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10.07.2020 | Perpetual Traveler: center of life and habitual residence as a criterion in taxation

13.07.2020 | Limited and unlimited tax liability in Germany

22.07.2020 | Functional relocation and functional doubling in International Tax Law

07.08.2020 | Tax haven check: Which country offers which tax advantages? (this contribution)

Tax havens are generally known for saving taxes there. But behind this simple definition lies a complex web of different conditions and consequences aimed at this goal. From this it can be concluded that there is no country that is equally a tax haven for all emigrants. In particular, the importance of possible double taxation agreements or taxation under the territoriality principle and many other factors must be taken into account. Therefore, in this article, we would like to highlight the advantages for a number of selected countries that make them suitable candidates for emigrants if certain conditions are met.

In the video Christoph Heuermann, Michael Wohlfart and Kanzlei Meyers & Partner AG explain which are the most attractive countries from a tax point of view.

1st tax havens – one like the other?

1.1. Tax havens: The two sides of a coin

When talking about a tax haven or a tax haven, an evaluation is often included. On the one hand, it happens that one may recognize in it a place of happiness and fulfillment. After all, you can save money there. That these are taxes is usually less in the foreground. In addition, in terms of climate, landscape and culture, longing ideas are associated with tax havens. But at least the exact tax background that brings these countries the title tax haven, on the other hand, are hardly known.

On the other hand, tax havens also have a different character for many people. Saving taxes seems to be especially people who lack this opportunity, often of low morality. After all, according to the imagination of most people, taxes should also benefit the general public. For example, many people think that the car tax is an earmarked state revenue that finances transport infrastructure. However, on closer examination of the concept of taxes, it must be noted that these government revenues are simply used to finance the State and its subordinate administrative units (§ 3 (1) AO). This therefore does not entail any earmarking of specific sources of taxation or any obligation towards the public in return. Indeed, tax collection may focus on aspects other than revenue. For example, the motor vehicle tax or the mineral oil tax should also be seen as a political regulation of the behaviour of citizens.

1.2. Our view of the tax haven

Rarely, however, is the objective view expressed that tax havens are a product of their time. So as long as it is completely legal to use all the options for saving taxes, this should be accepted. Even rarer, however, is the question of when and, above all, for what reasons a tax haven deserves this designation.

This is where we want to start with our contribution. Using selected examples, we show in which countries which tax regime has led to them now being counted as tax havens. This includes both some classic tax havens and some insider tips. Based on this analysis, we would like to contribute to a more differentiated view of the phenomenon of tax havens. Perhaps in this way it will be possible to sharpen the focus a little on the real connections in global tax policy; Information and food for thought at the same time.

2. Three examples of known control havens

If we deal with tax havens comparatively, then of course first of all those that are classically considered as tax havens should be mentioned. The three candidates mentioned here have been among them for a long time. But let’s see if this myth still holds true today.

2.1. Panama

Probably the most famous – that is, the most notorious – tax haven in the world is Panama. This concerns, in particular, the possibility of territorial taxation. Income in Panama is only taxable if the income flows from domestic sources. In contrast, income from abroad has no tax relevance in Panama. So if you start a company in another country that only provides for low taxation of the company, then a connection to a residence in Panama is ideal for saving taxes as an entrepreneur.

However, for many emigrants, one of the main advantages of a tax haven is that it keeps their personal identity confidential with other countries. In concrete terms, this means that there is no exchange of information and no cooperation in law enforcement in tax matters with other states. For many who had opted for Panama as a tax haven in the past, this was in the foreground. Because Panama paved the way to be available as a location for assets whose origin should remain unrecognized and thus untaxed.

But this was ultimately the indirect consequence of the publication of the Panama Papers. International pressure has meanwhile led to Panama also adopting many criteria of the measures advocated by the OECD. Therefore, Panama may still maintain the image of a tax haven – in many aspects still right – But reality now offers a different picture than before.

2.2. Cayman Islands

Unlike Panama, the Cayman Islands are not an independent state. Instead, they are considered British overseas territory. They also have their own legislative power. Under tax laws, the Cayman Islands waive the imposition of an income tax as well as an estate tax or property tax, to name just a few examples. This makes it one of the most attractive financial centers worldwide, which has thus attracted many large hedge funds and banks. This makes sense above all because then the turnover of the numerous companies and banks represented in the Cayman Islands remain tax-free among themselves and the companies involved can therefore also operate tax-free at international level.

This is why the Cayman Islands are considered a tax haven. However, the Caribbean culture and nature of the Cayman Islands also contribute to the fact that one can certainly speak of a paradise in more than one respect.

2.3. Bahamas

Income taxes are also unknown in the Bahamas, the third widely known tax haven on our list, which coincidentally also lies in the Caribbean. This also applies to corporate income tax and capital gains tax. For this reason, the Bahamas, like the Cayman Islands, has also become an important international financial centre.

As a British overseas territory, the Bahamas have also benefited in the past from proximity to the EU through Britain’s EU membership. Brexit, however, will probably now lead to a re-evaluation of the future with regard to tax policy. Many sources of income financed indirectly by the EU will probably have to be offset by taxes in the future. That the mother country of Great Britain could replace this source is more than questionable.

Now we turn to three countries that most people hardly associate with a tax haven. The first two countries mentioned are candidates who are increasingly benefiting from the relocation of companies and entrepreneurs from some of the traditional tax havens to date due to new tax laws introduced there in recent years.

