Tax Havens

  For those who know the ocean or enjoy the beach, "offshore" may bring back pleasant memories of far-off vessels passing on a blue horizon....of a leisurely sail cutting through the waves in your own sturdy boat. Here "offshore" refers to sovereign nations with laws that protect your financial privacy, your assets and your cash. Countries where the welcome mat is always out for foreign citizens weary of high taxes and government snoops back home.

Locating the right tax haven is no easy task.  In the ever-changing world of offshore finance, it is imperative to understand how the offshore system operates, what is legal, what is not, and how you can use this system to your own advantage.  Not all havens are created equal. The Sovereign Society has been identifying tax havens and building relationships with foreign governments since its inception in 1998.  We can tell you which tax havens are best and which to avoid. 

   The articles below originally appeared in our montly newsletter, The Sovereign Individual  and will help you more fully understand the benefits of tax havens. You can learn more about tax havens, offshore banking and asset protection in The Sovereign Individual each month by becoming a member of The Sovereign Society. Click here for details on membership.

• Extreme Tax Havens: How to Take Advantage of Two of Europe's Best-Kept Secrets - by Robert E. Bauman, JD
  
• The Five Best Offshore Havens: Tops in Privacy, Asset Protection, Investment Opportunities, and Lifestyle Benefits  - by Mark Nestmann
  
• Tax Haven Attack: The Phony War on Offshore Havens Fizzles  - by Robert E. Bauman, JD
  
• Due Diligence: The Key to Avoiding Offshore Disasters - by Derek Sambrook
  

Extreme Tax Havens:
How to Take Advantage of Two of Europe’s Best-Kept Secrets

Mirror, mirror on the wall…what’s the best offshore tax haven of them all?

Truth is, there’s no best haven for all purposes. Some offshore havens specialize in private banking, others cater to multinationals. Still others focus on attracting wealthy retirees to their shores. Here’s a rundown of five of the world’s leading offshore havens:

Dubai—Tax Haven on Steroids and Zero Taxes, too!

Strategically located Dubai (one of the seven emirates of the United Arab Emirates) is a gateway to more than 1.5 billion consumers in Asia, Africa, Europe, and the Middle East. Fueled by billions of dollars in oil wealth, it’s booming. Construction is everywhere.

Dubai is home to the world’s only seven-star hotel; the world’s tallest building is under construction there; and it contains the world’s most exclusive residential haven, The World (manmade islands in the Arabian Gulf, starting around US$23 million). Dubai also has one of the world’s largest free-trade zones and first-class infrastructure, much of it brand-new.

All this, and zero taxes, too. And (rarely for an offshore center), no “Mutual Legal Assistance Treaties” or other information exchange agreements with the U.S. Further, Dubai had the clout to resist knuckling under the OECD’s phony “harmful tax competition” initiative.

Dubai is a good choice for companies setting up distribution channels in Europe, the Middle East, Africa, and Asia. It’s worth considering for a bank account, although the banks tend to cater to rich Arabs and Dubai’s large expat community. Residence permits, entitling you to live in a warm weather jurisdiction with zero taxes, are easy to acquire, particularly if you’re hired by a local company.

For more information: http://www.dubaicityguide.com.

Hong Kong—Gateway to China, the World’s Fastest Growing Economy

We’ve written about using Hong Kong as a gateway for investing or doing business in China, most recently in our July issue. But that’s just one of its attractions.

Hong Kong is also a bustling low-tax international financial center. Its reliable legal system, based on English common law, makes Hong Kong a suitable jurisdiction for offshore companies and trusts. Taxes are low to non-existent. You pay 15% to 20% tax on personal or business income earned in Hong Kong, but no tax on overseas income.

For wealthy investors, Hong Kong is also a residential haven. If you’re prepared to invest the equivalent of US$833,000 in the local economy, and pass a background check, you can obtain a renewable residence visa. But don’t expect to find a cheap apartment—property prices are among the highest in the world.

Skeptics argue that Hong Kong’s status as a “special administrative territory” to China might mean that Beijing could eventually curtail its freewheeling ways. If anything, this status helps protect Hong Kong from attacks by do-gooders at the OECD, FATF and United Nations. Count on Hong Kong to continue prospering for years to come.

