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Tax Havens for

International
Business

ADAM STARCHILD
TAX HAVENS FOR INTERNATIONAL BUSINESS
Also lJy Adam Starchild
THE AMAZING BANANA COOKBOOK
BUILDING WEALTH: A Layman's Guide to Trust Planning
BUSINESS IN 1990: A Look to the Future
CAPITAL PRESERVATION THROUGH INTERNATIONAL
DIVERSIFlCATION
ESTABLISHING SELF-EMPLOYED AND INDMDUAL
RETIREMENT PlANS
EVERYMAN'S GUIDE TO TAX HAVENS
HOW TO DEVELOP AND MANAGE A SUCCESSFUL
CONDOMINIUM
HOW TO DEVELOP YOUR OWN CONSTRUCTION AND
LAND DEVELOPMENT BUSINESS
INVESTING IN THE USA
IT'S YOUR MONEY: A Consumer's Guidc to Credit
MARKETING COMPUTER HARDWARE AND SOFTWARE IN
LATIN AMERICA
PAYMENT SYSTEMS STUDIES
THE SEAFOOD HERITAGE COOKBOOK
SECOND PASSPORTS AND DUAL NATIONALITY
STARCHILD & HOLAHAN'S SEAFOOD COOKBOOK
(co-author)
SWISS MONEY STRATEGIES
THE TAX HAVEN REPORT
THE TAX HAVEN STORY
TAX HAVENS: What They are and What They Can Do for the
Shrewd Investor
TAX HAVENS AND CORPORATIONS
TAX PLANNING FOR FOREIGN INVESTORS IN THE US
(co-author)
USING OFFSHORE HAVENS FOR PRIVACY
Tax Havens for
International Business
Adam Starchild

~CMILLAN
Business
© Adam Starebild 1994

Softcoverreprint of the hardcover Ist edition 1994

All rights reserved. No reproduction, copy or transmission 01'


this publication may be made without written permission.
No paragraph 01' this publication may be reproduced, copied or
transmitred save with written pennission or in accordance with
the provisions 01' the Copyright, Designs and Patents Act 1988,
or umler the terms 01' any licence permitting limited copying
issued by the Copyright Licensing Agcncy, 90 TottenhamCourt
Road,London WIP 9HE.
Any person who docs any unauthorised act in relation to this
publication may be liable to criminal prosecution and civil
claimsfor damages.

First published 1994 by


MACMILLAN PRESS I.:fD
Houndmills, Basingstoke, Hampshire R021 6XS
andLondon
Companies and representativcs
throughoul the world

ISBN 978-1-349-13344-4 ISBN 978-1-349-13342-0 (eBook)


DOI 10.1007/978-1-349-13342-0

A catalogue record for this book is available


from the ßritish Library.

11 10 9 8 7 6 5 4 3
04 03 02 01 00 99 98 97 96
Contents
Preface vii
1 Tax Havens - An Introducdon 1
Understanding tax bases 7
Corporate taxes 8
Planning the tax haven entity 8
2 Establisbing the Foreign Company 11
Planning the foreign corporation 12
Time and cost data for organising the corporation 16
3 Who Can and Cannot Benefit from Tax Havens 18
The offshore tax haven 18
Typical tax haven operations 23
Establishing of headquarters 24
4 Tax Haven Classificadons 26
Tax havens with no income lax 26
Tax havens with no foreign source income tax 27
Speciallegislation for regional offices of
multinational companies 29
Tax havens for special purposes 29
5 Tax Havens with no Income Tax 31
6 Tax Havens with no Tax on Foreign Source Income 44
7 Tax Havens for Special Purposes 74
8 Special Legisladon for Regional Offices of
Multinadonal Companies 117
9 Switzerland - not al1 that it is Alleged to be 127
10 Liechtenstein - A Special Case 139
Index 147

v
Preface

Interested in increasing your after lax profit? Tax Haoens for


International Business is the book that shows you how the estab-
lishment of a lax haven operation, in any of many locations
worldwide, can save you more dollars than any internal tax-
shelter programme.
The book provides a comprehensive, step-by-step plan that
simplifies the myriad complexities surrounding the formation
and incorporation of branch offices and subsidiary companies
within such tax havens as the Bahamas, Berrnuda, the Cayman
Islands, Greece, Hong Kong, Luxembourg, Malta, The
Netherlands, Panama, Puerto Rico and Switzerland. In addition,
it presents detailed information on each tax haven's economic,
legal, political, cultural and geographical aspects which must be
considered if such an enterprise is to operate successfully.
Because of today's fiercely competitive business markets,
reducing taxes is no longer just a means for a company to
enhance profitability, but is often a matter of economic sur-
vival. Tax Hauens for International Business describes numerous
ways that companies based in heavily taxed nations can circum-
vent tax rates that hinder corporate initiative and productivity.
In this book, you will discover which countries offer special
benefits for holding companies or have speciallaws governing
branches of foreign cornpanies, which countries serve special
purposes for particuJar types of business enterprise, and which
countries do not impose an income tax at all. Also included
are insights into who can and cannot benefit from tax havens.
The book reveals the secrets of tax haven business pJanning
for the corporate executive, and details the theory and practice
of haven dealings and the incorporation of holding and operat-
ing companies. It speils out the advantages and disadvantages of
the multitude of haven uses that are available to all companies
having any international facets to their business - whether it be
manufacturing, importing components, exporting, or services.

ADAM STARCHILD

vii
1 Tax Havens -
An Introduction

In undertaking a work of the scope and purpose of Tax Haoens


for International Business, it is imperative that we establish
exactly what that scope and purpose is, and set forth
definitions.
The term tax hauen has been coined as business terminology
by tax-conscious businessmen, and is therefore not amenable
to dietionary definitions. For example, The Random House
Dictionary of English Language defincs a haven as "a place of
shelter and safety", This would imply that a tax haven is also a
tax shelter. However, when tax accountants talk about a tax
shelter, they mean something distinctly different. A ta»shelteris
a tax avoidance plan that is internal to the country concerned
(such as a US corporate profit-sharing plan). A tax hauen is a
foreign country with tax legislation especially designed to
attract .the formation of branches and subsidiaries of parent
companies based in heavily-taxed industrial nations.
First of all, this book's purpose is not to outline "get-rich-
quiek schemes" through tax avoidance. Organising a tax haven
operation assumes at the outset that the underlying organisa-
tion is productive (or has the potential to become so) or that
assets are available for investment. It also assumes that a viable
business-investment format exists in the contemporary scheme
of world business; and ideally a plan exists that includes short-
and long-range business-investment goals. In othcr words, a tax
haven operation is not the magie formula through whieh
something is created from nothing.
So what is the purpose of this book? Ir your organisation
meets the suggested criteria, this book explains how the organ-
isation can accumulate more after-tax dollars through a tax
haven operation than would be possible through the more
familiar, internal tax-sheltering schemes.
Another definition: tax hauen organisations are one or more
legally structurcd corporations, at least one of whieh is formed

