What are offshore tax havens and can I legally use them to avoid paying taxes?
More and more folks may be asking this question as April 15th draws closer. If the idea of avoiding taxes by stashing your cash in an offshore tax haven seems like something you should do, we recommend reading up a bit more on what offshore tax havens are and the consequences you may face if caught by the IRS.
What is a tax haven?
Tax havens are countries with low or no taxes. Depending on your perspective, the US is considered by some to be a tax haven, especially if you’re from one of the Scandinavian countries. Most of the time, these countries encourage investment by having reduced or no taxes for entities that organize themselves within the tax haven country but then operate outside that country. The offshore tax haven countries do charge fees for the ability to organize businesses in their countries and continue to charge those fees on a recurring, annual basis.
How People Use Tax Havens to Avoid Paying Taxes
There are several methods in which an individual or company can take advantage of tax haven benefits. The most obvious is to move to the tax haven country and become a resident for the purpose of paying taxes. Another way is to incorporate your business in the tax haven country then move all the company’s assets to it. Any new income that’s created by the incorporated company (or trust) would then be subject to taxation in the tax haven country.
Sound easy enough? While you may be tempted to use an offshore tax haven for yourself or your company, we recommend doing a lot of homework before jumping into it. Depending on the tax haven used and the specific circumstances surrounding your situation, what you’re choosing to do may or may not be legal. Most of the time it’s illegal for individuals to have ownership in a corporation or trust that’s located in a tax haven country. Becoming familiar with the offshore tax haven laws or hiring someone who’s experienced in this type of tax law is critical to keeping oneself from being pursued by the IRS as a tax evader. Most of the time, using an offshore tax haven doesn’t make sense anyway as there are laws that protect you from having to pay double tax, but what happens is then you end up paying the tax that’s the highest – regardless of where you’ve incorporated.
Are Offshore Tax Havens Legal for US Citizens?
According to U.S. tax law, it’s illegal for U.S. citizens to take advantage of offshore tax havens. If you should ignore these laws, pursue an offshore tax haven and then get caught by the IRS…you will be prosecuted for tax evasion. U.S. citizens are required to pay taxes no matter where their income comes from. The only way around that law is to renounce your citizenship and become a citizen of the offshore tax haven country.