Low Tax vs. No Tax: If you are using an offshore company structure as part of your asset protection strategy, then taxes must be one of your main considerations when choosing the right jurisdiction for the company. Logically, you may want to pay as little taxes as possible – legally. However, you should dig deeper on this issue: Should you get incorporated in the Carribean, say, Belize, and pay zero corporate tax or should you choose a jurisdiction that's not popularly known as a tax haven and pay a low-ish tax rate, instead?
This article is not trying to offer a legal guide. Rather, we're going to focus on some issues about offshore corporate taxes that will eventually make you think – and rethink – your asset protection strategy.
Low tax or no tax?
If you ask this to someone, chances are, the answer would be no tax. It's common sense: Why pay taxes if you can pay zero taxes legally? In fact, this is the principle that's generally followed by those who want to setup a company offshore.
The Cayman Islands, Isle of Man, Belize, and Ras Al-Khaimah are some of the offshore jurisdictions that allow companies to be exempt from all local taxes. It's completely legal to pay zero taxes on those jurisdictions.
So, if we want to establish a company offshore, we should do so in those jurisdictions, right? Well, perhaps. But we think you should reconsider your decision. Here's why.
1. The Panama Papers leak gives zero-tax jurisdiction a bad name
First thing first: To clarify, Panama's corporate tax rate isn't exactly zero. Depending on your residency status and your origin of income, you may need to pay a minimum of 7 percent after the first US$ 9,000 – this is for income coming from activities in Panama only. But what about the income for the business operations outside Panama? Well, foreign income is taxed at zero tax rate – which makes Panama a proper tax haven. This is probably why it's one of the most popular destination for offshore company formation.
Now, the thing is, Panama Papers, allegedly the biggest information leak in history, has put tax haven jurisdictions under the spotlight. The media – and then the general public – are having a tendency to label offshore company structures and banking as negative and wrong – which is misleading at best.
2. In business, image is everything
Think about it: Would you rather put your assets on offshore jurisdictions where the whole world deems them as bad, or put yours on offshore jurisdictions that are not traditionally known as a tax haven – like Cyprus, for example?
The latter might be more ideal the former, it seems – especially today. Here are some explanations.
Cyprus' 12.5 tax rate is indeed low, but as it's not offering tax exemption on income generated overseas – along with the fact that it's not offering secrecy to asset holders nor located in the Carribean – it's not really a tax haven, at least in the eyes of the general public.
Along with the fact that Cyprus is a part of EU since 2003, it's one of the best solutions for doing business in the EU, as well as securing your assets in a recovering economy.
Another recommended jurisdiction would be the United Kingdom. It's true that it's not as open as before, but if you can partner with a local businessman and hire local staff, then you can enjoy UK's low tax rate of 20 percent.
Remember, your aim is the whole offshore scheme is to avoid taxes – not evading them. It's still a legitimate way to lower your taxes. Tax havens, no matter how beneficial they are for you, are having a worse reputation than ever, partly “thanks” to the Panama Papers.
As always, consult with your trusted lawyer regarding this matter; you can also consult with us for free to learn more the offshore jurisdictions and their taxation policies.