1
2 Tax Hauensfor International Business
under the laws of - and located in - a tax haven country. In
such a structure, the horne country's revenue service views the
tax haven entity as a foreign citizen, exempt from taxes on
certain kinds of incomc. Once this status is established, the
only taxes to consider are those levied by the tax haven
country. These range from none to minimal.
The fact that a corporation is practically the only business
structure that can benefit from a Joreign citizen status would
suggest that this book is not for persons who generate income
as individuals, or for owner-managers of partnerships or single
proprietorships. However, because incorporation in virtually all
lax haven countries is quick, simple, and relatively inexpensive,
as a single proprietor or partner you may benefit by incor-
poration, or reincorporation, in a tax haven country.
For a lax haven operation to be viable, there must be some
interaction between the tax legislation of the heavily-taxed
country and that of the tax haven country. This interaction
may be explicit (as in the case of the reciprocal lax treaty) or
implicit. In either case, it sets the scope of this book. It would
be impossible to survey tax legislation of the many major,
heavily-taxed countries (Great Britain, Germany, France, The
Netherlands, United States, Canada, Japan, etc.) Therefore,
this book presents detailed analysis of tax haven country
legislation, and makes only general reference to the principles
that are common amongst the heavily-taxed countries. The
reader should use the information here in conjunction with
sources of tax information on his horne country.
The lax haven legislation of many countries is discussed, and
the incorporation laws of most of these countries are pre-
sented in detail, leaving nothing to guesswork for the
executive-rnanager who wishes to inc1ude tax havenry in a tax-
planning format. In addition, tax haven benefits are categor-
ised (no-tax, special purpose, etc.) for quick reference.
This book does not offer a do-it-yourself kit of forms to final-
ize incorporation abroad. Such a "quicky deal" is as dangerous
as performing a kidney operation on your own wife by using a
do-it-yourself surgical manual. The manual may be all right,
but who in his right mind would risk it? In principle, a "Do-It-
Yourself Tax Haven Manual" is possible; whatever expertise
professionals have in the field could be formulated in precise
and completc detail. However, such a book, if honestly and
Tax Havens - An Introduction 3
competently put together, would be gigantic, and would
amount to a combination of relevant legal training, relevant
accountancy training, and much more detailed information
about the tax and corporate laws of a multitude of countries.
The time required for a layman to digest such a manual would
be worth more than the priee of good professional advice. Try-
ing to avoid both such a detailed manual and the costs of pro-
fessional advice, using a shortcut approach, would be eheaper
in the short run - and much, much more costly in the long
run.
So anyone interested in pursuing any of the possibilities pre-
sented here should definitely get in touch with the best profes-
sional advisers he can afford before going into action. It will
mean risks, expense, and hard work, but properly done, it
could be very much worth it.
In conclusion, use the information presented in this book
for what it is intended - to achieve business growth through
the he1p of 80% to 100% after-tax dollars .
It is hardly possible to begin a discussion of tax havens from
the viewpoint of tax advantages, without considering the under-
lying philosophie concept. In other words, is the organisation -
or reorganisation - of a business in a foreign country for a pur-
pose of tax avoidance entirely legal? And if it is legal, but takes
needed revenue from the country of residence, is it moral?
To consider the first question: a correctly organised tax
haven operation that complies with the laws of the country in
whieh it is organised is as legal from the viewpoint of the
country of residence as the interpretation of that country's tax
laws allow it to be. In this respect, the legal status of a tax haven
company with regard to taxation in the country of residence is
the same as if the company were located in the country of
residence. To state this principle another way, a businessman
who uses space in his horne for business purposes may run
head-on into a revenue service investigation if a disproportion-
ate1y large area of the house is claimed as a business expense
against the income of the business. However, this is not a
matter of legality but of interpretation, and the worst that the
tax investigator can do is to disallow part or all of the space as a
business expense. If, on the other hand, the businessman
attempts to evade income tax by concealing part of his income,
this is a matter of legality, and the worst the investigator can do
4 Tax Havens fOT International Business
is file areport that may eventually result in fines and/or
imprisonment for the businessman. Essentially the same prin-
ciple should be applied in tax havenry: the responsible com-
pany executive should not establish any practices that smack of
tax evasion, but should set up an organisation that is legally
defensible in every respect.
To consider the question of the morality of tax avoidance,
we
In the context of taxation, morality is not considered an
absolute, but a concept which, like the tax laws themselves, is
subject to interpretation. One person might argue quite con-
vincingly that it is morally wrong to tax a working widow with
children to help provide the day-to-day support for a war
veteran who is able to work but prefers not to; and another
person can argue just as convincingly on behalf of the veteran.
The morality of taxation changes with the times. Prior to
World War I, when taxes were comparative1y low, though cer-
tainly not popular, the American worker and small business-
man were exempt from the controversy by virtue of low
incomes. During times of national emergency. particularly
during and directly following World War 11. tax avoidance was
frowned upon even by those who were looking at large tax
Iiabilities each year. But as progressive tax rates brought taxes
higher and higher in highly industrialised and populated
nations, the attitudes of taxpayers underwent a gradual, but
definite change. .
Today, even the individual worker for whom the tax system is
supposedly designed can see that a tax system in which higher
income brackets produce progressive1y higher tax rates is
stultifying to individual initiative and productivity. Business-
men and company executives feel not only duty-bound but
morally obligated to use the legal tax avoidance measures avail-
able to them. Thus, whether the loss of revenue to the nation
is through the use of tax advantages internal to the nation's
tax structure, or through the establishment of a tax haven
company in a foreign country, the tax avoidance principle is
exactly the same. From a pure1y pragmatic viewpoint, legal tax
avoidance by a company may not be the road to wcalth, but
simply a means of economic survival in a time when indus-
trially cmerging nations are becoming major compctitors in
the world marketplace.
Tax Hauens - An Introduction 5
The "losers" in the business of tax havenry are presumed to
be the heavily industrialised, heavily populated, and heavily
taxed countries of the world. If two nations could personify
this description, they would be the United States and Great
Britain. Yet, the attitude of these governments toward tax
havenry is ambivalent to say the least. The United States, for
example, actually established itself as a lax haven for foreigners
by not imposing a withholding tax on interest paid to for-
eigners on their US bank deposits, and allowing foreigners to
buy, hold, and sell securities at a gain without incurring a
capital gains lax liability. There are, of course, economic
reasons to justify these lax rulings (a reversal of the ruling on
interest paid on bank deposits would remove billions of dollars
from US banks, and might cause the financial collapse of New
York City). .
As another illustration, we can consider the attitude of the
United States toward Puerto Rico, a commonwealth in associ-
ation with the United States, which has gained a reputation as
a lax haven for certain US industries. Nearby lies the British
Virgin Islands, a British-eontrolled group, which has deliber-
ately passed legislation to attract foreign investment money. If
we stand on the premise that the governments ofindustrialised
nations are dedicated to stopping lax havenry wherever they
find it, we would nevertheless have to acknowledge that an
intrusion of the United States into the affairs of the British
Virgin Islands could conceivably cause a weakening of rela-
tions between the United States and Britain; however, there
would be no such restraints on the United States as regards
Puerto Rico. And the same could be said of Great Britain: Can
we believe that the British Virgin Islands, with a population of
about 20,000, could establish itself as a tax haven country with-
out the implied consent of Great Britain, of which it is a
colony?
If lax havenry takes needed revenue from industrialised
nations, why then do they not only tolerate it, but see m to
sanction it?
Superficially, in the case of Puerto Rico, lax havenry gives
the Puerto Rican economy aboost. In the case of the British
Virgin Islands (and other British territories or ex-eolonies),
Great Britain believes that it is best for all concerned to give
the islands an autonomy in decisions concerning their internal
6 TaxHavens Jot' International Business
economic development. Further, the British Virgin Islanders
hope that lax havenry will provide enough external income to
make the islands independent of British grants-in-aid within
the next few years. Somewhat the same situation exists with the
Dutch-controlled islands that have established lax havenry to
attract foreign money. This being the case, we can say that
there is no external threat to lax havenry from free world
nations.
Nevertheless, governments of industrialised nations are
ambivalent regarding lax havens. The United States, for exam-
pie, finds it beneficial to spend inordinately large amounts to
investigate lax fraud and evasion within the nation, and also
sends agents abroad to uncover illegal lax schemes set up by
Americans . Everything being equal, however, the lax haven
entity may fare somewhat better in an Internal Revenue Ser-
vice investigation than its US counterpart because most lax
haven authorities refuse to disclose lax information on a for-
eign company unless a tax law of their own country has been
violated, or unless a trcaty compels thcm to make the dis-
closure. Furthcr, the officers of financial institutions will pro-
tect the confidentiality of their clients for two reasons:
.(1) In many of the lax havens (Switzerland, the Bahamas,
and Cayman Islands are a few), there are stiffpenalties imposed
for the unauthorised disclosure of a client's affairs.
(2) Because tax havenry is an important source of revenue
for the tax haven country, the business community has avested
interest in providing an atmosphere of confidentiality for its
lax haven clients.
Nevertheless, there are some types of disclosures that are
required, both within the tax havcn country and to the country
of residence. Despite the tradition of secrecy that seems to sur-
round lax havenry, a person cannot depend on non-disclosure.
As one lax haven counsel said, eWe assurne that the business-
man and his counsel are out to create an honest structure
based on lax laws, and not some silly scheme of hiding their
money in a numbered account and then wondering where the
headlines come from when they get indicted".
In lax haven countries, it is safe to assurne that nothing short
of a revolution will cause radical changes in lax haven status or
create a situation in which company funds or assets are appro-
priated. This is not to say that changes cannot occur in a lax
Tax Havens - An Introduction 7
haven, but they are generally precluded by some triggering
event. In the majority of tax haven countries discussed in this
book the possibility of an internal revolution is practically zero.

