Tax Haven

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What is a Tax Haven?

A corporate Tax Haven is a country or region that has a friendly tax regime or even imposes no tax at all. The Cayman Islands, Bermuda, Luxembourg and Switzerland are well known examples.

On top of their low tax burden, these countries usually also offer favorable regulations, strict banking secrecy and a lot of privacy (lack of transparency in financial transactions).

Some of the most common types of entities that use tax havens include multinational corporations, wealthy individuals, and hedge funds.

Companies often form one or more special legal entities such as a trust, an offshore company, or a foundation in their tax planning process.

Tax Haven Types

In fact, tax havens are by no means similar. Rather they can differ on many dimensions such as political, economic or geographical dimensions. Orlov (2004) makes a division that is based on the attitude towards tax regulations; on how conducive these tax haven jurisdictions are towards their responsibilities. He distinguishes the following broad groups of tax havens:

1. Quality Tax Havens: These jurisdictions are characterized by legal policies and regulations supported by rules and laws and subsequent supervision of banks. Because of this, these countries attract prudent organizations and the best deals. These tax havens are often political stable and well-developed which also is beneficial for attracting companies (although some developing countries are included as well). Switzerland, UK, Monaco and Hong Kong are examples.
2. Other Tax Havens: This group is not able to compete with the first group because of the fact that they lack many of the benefits that quality tax havens have. Therefore they are required to lower legal regulations and supervisions. Most of the countries in this group are developing countries. Examples of this group are Liberia and Nauru.

Source: Orlov, M. (2004) “The Concept of Tax Haven: A Legal Analysis” Intertax Vol. 32 Iss. 2 pp. 95-111

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