

Kinds of Havens.

Tax havens are classified according to type. There are at least five basic categories.

1. Those that levy no income tax. These countries include the Bahamas, Bermuda, the Cayman Islands, and the Turks and Caicos islands.
2. Those that do not tax foreign-source income. Countries or territories in this group include Hong Kong and Panama.
3. Countries that, like those in group 2, do not tax the foreign-source income of companies that are owned by non-residents. The countries or geographic entities that fall into this category include Barbados, Guernsey, Jamaica, The Isle of Man, Jersey, Liberia, and Gibraltar.
4. Those havens that make special concessions for holding companies, among them Austria, Liechtenstein, Luxembourg, the Netherlands, the Netherlands Antilles, and Switzerland.
5. Havens whose tax laws make them ideal for special uses and purposes. These include Andorra, the British Virgin Islands, Cyprus, Nauru, and Macau.

Combining Tax Havens. The possibility that tax havens may be combined should never be discounted. In a typical case, a combination may make it possible to avoid withholding taxes on royalties.

How does this work? The tax haven company first sets up a Dutch subsidiary -- for example. The company then licenses its patents to a Dutch subsidiary. In its turn, the latter sub-licenses to an American manufacturer. The royalty payments go tax free to the Dutch company.

The Dutch company then avoids Dutch withholding tax on dividends by paying the tax haven company -- the patent owner -- a royalty equal to those that it received.

The Dutch company would not be taxed in The Netherlands because its expenses equal its income. The tax haven company has acquired a royalty tax free. That royalty would under other circumstances have been subject to a 30 percent U.S. withholding tax.

The entrepreneuer or multinational company desiring to incorporate in a tax haven country or area does not necessarily have to locate a headquarters there. Administrative offices may remain in another country offering greater geographical convenience. A Bahamian corporation could have its offices in Belgium. The company would in this case be subject to taxation on its Belgian-source income. But it would at the same time be appropriately located to conduct business in Europe.