Switzerland—Still the Offshore World’s Fortress of Secrecy

The Confederation of Switzerland is a survivor, and a rich one at that. Despite being surrounded by belligerents in World Wars I and II, it stayed out of both conflicts and emerged with its infrastructure intact. Today, more than one-third of the world’s private wealth resides in Swiss banks and fiduciary companies.

Banking secrecy is Switzerland’s most famous calling card, and it has resisted decades of pressure from the OECD, FATF and other haven-bashers to dismantle it. Financial discretion and unsurpassed professionalism in private banking and estate planning are the main reasons why wealthy investors have trusted Swiss banks for more than 200 years.

Switzerland recently weakened its secrecy laws and cooperates more fully in foreign criminal investigations. It’s no longer possible to have a truly anonymous Swiss bank account, and Switzerland now participates in the EU Savings Tax Directive. EU nationals banking in Switzerland now have taxes withheld from most interest bearing investments.

While Switzerland isn’t a residential tax haven, there’s an exception: wealthy foreigners who reside in Switzerland can be taxed on a lump-sum basis, starting at around US$40,000 annually. Formula 1 racer Michael Schumacher, tennis star Boris Becker, and thousands of other wealthy foreign nationals now carry Swiss residence permits.

For multinational corporations, Switzerland has important advantages. With proper planning, there are no withholding taxes on dividends, interest and royalty payments between affiliated EU enterprises and Switzerland. With its wide network of tax treaties, Switzerland is a great location for holding companies.

For more information: http://www.whvp.ch/ or http://www.henley-partner.com/switzerland.htm.

Liechtenstein—Tax Haven for Aristocrats

Laws designed to shield privacy and wealth in the Principality of Liechtenstein (Furstentums Liechtenstein) date back to 1926, making it one of the world’s oldest offshore tax havens. The British, Belgian, and Luxembourg royal families, among many other familiar names, are said to appreciate the professionalism, discretion and secrecy offered by Liechtenstein and its unique entities, such as the mysterious Anstalt (Establishment). No wonder they feel at home—Liechtenstein has been ruled by the same aristocratic family for more than 800 years!

Prodded by the phony war on (some) money laundering centers, Liechtenstein no longer offers anonymous bank accounts or entities. It also was pressured into ratifying a mutual legal assistance treaty (MLAT) with the U.S. But it remains one of the world’s best locations for private banking and estate planning. You’ll pay for the privilege of doing business here, though…fees and commissions are among the world’s highest.

Liechtenstein imposes no taxes on most entities owned by foreigners. However, it has signed on to the European savings tax directive and, like Switzerland, Liechtenstein will withhold tax from many interest-bearing accounts owned by EU nationals. Its only tax treaty is with Austria.

The Sovereign Society maintains an “Offshore Convenient Account” relationship with SwissFirst, a private bank in Liechtenstein. For more information, see The Liechtenstein Report. For information on Liechtenstein entities, a good source is http://www.atu.li/.

Panama—Low-Cost Tax Haven with 80 Years of Asset Protection and Less than 3 Hours from the U.S.

The Republic of Panama offers haven seekers a solid financial infrastructure, zero taxes for non-Panamanian income, low living and administrative costs, along with one of the world’s most attractive programs to attract foreign retirees. And it’s only a two-hour flight from Miami.

Nor is Panama a Johnny-come-lately among havens. Its corporation law dates to 1929, and Panama has long offered refuge for entrepreneurs seeking to escape hyperinflation and foreign exchange controls in Central and South American countries. More recently, Panama enacted a law authorizing private foundations—which are used like trusts in civil law countries—and based it on the best model available: Liechtenstein. While Panamanian foundations don’t have the decades-long track record of their Liechtenstein counterparts, they’re considerably cheaper to administer.

Panama has good offshore professional services, with dozens of banks, trust companies and attorneys to choose from. However, you’ll probably need an introduction from a local company to open an account.  Check out Robert E. Bauman's book,  Panama Money Secrets, available in our bookstore for further reading on Panama.