UNDERSTANDING TAX BASES

In deciding whether or not to organize in a tax haven, you


should at the outset have a good general understanding of the
tax laws of your country of residence, There are several
methods used in various countries to determine whether or
not certain income is taxable, and either a combination or all
of these methods are used by most countries that impose an
income tax.
Most countries tax income that originates in that country. In
the case of non-residents, a withholding tax is imposed,
requiring the person paying the income to withhold the tax
and pay it directly to the government. The rate at which
domestic source income is taxed on residents is determined
by current and often changing internal tax laws. In many
instances, the rate at which domestic source income to non-
residents is taxed depends upon treaties between the source
country and the resident country of the non-resident.
Some countries use the territorial principle in deciding if
income is taxable. This means that income is taxable only if its
source is the country of residence, but with no income tax
payable to the country of residence on foreign source income.
Countries that use the territorial basis apply the territorial test
to both individuals and corporations.
Some countries base income tax from world-wide income
upon the residence of the taxpayer, regardless of whether or
not the individual is a citizen of the resident country.
The United States taxes its citizens on world-wide income by
reason of their citizenship, regardless of whether or not they
are resident in the United States.
The United States applies all tests to determine taxable
income. This means that US citizens and resident aliens are
taxed on their world-wide incomes. In either case, neither US
domicile nor permanent residence in the United States is
required for tax liability. In the event that a US resident or
citizen pays an income tax to a foreign country on income
8 TaxHavensfor International Business
earned in that country, this tax is then taken as a credit against
US income tax. Non-resident aliens are liable for US income
tax on income derived from the Uni ted States. If a non-
resident alien receives foreign source income from an activity
involving a US trade or business, the non-resident alien may
have a tax liability with the United States.

CORPORATE TAXES

Corporations have different rates of taxation from individuals.


There are many similarities between individuals and domestic
corporations in determining taxable income. As regards
foreign corporations, however, they are generally taxed by
other countries on thcir domestic source income. Most of their
foreign source income is exempt from domestic taxation,
A corporation is viewed as a separate legal person with the
same legal responsibilities and rights as living persons. There-
fore, a corporation that is formed in a foreign country is a
foreigner, or for domestic tax purposes, a foreign corporation. If
such a corporation is structured so as to meet domestic tax law
requirements, it can gain significant tax advantages.

PLANNING THE TAX HAVEN ENTITY

To understand the planning of a tax haven company, you or


your tax counsel should have a working familiarity with the tax
lawsof the country of residence or citizenship, and with the tax
laws of the tax haven countries, as thcy apply to the particular
enterprise being planned. Certain tax haven countries are best
suited for certain enterprises. Hong Kong, for example, would
in many cases be a viable choice for a manufacturing enter-
prise, since its tax laws favour manufacturing for a world
market; furthermore, a Hong Kong-based plant has access to a
vast pool of locallabour, as weil as Eastern markets. As another
example, a Panamanian-based distribution company can bene-
fit from Panamanian shipping facilities and proximity to Latin
American consumer markets. In any case, the tax haven com-
pany should bc planned in accordance with the financial goals
that it hopes to achieve, This also means that the tax haven
Tax Havens- An Introduction 9
country should impose Iittle or no taxes on the particular activ-
ity being planned. Further, if there are tax treaties in existence
between the tax haven country and your country of citizenship
or residence, the effects of these treaties should be carefully
studied.
Political upheaval is not an imminent threat in any of the tax
havens discussed, but it cannot be considered an impossibility
in the future. Most experts agree that the absence of military
power in the no-tax and low-tax island countries prec1udes the
possibiJity of a military coup, which is historically the most
serious threat to funds.
Since most tax havens are small, with small populations and
few internal resources that can lead to economic independ-
ence, they see tax havenry as a means of attracting clean,
desirable businesses that will exploit neither the land nor: the
native population. A lack of heavy industrialisation (and thus, a
lack of the technology that can produce a vast array of con-
sumer goods), and a lack of large voting blocs that lead to
divergent political interests, combine to create a situation in
which heavy taxation is neither desirable nor necessary. Many
tax haven countries offer long-term, written guarantees against
certain kinds of taxation, with a view to attracting enterprises
(such as hotel building) that will help the local economies.
Nevertheless, a competent tax haven consultant will carefully
consider the current tax situation in the tax haven country you
are considering.
Some tax haven countries have tax treaties in effect with
industrialised nations. Generally, if the advantages of a tax
treaty can be combined in a tiered structure, with the advan-
tages of a no-tax tax haven, considerable tax advantages can be
realised. The existence of a tax treaty means, among other
things, that the countries involved have agreed to exchange
Information regarding companies doing business in the tax
haven.
While there are significant advantages (no requirement for a
disclosure to any local exchange control authority) in oper-
ating in a tax haven country that does not have exchange con-
trols, a foreign company can avoid most of the restrictions
of exchange controls by maintaining a non-resident status.
On the other hand, taking non-resident status can conceivably
raise the question betwccn the foreign-based corporation and
10 Tax Havens for International Business

