Tax is a compulsory financial charge in any business, including forex trading. However, in tax haven countries, trading profits can be tax-free.
What is a tax haven? A tax haven is a country or place with very little or no tax liability in an economically and politically stable environment. Financial secrecy is strictly protected by the law, as tax havens typically do not disclose such information. In general, residency for foreign individuals is not required to enjoy the benefit of tax policies, as is the case with business presence for foreign business entities.
Intranational regions may also be regarded as tax havens if they have distinctive tax policies. For instance, the state of Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming can be regarded as tax havens because they do not impose the state income tax.
- Understanding a Tax Haven
- Corporate Tax in the US
- Tax Haven Countries and Territories in the Caribbean
- Other Tax Haven Countries
Understanding a Tax Haven
Tax haven countries benefit by drawing capital to their banks, financial institutions, and other investment vehicles, which can be used to build the financial sector. On the other hand, individuals or businesses benefit from low or no taxes imposed on their incomes. For most countries, income taxes heavily contribute to government revenue. In order to make up the loss of income tax revenue, tax haven governments usually charge high customs and import duties, which are some forms of indirect taxes. Another way is to charge a fee for newly incorporated business entities which will have to pay a renewal fee on yearly basis.
The Organization of Economic Cooperation and Development (OECD) and the U.S. Government Accountability Office are two regulatory bodies that monitor tax haven countries. In 1998, the OECD gave a number of factors to classify a country as a tax haven, including:
- No or nominal tax on the relevant income,
- lack of effective exchange of information,
- lack of transparency, and
- no substantial activities.
That being said, there is no definite standard to identify tax haven countries.
Corporate Tax in the US
The Tax Cuts and Jobs Act (TCJA) signed in December 2017 changed corporate income tax rates from tiered 15%-39% to a flat 21%. The act also changed the US tax system from global to territorial. Under the territorial tax system, the US does not impose taxes on profits earned overseas but retains taxation on high return foreign profits. In general, business entities may exploit the benefit of low or no taxes offered in tax haven countries, but it is very important to monitor and report foreign income in accordance with the US tax law, Generally Accepted Accounting Principles (GAAP), and International Financial Reporting Standards (IFRS).
Individual Taxpayers in the US
The Foreign Account Tax Compliance Act (FATCA) regulates the reporting of foreign income by US citizens and non-US citizens. The FATCA requires taxpayers to file Schedule B to disclose the existence of foreign accounts and/or Form 8938 if the total value of all foreign financial assets exceeds $50,000. Separately, taxpayers holding foreign accounts are required to file FinCEN Report 114 (Report of Foreign Bank and Financial Accounts) if the total value of the foreign financial account exceeds $10,000. There may be potential exemptions and foreign tax credits for any foreign investments, but it is imperative for each individual taxpayer to consult with a professional tax advisor beforehand.
All income earned by US individuals and business entities is subject to taxation. Offshore investment can lead to violation of tax regulation and in turn illegal activities. Foreign governments tend to pressure tax haven countries into disclosing information of offshore investment accounts in order to maximize tax revenues. However, due to financial burdens, regulatory oversight is not always a priority.
There are some existing programs to increase the enforcement of offshore investment reporting, such as the Automatic Exchange of Financial Information, overseen by OECD. With this program, participating countries automatically send tax-related banking information of non-citizen depositors, which will be used in the facilitation of taxes on income, earnings, interests, dividends, and royalties.
Tax Haven Countries and Territories in the Caribbean
The Caribbean is famous not only for its tourism but also for its status as a tax haven. Many countries and territories in the area are pure tax havens, meaning that they do not impose any tax at all. This way, they could be less dependent on foreign countries to maintain their own economies. Below is the list of tax havens in the Caribbean.
The Cayman Islands
The Cayman Islands is a pure tax haven as there is no income tax, no corporate tax, no estate or inheritance tax, and no gift tax or capital gains tax. The country is one of the five largest offshore financial centers worldwide and has very strict laws to protect banking privacy. Offshore companies are not taxed on income earned abroad, not required to submit financial reports to the authority, and not required to pay stamp duty on any asset transfer. There is also no tax liability for international business companies (IBCs). Incorporating a company is a very simple process and can take as little as a day to complete.