Tax Haven Attack: The Phony War on Offshore Havens Fizzles
By Robert E. Bauman, JD

In early August, United States Senator Norm Coleman, (RMinn) and his subcommittee held another one of their orchestrated anti-offshore hearings, complete with pre-hearing horror stories in The Wall Street Journal and The New York Times. The subcommittee’s presumed-guilty indictment was billed as “Tax Havens and Offshore Abuses.”

This Senate circus, with 14 witnesses capped off a year-long investigation that cost millions of taxpayer dollars, claims to have served 70 subpoenas, reviewed over 2 million pages of documents and produced a 401 page report written by the committee of Sen. Carl Levin (D-MI), the fanatic leader of the anti-offshore band.

Amazingly, they even went so far as to advocate curtailing centuries old legal rights to create and operate freely offshore trusts, corporations, and other entities traditionally used to protect assets. Ignoring the U.S. Constitution and the presumption of innocence, the senators suggested that any American with offshore financial activities should be forced to prove their actions do not involve illegal tax evasion.

The Alternative to Burying Your Assets in Your Backyard

If you're interested in protecting your assets, there are several things you can do.

You can bury your money in your backyard or under your mattress. You can put your money in a domestic bank or money market account, and earn a paltry interest.

You can invest in the so-called "safe" investments that your broker recommended on the NYSE (that supposedly produce meager 10% a year for a diversified domestic stock portfolio).

Or you can house your wealth in an offshore region, for superior investments, access to the hottest emerging markets, iron-clad asset protection and financial privacy.

Millions of Americans enjoy the fully legal freedom of offshore financial activity. Nevertheless, based on a few selected cases, subcommittee chairman, Sen. Coleman, surrendered the show to his liberal Democrat cohort, Sen. Levin, who made the startling, illogical charge that an alleged US$40 to US$70 billion in U.S. taxes is being illegally evaded each year by Americans’ use of offshore financial activity. The senators offered zero proof of such wild numbers, and even IRS Commissioner Mark Everson, who testified, did not endorse these senatorial fantasies.

In their rush to prove their unsubstantiated ramblings, they ignorantly summoned leading offshore tax and estate planning attorney, Michael Chatzky JD to testify. These misguided senators wanted Mr. Chatzky to prove their theory that individuals keep their offshore trust reporting secret. Instead, this longtime member of our Council of Experts just made them look foolish. Mr. Chatzky started explaining exactly how offshore tax reporting laws really work, commenting that individuals must report their offshore trusts to the IRS by U.S. law. Once he explained, the senators lost interest, since the truth did not fit their preconceived, anti-offshore notions.

Now, nearly two months later, it seems this entire attack on offshore dealings has fizzled. The media has mostly stopped discussing this phony attack. And it seems this Capitol Hill dog and pony show was another calculated tax attack on middle class and wealthy taxpayers who honestly are trying to reduce their liability and protect their wealth by using legal offshore means.

Bottom line: Coleman-Levin and their IRS buddies just wanted to scare all Americans into believing that going offshore is illegal—when it is fully legal, so long as you report your activities and pay your taxes on all worldwide income, (and we repeatedly tell you how to do that). And in short, they didn’t succeed. We’re not sorry, Senators.

Due Diligence: The Key to Avoiding Offshore Disasters
By Derek Sambrook

The stream of business into Panama during the last twelve months has been remarkable. In 2005, almost 40,000 (39,976) new companies were registered. That’s some 55% more than in 2004.

But, some of the people discovering this Latin finance center are moving too quickly. I know this from the number of “walking wounded” who visit me—often with a bundle of papers and a look of frustration on their faces. Their errors have been costly in time and money.

One gentleman produced a foundation charter, and when I asked him to let me see a copy of the equally important regulations, he couldn’t. None had ever been drafted. That’s a little like buying a car without an engine—it may look good parked on the dealer lot, but you won’t be able to drive it.

Examples such as this underscore the critical importance of making sure that your offshore plan is correctly set up from the beginning and that afterwards, everything stays in place. Of course, you can’t predict future events, and there are often surprises such as the whale recently seen swimming up the river Thames in London, past Big Ben and the Houses of Parliament. The flow of life can lead to the unexpected, but a certain degree of contingency planning is still possible.