the horne country tax authorities of whether or not a legitim-


ate business purpose is being served by establishing the foreign
corporation.
To provide a viable business base, a tax haven country
should have modern banking and accounting facilities, as weil
as a good system of communication and transportation. These
factors will be discussed fully for each tax haven country,
throughout this book.
In general, incorporating in a tax haven country is just as
simple as incorporating at horne. The exceptions to this are
found in Bermuda, Vanuatu, and Malta, which have a screen-
ing process for foreign corporations. In many instances, it is
even simpler to incorporate in a tax haven country than at
horne. In no case is your physical presence necessary for the
actof incorporating. In virtually every case there are official
fees in connection with forming either the trust or corpora-
tion . There are also initial and annual expenses for rnaintain-
ing the foreign corporation - fees for agents, nominee
directors, ctc. The costs and mcchanics of incorporation are
discussed more fully with the discussion of each country.
2 Establishing the Foreign
Company

Because there are no tax advantages to be realised in establish-


ing a single proprietorship or partnership in a tax haven
country, the information in this chapter applies spedfically to
the formation of a corporation, with the word company being
used interchangeably with corporation.
The most commonly used method of establishing the tax
haven company is to incorporate in a tax haven country (or
countries, if a tiered structure is desirable), thereby taking
advantage of the principle that is observed world-wide - a
corporation has the legal status of a separate legal person. In
rare cases, there may be advantages in establishinga branch in
a tax haven, particularly if the base company is in a high-tax
country which does not tax the activities of foreign branches.
But this often creates problems as to which office really
generated the income. There are also circumstances in which
one might want to incorporate in one tax haven and then
establish a branch in another tax haven.
In application, the "legal person" principle means that a
company incorporated in a tax haven country must observe
the same laws, and is entitled to the same privileges, as any
dtizen of that country, with the notable exception that, if the
tax haven country has a reciprocal tax treaty with the country
of citizenship of the controlling stockholder(s}, the provisions
of the treaty would supersede the internal tax laws. Apart from
the tax effects of tax treaties, the legal framework of a corpor-
ation formed in a tax haven country depends upon the laws of
that country - whether that country has a common law or a
civil law system.
In this context, the term "civil law" is taken as an inexact
description of the legal system existing in certain countries,
such as those of Latin America, in which the system is based
on written (statutory) law. Common law is a rather broad and
also somewhat inexact description of a legal system in which

11
12 Tax HavensJOT International Business
lawyers seek precedents in law that are favourable to their
cases, i.e.,laws by custom.
The United States, as weil as UK territories, inherited the
common law concept from the nineteenth century British legal
system. Therefore, all of the tax haven countries that are or
were territories of the United Kingdom are common law coun-
tries. These tax havens include Hong Kong, Gibraltar, the
Cayman Islands, Bahamas, the British Virgin Islands, Bermuda,
the Isle of Man, and Nauru. Liechtenstein, Switzerland,
Luxembourg, Panama, and The Netherlands are civillaw coun-
tries. Corporations formed in civil law countries are also recog-
nised as legal entities for tax purposes in common law countries.
The corporation laws of Liberia and Panama are patterned on
the Delaware corporation laws ofthe 1920s (see Chapter 6) .
The fact that several of the common law lax haven countries
pattern their companies' laws after Great Britain's does not
mean that the laws are uniform from country to country, just
as thc corporation laws of each US state (and Puerto Rico) are
not uniform from state to state. There are, however, enough
similarities between the laws of the lax haven countries
discussed here and the incorporation laws of the high-tax
countries for the industriaJised countries to recognise com-
panies formed in tax haven countries as corporations for tax
purposes.
When you begin to plan a tax haven company, which is in
effect a foreign corporation, you are faccd with an entirely
different set of criteria from when you form a company at horne.
First, to derive any tax bencfits from a tax haven entity, that
entity must be estabJished as a corporation under the laws of the
country that you choose. The tax haven country should be
chosen in accordance with the activities and financial goals of
the enterprise. Do not ehoose a tax haven eountry beeause ofits
proximity to your horne country, or because incorporation laws
are lenient. Choose simply on the basis of the tax advantages
that the tax haven can offer your particular entcrprise.

PLANNING THE FOREIGN CORPORATION

Onee you have decided which of thc lax haven countries will
provide the most viable lax benefits for your enterprise, you
Establishing the Foreign Company 13
will have basic decisions to make concerning the corporate
structure. These decisions are somewhat similar to those you
would make regarding a domestic corporation. First, decide
whether the corporation will be public or private.
Just as its domestic counterpart, the foreign public corpora-
tion is one that may have an unlimited number of share-
holders, with shares offered for sale to the general public,
The foreign private corporation (particularly the ones
formed under UK laws) finds its American counterpart in the
dose (or dosed) corporation, which can be formed under UK
law with a minimum of two shareholders.
Major differences between foreign private and public
corporations are:
(l) Under UK law, whereas the shares of a public corpora-
tion may or may not be offered to the general public (unlike in
the Uni ted States where "public" implies the selling of shares),
the shares of a private corporation are held by a restricted
group that may be as small as a husband and wife, and are not
offered for sale to the general public, However, the shares of
a dose corporation can change ownership. The minimum
number of shareholders for a private corporation under UK
law is two. The minimum number of shareholders for a public
corporation under UK law is seven.
(2) Under UK law, a public company must have a minimum
of two directors, whereas a private corporation may have a
minimum of one.
Several of the tax haven countries that are guided by UK
laws will give companies an exempted status. Notable among
the tax haven countries acknowledging the exempt status for
corporations are Berrnuda, Cayman, Gibraltar,Jersey, and the
Isle of Man. A corporation that takes exempted status in one
of these countries receives significant tax benefits, In Cayman,
for example, the exempted company may receive these
advan tages:
(1) It may issue no-par value shares.
(2) It may issue bearer shares to non-residents. This may be
an important advantage, as it makes possible the transfer of
stock - and therefore of ownership - without a disclosure of
the new owners.
(3) The names of the shareholders are not on public
record, nor are they required to be disclosed.
14 Tax Hauens JOT International Business
(4) Cayman exempt companies receive a guarantee from
the Cayman government that no income tax will be imposed
for the next 20 years. However, this is a doubtful advantage,
since there is little likelihood that income taxes will be
imposed in the Caymans within the next 20 years.
A Cayman exempt company costs considerably more to start
and operate than an ordinary company. When this is com-
bined with yet another disadvantage, namely that the exempt
company raises the question of "legitimate business purpose"
with the horne country tax authorities, the value of an exempt
company may be questionable.
In some jurisdictions, the minimum capital is set by law;
in others there is no minimum required for capitalisation.
Switzerland, as an example, requires a minimum of 50,000
francs for capitalisation; the Caymans and Hong Kong have no
minimum requirement for capital,
The minimum number of shares to be issued by any company,
public or private, is established by the law of the tax haven in
which incorporation is sought. Above this minimum, the num-
ber of shares to be issued by a public company depends on such
practical considerations as the amount of capitalisation, the par
value of the shares, etc. In the private corporation, the number
of shares issued is usually held to aminimum, since filing fees
are often determined by the number of shares issued.
If you are incorporating in a tax haven that allows the
exempted company, you must decide whcther to form the
ordinary or exempted company. If this decision is irrevocable
(as it is in the Caymans, for example), the decision should be
carefully considered.
Normally, two documents are required in the forming of the
foreign corporation in common law countries: the memor-
andum of association and the articles of association.