See also: Forex Brokers in the Cayman Islands
The Republic of Panama is a very secure pure tax haven. There is no income tax, no corporate tax, and no local tax. Company incorporation is open to any nationality and offshore companies are allowed to operate their business within and outside of Panama's territory. Panama has very strict laws to protect the banking secrecy of the account holders. In addition, Panama has no tax treaties with other countries and no exchange control laws.
Like Panama, the Bahamas is a pure tax haven. There are no income taxes on offshore companies and individual offshore account holders. Also, residents are not required to pay income tax regardless of where they earn their income. Residency permits cost $1,000 and must be renewed every year. An individual can receive a permanent residency permit through investments, such as investing $250,000 in real estate.
The Bahamas is one of the popular choices for the US and European countries resident especially after the country passed the law that enabled the incorporation of offshores companies and IBCs in 1990. The Bahamas is the first Caribbean country to adopt strict banking secrecy laws. Disclosure of information on offshore bank account holders can take place only if ordered by the Bahamian Supreme Court.
Turks and Caicos
Turks and Caicos is a British Overseas Territory located southeast of the Bahamas. Technically, the Turks and Caicos are located in the Atlantic Ocean but widely considered as part of the Caribbean. Turks and Caicos are tax-free and will grant permanent residency to individuals that spend at least $300,000 in real estate. The alternative is to make a minimum of $700,000 investment in a local business.
The British Virgin Islands
The British Virgin Islands is a pure haven British Overseas Territory. Offshore bank accounts are not taxable, and the privacy of account holders has protected thanks to the lack of tax treaties with other countries. Offshore companies and the BVI IBCs are not taxed on profits or capital gains earned from outside of the BVI's jurisdiction. In addition, the absence of exchange controls makes it easier and more secure to transfer funds for trading purposes. A residency permit can be obtained by paying $1,000 annually and providing a bank statement.
Dominica, officially the Commonwealth of Dominica, is a pure tax haven. People of any nationality can incorporate a company in Dominica. Offshore companies are not required to pay stamp duty on the transfer of assets. The identities of offshore company owners and offshore bank account holders are protected by Dominica's asset protection and financial privacy laws.
The island of Nevis and Saint Kitts constitute the Federation of Saint Kitts and Nevis. Company incorporation is fairly easy as it only requires one director and one shareholder, who can be the same person. Nevis is a pure tax haven. There is no income tax earned outside of Nevis, no withholding tax, no capital gain tax, and no estate tax. Moreover, there are no exchange controls and no taxation treaties with any country.
Anguilla is another Britain Overseas Territory on this list. Like the previous two, Anguilla is a pure tax haven. Individuals or corporations do not have to pay income taxes, estate taxes, or capital gains taxes. Privacy is protected by the Offshore Banking Act of 2005 which states that all bank employees and agents are prohibited from disclosing any financial information without the express consent of the account holders. Offshore companies are free from paying stamp duty, and exchange controls do not exist in Anguilla.
Often referred to as the Switzerland of Central America, Costa Rica is a tax-friendly country that has been attracting many large corporations through tax incentives. Costa Rica offers exemptions from any tax to many companies for eight years. For companies that have to pay taxes, do so with low rates and usually are not required to pay taxes on interest, capital gains, or dividend income.
Like other tax havens on the list, Costa Rica is committed to protecting the privacy of offshore banking. Transfer of assets in unlimited amounts from and to Costa Rica can be done without having to disclose the source. Residency permits are granted to individuals with a $2,500 monthly income. A $60,000 in saved income can grant individuals two years visa. For a retiree visa, a minimum income of $1,000 is the requirement. Another way to receive a residency permit is through investment, such as a $200,000 investment in real estate.
Formerly known as British Honduras until 1973, Belize was the last British colony in the Americas. Like other Caribbean countries, Belize offers offshore financial services such as offshore banking, incorporation of offshore companies, the formation of trusts or foundations, etc. Offshore companies and trusts are exempt from paying income tax earned abroad and from paying stamp duty. Offshore bank accounts are not liable to interest tax, repatriation tax, or capital gains tax. Privacy is strictly maintained, disclosure of information can only be ordered by the court for a criminal investigation purpose. There are no exchange controls and no tax treaties with other countries.