Do Your Research

Let’s start at the beginning of your offshore plan. Your first step should not be to book a flight to an offshore center. Rather, you should start by doing your research at home with your own domestic professional advisors. They can inform you of the legal and tax consequences of your plan. Getting it right onshore before going offshore just makes sense.

Next, you need to select the appropriate offshore service providers. Take your time and try to get recommendations from sources you have faith in. The Sovereign Society, of course, is one such source. Relying on Google can turn your choice into a gamble, one that you may very well lose in the long run.

You can narrow down the selection process by choosing an offshore service provider with no fixed ties outside his jurisdiction. That means no affiliates, representatives, or branches in another country. Also, don’t assume that because the firm’s offices are offshore, that its managers and executives cannot still be a source of compromise in your own jurisdiction.

To appreciate how important this could turn out to be, you need only consider the case of the now defunct Cayman Islands bank, Guardian Bank & Trust (Cayman) Ltd. Maybe some of its American customers felt comfortable when they did business with the bank because it was headed by a fellow American, John M. Mathewson. But as it turned out, the Chicago builder—turned banker—became one of the most valuable single sources of information for the prosecution of American tax evaders. When he was arrested in 1996 for facilitating money laundering, he was living in San Antonio, Texas. To stay out of prison, he not only provided a wealth of documentation, he revealed many of the tactics used for keeping the funds disguised, including the use of offshore credit cards.

It has become common for plaintiffs to pursue related parties (no matter how tenuous the circumstances) within the jurisdiction of the court when they cannot take direct action against an offshore party. You can see the approach at work every day: co-trustees or protectors of foreign trusts, for example, who share a common country of residence with the plaintiff. These connections can be stepping stones that lead those with ominous intention and determination across the secure moat surrounding an offshore centre.

Avoid Self-Inflicted “Wounds”

The offshore landscape is strewn with victims of bad advice and incompetence. Many of the wounds, however, are self-inflicted by not taking sufficient care in the first place. Wouldn’t it be innovative, therefore, if one of the offshore governments issued a financial services advisory with their immigration cards? It need only contain a simple text along the following lines: “We hope you enjoy your stay with us, but please exercise caution if you plan to attend to personal financial affairs during your stay. Not just our tropical sun can burn you.” Hopefully, the service provider you choose will not be one who forgets to draft regulations for the foundation he has provided.

At your first meeting with the service provider, have a list of questions that cover your objectives and your concerns. Make sure that you understand the fee structure and are satisfied with the terms of service. And don’t equate size with the degree of skill and expertise you will receive. Big firms often see greater staff turnover so you must look beyond the gloss and sheen. Don’t be lured by clever, eye-catching websites, or glossy logos alone; nor the slick sales pitch that promises quick-fix solutions.

Once your onshore and offshore assets are working smoothly in tandem, thanks to preliminary careful groundwork, it is important that you regularly review your financial affairs. If, for example, you have either a trust or foundation, you might want to periodically consider whether any beneficial changes (if permitted) need to be made. If you have an investment portfolio or other income-producing assets, you should be sure that performance is satisfactory and that your priorities (which might have changed) are being met.

Don’t appoint a trustee, for example, and expect him to necessarily have the competence to manage an array of business interests, some of which may be specialized and require certain skills. That’s an unfair burden that can lead to losses and acrimony. The analogy I often use with clients is the example of the circus ringmaster. It’s his job to make sure that the show runs smoothly and the various acts perform well. That’s what a trustee or corporate manager must do: maintain control and make sure that all the various assets perform well. You should make a point of visiting your service provider at least annually. In my 40 years of experience, I have not found any substitute for personal discussion—telephones, faxes and e-mails are an aid, not a substitute.

In summary, do your research, go wherever it leads you, and remember to go back to check on the outcome of your plans. Remember what Deng Xiaoping once observed: “It doesn’t matter whether the cat is black or white, as long as it catches the mouse.”  And keeps catching it, I might add.