Understanding Favourable Tax Jurisdictions

Understanding of favourable tax jurisdictions is important. With the coming of General Anti Avoidance rules in India, any arrangement that is done solely for the purpose of tax avoidance or just for gaining tax benefits is illegal. Any arrangement that is done with the objective of gaining tax benefits should have some commercial substance too in order for tax benefits to be eligible.

Rolex, Omega, Breitling, among the world’s most luxurious watch brands, have another commonality. They are manufactured in Switzerland, a country known for its ski resorts. No wonder the European nation has earned the reputation for housing premier luxury brands. But it also earned the moniker of being a tax haven, a much-debated topic. The Cayman Islands, Bermuda, Luxembourg, Singapore, Mauritius, the Channel Islands, and the Netherlands are also some of the popular jurisdictions with special taxation.

There is no set definition on what qualifies as a tax haven. But generally, the jurisdictions with favourable special tax treatment are known as tax havens but there are other qualifying metrics. Some of the key features - 
1) Low to no tax: This is the most attractive feature of any tax jurisdiction. Minimal to zero taxation allows non-residents to reduce tax burden by moving assets from their home country. Individuals can do so without opting for a residency or having a substantial legal local presence. 
 

2) Swear by secrecy: Jurisdictions offering special tax treatment have formal laws and practices that protect personal information such as details of offshore bank accounts. 
 

3) Stable political climate: It goes without saying that a tax jurisdiction is able to provide special tax benefits and secrecy because of a stable political and legal environment, which in turn is conducive for businesses.
 

The above-mentioned reasons give an impression that tax jurisdictions have become a shelter for rich individuals to hide their wealth to avoid payment of taxes. To be sure, tax havens are sovereign jurisdictions with their own laws and regulations. The reason they have earned a negative connotation is because of how individuals use them to bypass laws in order to avoid paying taxes. 
 

That said, individuals can legally park money in favourable tax jurisdictions while also complying with both domestic as well as international rules. Many start-ups register their companies in foreign jurisdictions in order to position their products and services as global in nature. With this, they can also get benefits such as tax optimization, access to international markets, ease of doing business, intellectual property management, fundraising and investments.  
 

Below are some strategies that are used to legally move money to tax jurisdictions:
 

1) Jurisdiction selection: Choosing favourable tax jurisdictions is one of the most important steps. The idea is to select a geography that is aligned with individual goals and business requirements. Hence, the selections must not be made only on the basis of special tax treatment. It is a good idea to hire tax professionals, lawyers, or financial advisors that will not just help in selection but also maintain documentation and comply with law. Before selecting, must go through a following checklist – 
 

Tax rates: Compare tax rates with all other jurisdictions. Scan for various taxation related to income, capital gains, corporate, wealth, inheritance, etc and then make a comparison for selecting a jurisdiction that suits you. 
 

Tax treaties: Check for any tax treaties and agreements the selected jurisdiction has with other countries, especially the home country. Such tax-treaty have direct bearing on income and investment. In fact, you can take advantage of such treaties to minimize tax outgo while also structuring business activities with efficiency in the area of taxation.  For instance, The Cayman Islands has tax information exchange agreements (TIEAs) and bilateral agreements with many countries. But it does not have a comprehensive network of double tax treaties for the avoidance of double taxation.
 

Regulatory environment: It is important to look for tax jurisdictions that have a proven record of stability and continuity when it comes to legal systems, investor protections, and for conducting business and managing assets. It should also have a stable political environment. 
 

2) Offshore bank account: Banking is central to the financial system and hence, opening a bank account is crucial for facilitating transactions. Good part is that many tax jurisdictions offer banking services that are palatable and attractive to the users in the area of documentation, taxation and even related to confidentiality. 
 

3) Offshore Investment Vehicles: There are plenty of options for investments in special tax jurisdictions. Some of the most popular are investment in offshore funds such as mutual funds and hedge funds that offer certain tax benefits and exemptions. 
 

4) Offshore Companies or Trusts: Such companies or trusts can be opened in your selected jurisdictions not just for business purposes but also for asset protection and even estate planning. These trusts and companies will act as entities holding investment and assets, including physical assets like real estate, and provide maximum returns compared to home jurisdiction. 
 

5) Residency or Citizenship: Tax jurisdictions don’t insist on taking up residency or citizenship. But opting for a residency program has several advantages. Residents of such geographies have many travel privileges such as visa-free travel to numerous countries. Many of the tax havens are situated in picturesque locations and hence, they generally have a better quality of life. Following are some of the popular residency programs: 
 

• Ordinary Residency
• Golden Visa
• Citizenship-by-Investment Programs
• Retirement Residency Programs
• Entrepreneur and Startup Residency Programs
• Family Residency
   

Again, the decision whether to opt for such residency must be taken after consulting with experts in the field of cross-border taxation, law, and immigration consultants. Such expert advice will also ensure that individuals are fully compliant with legal requirements and don’t find themselves at the wrong side of the authorities. 
 

International forums such as Organisation for Economic Co-operation and Development and G-20 have several steps to plug loopholes by addressing the issue of tax evasion and promoting greater transparency and fairness in the international tax system. These include steps to curb multinational companies from shifting profits to low tax jurisdictions, exchange of information, blacklisting of non-co-operative jurisdictions.  
 

While moving money to tax havens legally is permissible, individuals must ensure that they are not indulging in tax evasion or illegal tax avoidance schemes, which could lead to severe penalties. As mentioned above, seeking professional advice, and conducting due diligence in a must before implementing any tax planning strategies involving tax jurisdictions.