By the way, these new laws are due to international pressure, in particular to enable greater transparency through intergovernmental exchange of information. After all, this is the reason why, since the publication and evaluation of the Panama Papers, tax revenues in Germany as well as in many other countries have increased significantly worldwide.

The tax havens presented here have also taken measures to meet the increased demand for transparency and international cooperation in matters of securing tax revenue. But here too, a look at the detail is illuminating.

3.1. Cyprus

As an EU member state, Cyprus is in a particularly advantageous position to offer tax privileges as an incentive for immigration because its tax certificates are recognized in all other EU countries. So the conditions for obtaining such a tax certificate in Cyprus are quite favorable. For example, a stay of only 60 days in Cyprus is required, although it should be noted that a corporation is set up in Cyprus, which then appoints the shareholder as managing director, who in turn has to pay contributions to the local social security in the order of about EUR 2,500. In addition, as a further condition, a maximum stay in another country of 183 days must be excluded. Alternatively, you can also obtain the tax certificate if you stay in Cyprus for 183 days.

But now we come to the tax advantages with which the divided island state in the southeastern corner of the Mediterranean attracts. For example, you do not pay taxes on capital gains. As a result, dividends from investments in corporations are also completely tax-free. Although taxation takes place at company level, the rate of corporation tax in Cyprus is only 12.5%. This is one of the lowest tax rates in this context in Europe. In addition, income from the marketing of patents and software licenses is taxed at only 20%; the remaining 80% is tax-free. This has made Cyprus an important location in the international gaming industry. Furthermore, Cyprus offers the advantage of having concluded double taxation agreements with many other countries outside the EU.

Last but not least, Cyprus is also a member of the euro zone. This eliminates conversion fees when payments are made between other countries in the common monetary union.

3.2. Georgia

All of Europe has submitted to the world income principle in taxation. All Europe? No. A small, extremely proud patch of land in the east chose a different path. Because in this country named after St. George the territoriality principle prevails.

Even if the pride of Georgians on their land is more than equal to that of the inhabitants of a certain Gallic village, let us here deal more closely with the background of the taxation of this Caucasian country. Because Georgia attracts here with many very positive incentives, especially for entrepreneurs.

3.2.1. Tax advantages in Georgia

In addition to the fact that Georgia is the only European country to apply the territoriality principle in taxation, other peculiarities lie, for example, in the complete absence of the collection of social contributions or an inheritance tax or gift tax and a property tax. The fact that a sole proprietor has to pay taxes only after a certain profit level is also remarkable. Even if this threshold is exceeded, although it is quite low, only a low tax rate of 3 to 5 % must be applied until the next profit level. In the case of corporations, 15% of profits are to be made more expensive. Unlike in Germany, however, this only applies if a shareholder actually receives the distribution of the dividend.

3.2.2. Double Taxation Agreement and facilitation in the issuance of tax certificates

These and many other tax peculiarities make Georgia increasingly attractive as a location for entrepreneurs. Above all, however, the principle of territoriality attracts many entrepreneurs who run a company abroad and for whom they do not have to pay taxes locally due to the application of the world income principle, to Georgia. This means that there is no tax either abroad or in Georgia.

But unlike in other countries where this is also possible, Georgia has a double taxation agreement with Germany (and many other countries). This also means that a Georgian tax certificate is valid when presented to German tax authorities. The prerequisites for obtaining this are relatively easy to fulfill. Under certain conditions, even a residence or residence in Germany can be waived altogether. But in many cases, the domestic investment or a certain annual income level is also sufficient. In addition, ordinary residence and work permits are also very easily available and renewable.

3.3. USA, model student of tax havens

The USA is a tax haven in which the establishment and management of a partnership is of particular interest for tax purposes (for example, a US LLC). The profits generated by the partnership are taxed where the shareholder is resident. In clever design, the residence is therefore in a country that is taxed according to the territoriality principle. This is why combinations of different countries, where permanent establishments, tax liability and residence play a role in tax avoidance, are so important in tax design in international tax law. Free zones play a complementary role here, which can also save taxes.

The establishment of a partnership in the USA also offers other advantages. These include, for example, the possibility of establishing such a company in a fast, because simple way, the relative legal certainty, especially in connection with legal disputes abroad, or the recognition of the company in many other countries. In addition, although the US has signed many of the international regulations for avoiding tax evasion on paper, it hardly implements them. Even the EU was afraid to put the US on its (symbolic) list of tax havens because of these practices. Although many tax-favorable regulations are designed at the level of the individual states. But in many cases, legal measures for checking a tax liability abroad hardly apply. Even the implementation of some basic OECD standards or the signing of double taxation agreements with all EU member states is basically still open.

4th Concluding Notes

So as you can see, there are tax havens that advertise special tax benefits for certain reasons. On the one hand, there are those who, in the classical way, are tax havens, especially for the rich and large, international corporations. On the other hand, there are also countries that want to provide tax incentives for the economic development of their own country and thus, above all, combine the welfare of their own population with it. Against this background alone, one should differentiate in the general criticism of tax havens.

What also emerges from these comparisons is that tax havens also follow a constant change. In the meantime, what five years ago promised advantages as a tax haven in certain situations may have either been abolished or will be outperformed by even better conditions in another, new or already competing tax haven. At the same time, the approximation of the taxation rules in international comparison is still far from following even a halfway uniform scheme. Therefore, changes in the international tax landscape are to be expected.