Memorandum of Association

The memorandum of association is the equivalent of the art-


icles of incorporation of the US corporation (and some
Canadian provinces) , and contains the basic law of thc com-
pany. Although there may be slight differences in the content
of the memorandum from one tax haven jurisdiction to
another, in general it contains:
Establishing the Foreign Company 15
(1) The company name. Except in the case of ccrtain
exempt companies, the company name should be followed by
the word "limited", indicating it is a company with Iiability
Iimited by shares in jurisdictions using UK common law. (Rules
for incorporating in civil law countries are discussed in detail
in the specific seetions for those countries.)
(2) An objects clause that outlines the powers of the company.
(3) A clause stating that the shareholders have Iimited Iiability.
(4) The company's registered office address. The registered
office must be located in the tax haven jurisdiction (in
practice, this may be arranged by your lawyer, and may be
space within his office).
(5) The amount of authorised capital, as weil as the number
and par value of the shares.
(6) A c1ause stating that the subscribers to the memoran-
dum have associated themselves together for the purpose of
forming the company.
In some jurisdictions, the following information must also be
included in the memorandum:
(7) The number ofdirectors.
(8) The names and addresses of the directors and officers.
(9) The names of the shareholders, their addresses, and the
numbers and classes ofshares held.
The memorandum of association should be typed or printed,
with spaces provided for the signatures of the subscribers. The
signatures must usually be witnessed.

The Articles of Association

The articles of association are the equivalent of the by-Iaws of


the US corporation. A1though the articles of association are
not always required, most companies write them for their own
use, The companies' laws of some jurisdictions contain stand-
ard regulations which you may use as a substitute for adopting
your own articles of association. In Cayman, for example, a
company that docs not include articles of association will be
presumed by Cayman law to have adopted the standard regu-
lations contained in Table A of the Cayman companies' law. In
the Caymans, you would have the choice of (1) adopting Table
A regulations, (2) adopting a partial set of artic1es to supple-
ment Tablc A regulations, or (3) adopting a full set of articles
16 TaxHavens for International Business
in Jieu of Table A regulations. It is advisablc to write your own
articles of association.
Each subscriber whose signature is affixed to the mernor-
andum must subscribe for a specific number of shares, with the
minimum determined by the corporation lawsof the jurisdiction.
In the Caymans, for example, three subscribers or incorporators
are required. In Hong Kong, a minimum of two subscribers is
required, and each must subscribe to a minimum of one share.
In most jurisdictions, the subscribers may be individuals or
companies, and there are usually no laws regulating the re-
sidence or nationality of thc subscribers or shareholdcrs.
As a practical matter, local nominee subscribers are used.
They subscribe to the memorandum and other incorporation
documents, then give the company to you after incorporation.
The use of local subscribers may eJiminate the need to obtain
permission from the local exchange control authority to
subscribe .
The general requirements timt must be met by Lax haven
companies formed in common law tax havens are:
(1) You must maintain a local registered office to which
legal notices can be addressed.
(2) The company name must be present outside the regis-
tered office, as weil as any other office where you will be
conducting business.
(3) The company must keep a rcgister of sharcholdcrs
(members) a rcgister of dircctors and sccretaries, and a regis-
tcr of mortgages and chargcs at its rcgistered office.
(4) The company is usually required to convene a gencral
meeting of shareholders at least once annually, usually at any
location that is agrceable to all.
(5) The company must file an annual return, which usually
contains such routine information as a list of directors,
officers, and shareholders of record. Financial information
mayaiso be required by some Lax haven countries.

TIME AND COST DATA FOR ORGANISING THE


CORPORATION

To go through the actual steps of incorporating, you must


either correspond with a lawyer in the Lax haven country of
Establishing theForeign Company 17
your choice, or make a trip to that country. By the time you
finish reading this book you and your advisers will probably
have decided on one or two tax havens that will best suit your
needs. Your advisers will then be faced with the problem of
whom to contact to carry out the mechanics of incorporating
the new company. Unlike incorporation at horne, incorpora-
tion overseas is usually considerably more complex. The pro-
cedures and requirements vary widely from jurisdiction to
jurisdiction.
Of course, your advisers may have an affiliatc lawor account-
ing firm or corrcspondent in thejurisdiction desired. Ifso, you
are a long step toward successfully achieving your objective. If,
on the other hand, such a relationship does not exist, you are
advised to proceed with extreme caution in selecting your
ovcrseas contacts. .
In your initial letter to the lawyer, briefly outline your
purpose, and suggest that the two of you exchange refcrences.
After the initial formalities, the lawyer will tell you what
services he can perform, and provide you with the necessary
forms and fee information.
In many tax haven jurisdictions, corporations are also
organised by banks, accounting firms, and special companies
that form and manage companies for foreign clients.
The information in this chapter should give you an idea of
the corporate structure that will be suited to your enterprise,
and provide you with enough knowledge to deal intelligently
with a lawyer or accountant. The corporation can, in most
countries, be formed within a few days after your contact
receives your instructions. But there are some countries where
incorporation can take weeks or months.
It has become a popular notion recently that forming a
corporation is an extremely simple procedure, one that is
applicable to the do-it-yourselfer, However, complexities can
and do arise, and you would be well-advised to work with
someone competcnt in corporation law.
3 Who Can and Cannot
Benefit from Tax Havens

Establishment in a tax haven does not solve all the tax prob-
lems of every conceivable case. The selection of a tax haven
has to be made in accordance with each company's needs and
special requirements. For example, if a particular tax haven
has internal tax laws favouring a certain business situation, but
the country of residence has anti-avoidance legislation that
counteracts thc tax havcn advantages, these factors must be
weighed in making the decisions.
Moreover, in certain situations, a combining of tax havens
can result in a better tax advantage than using a single tax
haven that has no internal taxes on certain income.

