What is an Offshore Tax Haven?

An offshore tax haven is location that has tax laws that are more favorable than the location in which a person or company currently resides. These locations typically have some combination of an anonymous banking system, low or non-existent income tax and avoidance of large international trade agreements. In order to utilize these locations, a person or business will occasionally need to move official residence to that location. The actual location of the person or business often doesn’t need to change, just the location on paper.

Exactly what constitutes and offshore tax haven is a tricky subject. By its strict definition, offshore is any location outside a home country. In most cases, this isn’t what offshore means in this context. In this case, offshore refers only to those places where international policy and agreement don’t have much power. These locations are large enough to have a stable government and banking system, but small enough that they are overlooked in matters of international business policy.

Tax haven is another term with only a marginal definition. A tax haven is any place where tax laws are favorable to a person’s current situation. This has a huge range of meanings based on where the person originates. For many years, wealthy British people would establish permanent homes in the United States to avoid the high income tax rate in the United Kingdom. They would retain their UK citizenship, but they would officially make their money elsewhere. In this case, the US was the tax haven.

Few would consider the US a tax haven in most cases; it just happened that the laws worked out in this instance. In fact, many large US corporations have headquarters in other countries to avoid paying taxes. Exactly what is and isn’t a tax haven is based completely on the interactions between the home country’s laws and those of the haven’s.

Even with all of that considered, there are a few factors common to any given offshore tax haven. Generally, an offshore tax haven either has been excluded from or is not participating in international trade and banking agreements. This lack of involvement keeps the international world from influencing the area’s laws, allowing a more lenient approach to tax matters.

This is the second common factor in an offshore tax haven—low or no income tax. In many cases, the governments of these areas have other methods of getting money from a company that are separate from taxation. Regardless of the amount of money made, the company pays much less in taxes and fees than it would in its home country.

The last common trait of an offshore tax haven has to do with its banking system. Many of these countries feature a banking system where the accounts are not legally required to have a name attached to them. This allows anonymous, number-based, banking and makes following monetary transactions very difficult.