Though it is not a pure tax haven, Barbados is an attractive place to incorporate offshore companies due to its extremely low tax. Profits are taxed in the range of 0% to 5.5%, and if the profits increase, the tax rate decreases. Offshore companies are not subject to import duty, which can help save the companies' budget when importing machinery or business equipment. In addition, there is no withholding tax or capital gains tax. However, Barbados has double taxation treaties with Canada and the US, and a number of other countries.
Other Tax Haven Countries
Outside of the Caribbean, certain countries can be considered tax-free, meaning that residents are not subject to income tax, dividend tax, or capital gains tax. Below is the list of other tax haven countries.
United Arab Emirates
The United Arab Emirates does not charge personal income. For business, the UAE levies a corporate tax on oil companies and foreign banks only. A residency permit can be obtained by setting up a company in one of the UAE's free trade areas. Offshore companies can also be established in Ajman, Dubai, and Ras Al Khaimah. Foreign individuals are eligible to own real estate in Dubai's projects.
Brunei Darussalam is a tax–free country, located in the northern part of Borneo, Southeast Asia. Brunei has no income tax and no exchange controls. The country offers excellent banking options in an economically and politically stable environment.
Monaco is considered a tax haven country due to its relatively lax tax policies and laws. Residents are not subject to income tax. People of any nationality can apply to be a resident should they plan to reside in Monaco for more than three months in a year. Other benefits for residents are the absence of capital gains tax, net wealth tax, and property tax. As for the company, there is no corporate income tax in general.
Vanuatu is an island country located in the South Pacific Ocean. Vanuatu imposes no tax on profits, dividends, or income. There are also no capital gains tax, no withholding tax, and no sales tax. Companies are only subject to export and import tax and business license tax. An investment of $89,000 will grant individuals a one-year visa, renewable on yearly basis.
Georgia imposes no taxation on spread betting winnings. Companies in the country are exempt from paying corporate tax until the profits of the company are distributed. Thus, companies are not tax liabilities if profits are reinvested or retained. The immigration process is not complicated, since a total of 94 nationalities are allowed to live in Georgia without a visa for one year.
Hong Kong is one of the world's financial centers. Income earned outside the region will not be taxed. In addition, there is no sales tax or vat, no withholding tax, no capital gains tax, no estate tax, and no tax on dividends. Despite not being a pure tax haven, its tax system is extremely friendly and attractive for foreign investors. However, becoming a Hong Kong resident is increasingly difficult as an individual must spend a considerable amount of time in the region.
Malta is a country located in the central Mediterranean Sea, between Sicily and the North African coast. Malta is not a pure tax haven, but it is considered tax-friendly since it offers a number of potential benefits for foreign companies. Malta is a favorite choice for digital nomads who want to base themselves in Europe.
See Also: Forex Brokers in Malta
Despite its physical size, Singapore is one of the economic powerhouses in Asia. Singapore is an attractive place for foreign investors thanks to its low tax rates and other intensives. The tax rate on corporate income is flat at 17% but can get lowered thanks to incentives. Start-up companies in Singapore are exempt from paying taxes for the first 3 years. If the profits are less than $150,000, companies are not subject to tax either. No wonder a lot of established forex brokers expand their operation in Singapore. Also, there are no interest tax, foreign profits tax, and capital gains tax. A temporary residency permit is granted through a $4-million investment.
A tax haven country or territory is an attractive place for foreign individuals and business entities to make investments as there is minimal or no tax liability. In general, trading profits are not subject to taxation in tax haven countries or territories. However, it is recommended for traders to be compliant with all relevant tax laws.
From the abovementioned countries and regions, Belize, Vanuatu, the British Virgin Islands, the Cayman Islands, Singapore, Hong Kong, and Malta are well-known tax haven countries among forex traders. Many brokers somehow prefer to set up their business in the selected countries than the other tax haven regions. Furthermore, there are some tax haven countries not explored in this article but are familiar in forex industry such as Cyprus, St. Vincent and the Grenadines, Mauritius, and Seychelles.