THE OFFSHORE TAX HAVEN

The popularity of offshore tax havens will probably grow now


that multinational company activities are increasing. A viable
operational tactic for the multinational company is to head-
quarter in a tax haven, with its various shareholders located in
many different countries. In such a situation, no single country
would exert complete control over the multinational company.
Of all the leading nations, the United States and the United
Kingdom have the strictest control over their residents' activ-
ities in offshore havens. From the legal point of view, the
Englishman fares slightly better than the American in this
regard, as he need only relocate to a tax haven to become a
non-resident for UK tax purposes. The American's tax status,
on the other hand, is based upon citizenship rather than
residence.
The manufacturing company that depends heavily upon
transportation, and on availability of skilled or serni-skilled
labour, will not find the typical tax haven country to be the
best location for its plant facilities. However, this problem may

18
Who Can and Cannot Benefitfrom Tax Haoens 19
soon be solved as a nctwork of lax havens are establishcd with
the intent ofwooing foreign manufacturers with 10- to 15-year
lax holidays.
Iflocal conditions are favourable to a certain manufacturing
operation, a plant may be established in a lax haven to manu-
facture and seil or lease its products to the parent company
without lax liability. Also, such a lax haven company can organ-
ise to manage the foreign sales, etc. of the parent company,
thus minimising laxes in the parent company's country of
residence.
If a ship service (or an airline service) engages in inter-
national activity, it may find itself in a position to establish a lax
haven company to minirnise, or completely avoid, laxes on
such activities as bunkering, leasing, hiring, etc, Many lax
havens are flag-of-eonvenience nations, allowing foreign ship
owners to register under the lax haven flag, to avoid laxes, eco-
nomic restrictions, and the various rules and regulations of
their own nations.
Favourable ship registration laws attract shipping companies
to incorporate in Liberia and Panama. However, the Bahamas,
Berrnuda, Cyprus, Hong Kong, the Isle of Man, Malta and
others are offering inducements that should attract a portion
of this market from Liberia and Panama. Greece has enacted
legislation to encourage foreign shipping companies to estab-
lish offices there. Thc benefits under this legislation, which are
many, apply to customs duties, vehic1e registration fees, and
income tax, This creates a situation in which a shipping com-
pa ny could obtain tax advantages by incorporating in Liberia
or Panama, and maintaining its head office in Greece. Since
few countries tax the fees collected for foreign shipping com-
panies, tax havenry is particularly weil suited to the shipping
industry.
Because of favourable laws in both the United States and
Great Britain, there is a good potential for lax savings in the
establishment of mutual funds in offshore lax havens.
International investment companies are in a favourable posi-
tion to make investments in Britain and the United States,
because the British and American requirements regarding the
length of time a security must be held to qualify for the lower
capital gains tax rate does not apply to lax haven companies.
Mutual funds or investment trusts can be established in a lax
20 Tax Havens for International Business

haven enabling investors from various countries without the


usual tax liabilities associated with such investments.
The travel business is especially well-suited for establishment
under tax haven benefits in certain tax haven countries. As an
example, a retailer, or group of retailers, could make a viable
operation out of establishing their own travel wholesale opera-
tion in a tax haven such as Bermuda, and channeling their
European business through it. It is important to understand
that the tax-free profits of such a Bermuda-based operation
should not be repatriated to the horne country (where they
will be subject to taxation), but invested in other foreign
operations, where capital growth can continue unhampered
by taxes.
The next question, of course, is what kinds of forcign opera-
tlons are best suited for this type of reinvestment procedure.
Hotel construction or operation in one of the many lax haven
countries that offer tax holidays of from five to 20 years (or 10
to 30 years in Puerto Rico) to companies that construct or
otherwise invest in hotels, is an excellent vehicle for such
reinvestment. In a few cases, the hotels can have as few as 10
rooms. In addition to Puerto Rico, some of the countries offer-
ing lax holidays as incentives for building hotels are Morocco,
Jamaica, Tunisia, Barbados, Haiti, Panama, the Dominican
Republic, most of the British islands of the Caribbean, and the
French West Indies. Usually, additional lax incentives are
included, such as an exemption from customs duties on build-
ing materials and hotel furnishings and fixtures.
In the event that your horne country does lax the current
income of your foreign corporation (as some do with certain
leasing companies and other enterpriscs), alternative tax
avoidance mcasures are available. You may, for example, estab-
lish ajoint enterprise with a foreign company on a 50-50 basis
that will allow income to accumulate tax-free because the corn-
pany is not controlled by cither parent company. If the
enterprise is the leasing of aircraft or other transportation
equipment, you may consider the formation of ajointly owned
company with a foreign partner as a means of lax avoidance.
You and your partner can benefit from such a vcnture. Profits
will not be taxed in your country or your partner's country
(unlcss they are repatriated), because the profits are not
controlled bya national of cither country.
Who Can and Cannot Benejitfrom Tax Hauens 21
Certain countries - Bermuda, the Bahamas, the Cayman
Islands - have no income tax; certain other piaces - Panama,
Hong Kong, and Liberia - do not tax foreign source income.
However, despite the fact that many service companies are
taking advantage of these tax haven situations few, if any, travel
companies have done so. Cruise ship operators have for somc
time utilised thc tax havenry of Panama and Liberia, but they
are the only segment of the travel industry that has availcd
itself of tax haven opportunities.
It would seem, thcrefore, that tourism is a wide-open field,
yet to be exploited in the many tax haven countries around the
world. The travel industry might do weil to ask itself the
question: which grows the faster, 50% after-tax dollars, or
100% tax-free dollars?
An example of a manufacturing company that operates
advantageously in a tax haven is the Syntex Corporation, which
manufactures and markets as much as half the birth-control
pills used in the United States, The main Syntex plant is
located in Frceport, Bahamas. It is incorporated in Panama
and its administrative offices are in Mexico City. It is listed on
the New York Stock Exchange.
Royalties from patents, copyrights, models, designs, or secret
formulas can be receivcd with certain tax advantages if a tax
havcn company is established to sub-license other companies
in various countries. When such a licensing arrangement is
properly organised, with the income effectivcly accruing to the
tax haven company, the income is not taxable. However, to
understand and benefit from such an organisation, you should
consider both thc tax-at-source situation and the possibility
that a tax haven has a double taxation agreement with one of
thc princlpal countries.
To illustrate, a tax saving can be effected on patent royalties
by combining lax havens. The United States does not deduct
withholding tax on royalties paid to a Dutch company. Thus, if
a tax havcn company sets up a Dutch subsidiary, licensing its
patents to a Dutch company, thc Dutch company can in turn
license to an American manufacturer. Now, the American
company can pay the Dutch subsidiary the patent royalties
tax-frec. The Dutch company can pay the lax havcn company
(the patent owner) the royalty, thereby avoiding Dutch with-
holding taxes on dividends. Thc net rcsult is that the Dutch
22 Tax Hauens for International Business

company is not taxed in The Netherlands, and the tax haven


company avoids the US 30% withholding tax, As a further
advantage, since the tax haven company owns the American
manufacturer, it can set the royalty rate in such a manner as to
absorb much of the US profit, thereby minimising US taxes.
Trust funds and/or personal holding companies can be
established to hold foreign currencies or foreign currency
assets. Nearly any kind of investment or asset can be trans-
ferred to a tax haven as a safeguard, to minimise and in some
cases completely avoid such debilitating forms of taxation as
inheritance taxes.
Banking and financial activities can be conducted in a tax
haven virtually tax-free, because dividends, interest, and capital
gains are not considered taxable income. Because withholding
taxes are not assessed, it is obvious that restrictions on the
transfer or accumulation of funds are minimised, thus giving
the financial institution considerable freedom of operations.
Ifa tax haven company is established to reinsure or to insure
casualty risks, unlimitcd premiums and interest income can be
accumulated by the tax haven company completcly tax-free.
Moreover, the clients of the company may be located anywhere
in the world. This creates the opportunity for a company to
operate its own captive insurance company as a hedge against
the inflatcd cost of casualty insurance, and at the same time,
gain the tax advantages of the tax haven-based company.
A parent company can establish an export tradc company or
a commodity brokerage operation in a tax haven to be used as
a liaison for world-wide sales and financing. The tax haven
company can accumulate discounts, commissions, advertising
allowances and other direct or indirect incomes in connection
with thc business completcly tax-free. Moreover, by the proper
allocation of administrative and selling costs, the parent com-
pa ny can realise tax deductions that would not otherwise be
possible.
For many years now, Europcan and American companies
havc bcen expanding and diversifying their operations to take
advantage of labour conditions or other economic factors not
available in their own countries. Ultimatcly, this means that
not only does the diversifying company establish plants in
forcign countries, but establishes tax haven operations as weil.
An intelligently planned multinational operation, located
Who Can and Cannot Benefitfrom Tax Hauens 23
strategically to receive tax haven advantages, will invariably
find its growth and expansion greatly accelerated. Tax haven
countries see this syndrome as a vehic1e for attracting indus-
try, and design their tax legislation accordingly: the well-
known "tax holidays" are examples of this legislation .
Ir some company offers services in the areas of technology,
management, engineering, architecture, science or industry
on an international basis, a tax haven company can be estab-
lished to channel income from these services tax-free.

SUMMARY

The foregoing information has been highly generalised


because it would be impossible to give specific information
that would apply to every conceivable case. If, after reading
this book, you seek answers to specific questions, communicate
with a tax haven management company, bank, accountant, or
lawyer that can provide specific advice about your individual
situation.

TYPICALTAX HAVEN OPERATIONS

Example 1
An American-based myrtlewood manufacturing company
manufactures myrtlewood novelty items and seils them to its
Berrnuda-based company, who in turn seils them to dealers
around the world at a profit. By careful pricing, the parent
company minimiscs its profits, and the Bermuda-based com-
pany accumulates profits tax-free with no US penalty, because
thc incomc is from "sale of goods manufactured, produccd,
grown, or cxtracted in the United States".

Exampie2
A British company with shipping interests forms a Bermuda
company to charter, manage, and operate ships that are
involvcd in commerce around the world. The income to the
Bermuda-based company is tax-free in Bermuda. Bermuda,
incidentally, welcomcs this kind of tax havcn enterprise.
24 Tax Hauensfor International Business
Example3
A Hong Kong company that assembles watch, clock, and
related mechanisms joins with an American company that
cases and packages the mechanisms for world-wide distribution
to form a Panama-based sales company. The Hong Kong and
American companies each own 50% of the Panamanian com-
pany. The Panamanian company handles the sale of the
watches, etc. in various countries around the world, through
dealerships. Since the Panamanian company is not American-
controlIed, it can accumulate profits from non-US sales.

Example4
A Japanese company joins with a Netherlands company to
establish dealerships around the world in pocket calculators
and related electronic consumer items. These two companies
form a Hong Kong company to procure the components and
assemble and package the items. The Netherlands company
owns a controlling interest in the Hong Kong company. The
Hong Kong company in turn forms a Cayman Islands-based
company as a liaison and distribution point for sales to world-
wide dealers. Profits from world-wide sales can accumulate in
the Cayman company free of lax.

Example5
Several food processors joined together. to form a casualty
insurance company in the Isle of Man for the purpose of
insuring the companies against claims for botulism and other
food-related diseases. Because of the wide distribution of the
various products, there is the potential for claims to become
widespread and catastrophic. The Manx-formed insurance
company will also be empowered to insure risks outside the
constellation of the parent companics.

ESTABLISHING OF HEADQUARTERS

If a multinational company wishes to incorporate in a lax


haven country, it does not necessarily have to move its head-
quarters there. Ir the country of residence happens to be more
conveniently located geographically, the administrative offices
Who Can and CannotBenejit from Tax Haoens 25
may be located there in some cases, depending on the tax laws
of the residence country. AB a foreign company, many
countries will tax only income that is from local sources. For
example, a Bahamian company could have its administrative
offices in England, a convenient location for administering its
European business, and would be liable for laxes only on its
British source income.
4 Tax Haven Classifications

Apart from geographical and cultural considerations, tax


havens fall into cIassifications regarding the tax advantages
that each has to offer. These tax advantages are a result of
internal legislation, and/or tax treaties with other nations.
From a practical viewpoint, they are the most important
considerations in choosing a tax haven .

TAX HAVENS WITH NO INCOME TAX

Tax havens with no income tax incIude Bermuda, the


Bahamas, and the Cayman Islands.

Bermuda
Bermuda has become an important offshore tax haven in
recent years, due in part to its convenient location, its thriving
business community, and the fact that it is virtuaUy tax-free .
Bermuda has no income tax, no capital gains tax, no withhold-
ing tax on dividends, interest, etc. and boasts, furthermore,
that there is no discrimination in Bermuda as regards taxation.
The foreign corporation can accumulate income, from either
internat or external sources, fuUy tax-free in Bermuda.
Bermuda has no double taxation treaties with other nations.

Bahamas
In the Bahamas there are no income taxes, no capital gains or
wiLhholding taxes, no corporate taxes, and no estate duties.
There are no double taxation treaties with other nations. A
pleasant cIimate and proximity to the US make the Bahamas a
favoured tax haven for US businessmen.

Cayman Islands
In the Cayman Islands, there are no income taxes, no cor-
porate tax, no estate tax, no inheritance tax, no sales tax, and
no property tax. Cayman company legislation aUows exempted

26
Tax Haven Classijication 27
eompanies to be formed with a guarantee of no future taxes,
usually within the next 20 years. The Cayman Islands have no
double taxation treaties with other nations.

TAX HAVENSWITH NO FOREIGN SOURCE INCOME TAX

Tax havens with no lax on foreign souree income include


Hong Kong and Panama. Tax havens with no tax on foreign
souree ineome provided the eompany is owned by non-
residents are Gibraltar, Jersey, Guernsey, Isle of Man, Liberia,
Cyprus, and Malta.

HongKong
A Hong Kong eompany is Iiable for tax only on the portion of
ineomc derived from loeal business . Ineorporation in Hong
Kong ean be relatively fast, and the fees are modest. Hong
Kong is an attractive, flourishing, modern city. It is a favoured
Ioeation fur eertain manufaeturing enterprises because its
Ioeation provides aeeess to Iabour, raw materials, and Asian
markets. Hong Kong-based enterprises are usually pereeived
by domestic revenue authoritics as serving a legitimate
business purpose.

Panama
A Panama-based company not doing business in Panama is not
required to file annual reports, There is no withholding lax on
bank interest aeeumulated in loeal banks, and the Colon Free
Zone offers some important duty advantages to foreign
businesses. It may be wisc to investigate the politieal situation
in Panama when you contemplate establishing a eompany
there. However, politieal strife in Panama has never had an
adverse effeet on foreign business operations.

Gibraltar
Gibraltar is a self-governing British eolony loeated on a
prornontory at the western end of the Mediterranean. Its lax
haven legislation allows the exempt eompany to be fully
exempt of ineome and estatc laxes. To mcet the exempt
requirernent, the eompany must generate no loeal ineome and
must be owned by non-residents. The eertificate of exemption
28 TaxHavensfor International Business
allows this tax-free status for 25 years. Therc is also a company
called a "qualifying company", which is similar to an exempt
company, but pays a low rate of income tax, which can some-
times be beneficial to a holding company in The Netherlands,
which exempts dividends received from a subsidiary which has
paid some tax.

Jersey
Jersey (in the English channel, betwcen England and France)
legislation provides exemptions for non-resident companies,
and local taxes are only 20%.

Guernsey
Located ncxt to Jersey, with somewhat similar legislation to
Jersey.

Liberia
In addition to no tax on foreign source income of companies
owned by non-residents, Liberia has no exchange control regu-
lations, no reporting requirements, and is a favoured country
for ship registration.

Isle ofMan
Part of the United Kingdom, and located in the Irish Sea
between Ireland and Great Britain, the Isle of Man has become
one of the most promoted European tax havens in the last few
years.

Cyprus
Cyprus is located at the eastern end of the Mediterranean,
which has made it particularly useful for companies engaged
in tradc or services in thc Middle East. Depending upon the
structure used , there are no-tax or low-tax possibilities. Cyprus
also has a useful network of lax treaties.

Malta
Malta has only recently become a lax haven, but has a long
history of stability and neutrality. It has special legislation
for holding companies, trading companies, and shipping
companies.
Tax Hauen Classification 29
SPECIAL LEGISLATION FOR REGIONAL OFFICES OF
MULTINATIONAL COMPANIES

Tax havens with speciallegislation for regional offices of for-


eign companies are The Philippines, jordan, Greece, and
Tunisia.

The Philippines
The Philippines passed complex tax haven laws with the stipu-
lation that foreign firms must spend $50,000 annually for
local services, supplies, etc. It was expected to attract Asian
regional offices, but in practice few companies have taken
advantage of the legislation, because of questions of political
stability.

Jordan
jordan offers an excellent package of tax benefits to the for-
eign firm, as weil as to personnel who manage thc foreign
branch. The country has modern facilities and friendly people.

Greea
The tax haven legislation of Grecce is similar to that ofjordan.
It attracts many foreign companics with shipping interests.
Apart from the legislation favouring regional offices, that are
allowed 100% tax exemptions for qualifying activities, Greece
has a complex system of tax laws.

Tunisia
Tunisia has recently passed legislation similar to that in Greece
andjordan.

TAX HAVENS FOR SPECIAL PURPOSES

The Netherlands
Although a high-tax country, The Netherlands is one of the
best tax havens for holding companies, finance companies,
and royalty companies receiving income from patents, trade-
marks, and copyrights.
30 TaxHauens for International Business
Austria
Another high-tax country with special tax laws for inter-
national holding cornpanies.
Both The Netherlands and Austria have extensive tax treaty
networks which can work with their special cornpanies.

Luxembourg
Luxembourg is a traditional haven for large holding corn-
panies and international investment funds sold to the public.
It is otherwise a high-tax country, and its treaties do not apply
to the special cornpanies incorporated there.
5 Tax Havens with no
Income Tax

These no-tax countries share some basic similarities, which are


important to a company considering establishing in one or
another of them. These factors need to be kept in mind when
forming ajudgement about the likelihood ofthe governments
of these countries violating their no-tax traditions.
All of the no-tax havens considered in this chapter are
island, or archipelago, societies. Foreign invasion is most
unlikely, and defence budgets are minimal to non-existent. Ail
have ethnically mixed populations, native peoples and white
immigrants from Europe and America. They have almost no
racial friction and are peaceful and non-violent, so the ''war
against crimc" as Ci mnjor motive for taxation to support large
government outlays for police activities is happily lacking.
Because of their multi-island geographies, all of these havens
are free ofstrong central government. Where government offi-
cials have to use motorboats to get around, their mobility is
reduced, and correspondingly, so is their control. None of
these countries share the European and American notions of
technologically oriented living standards. The idea that some-
one is "socially underprivileged" because he does not have a
late-model car would seem odd to a citizen of any of these
lands, and welfare policies are non-existent and very unlikely
to be introduced in the future.
Every one of these no-tax havens has a British colonial back-
ground and is a member of the British Commonwealth (now
formally called The Commonwealth ofNations). While Britain
itself has the high taxes typical of industrialized countries,
these colonies and ex-colonies inherited the nineteenth-
century colonial tradition of no local taxation. The legal tradi-
tion in all of these piaces is that of British common law and the
officiallanguage is English.

31
32 TaxHaoens JOT International Business
Finally, all of these natlons, in view of their restricted land
areas, depend on tourism and foreign investment for eco-
nomic success. The tax haven industry is an economic
ncccssity for each of them, and any attempt to change this by
future governments is improbable to say the least.
All in all, the consideration of stability is very much in favour
of these no-tax havens. They have been no-tax countries for
many, many years, and they have both traditional and practical
stakes in staying that way.
However, all these havens share a major disadvantage: It
is very difficult to establish plausible business reasons for
incorporating in them. The names Bahamas, Berrnuda, and
Cayman Islands are immediately suspect in theeyesof any tax
collector.

TheBahamas
This is a very traditional tax haven. Gcographically, it is an
archipelago. It is composed of 700 islands and uncounted
rocks and reefs, stretching from Haiti on the southeast to
Florida on the northwest. It has a total land area of 5,400
square miles, scattered over 70,000 square miles of ocean.
The Bahamas are usually associated with pleasant tourism.
Clearly, a country where the major means of transportation is
boats sailing across vast stretches of tranquil ocean has its fas-
cination. The pleasant climate is an extra consideration. The
sun almost always shines; the tcmperature varies only s1ightly
the year round, from an average minimum of 70 degrees
Fahrenheit to an average maximum of 80.
An archipelago Iike the Bahamas can only be organised
po1itically and economically if there is some major island to
serve as its centre of trade and government. For the Bahamas,
this is New Providence; it contains 50% of the total population
and the capital, Nassau .
Economically, the Bahamas thrive on tourism, the tax haven
industry, and the export of petroleum products, cement, rum,
salt, and ocean products, It has no heavy industry, but the
export trade is a good business reason for being there, as is
tourism.
The Bahamas are highly accessible. Nassau can be reached by
air from any major airport in the United States, and it is but 35
minutes flight-time from Miami. There are direct flights from
Tax Havens witk no Income Tax 33
London, Toronto, Jamaica, Bermuda, Frankfurt, Cologne,
Brussels, and Luxembourg.
Communications are no problem. Everyone speaks English,
and airmail, telegraph, direct-dial telephone, and telex ser-
vices are of the highest quality.
The Bahamas are a sovereign state within the British Com-
monwealth, independent since 1973. Commonwealth rnem-
bership means that Her Majesty the Queen is head of state,
and she is locally represented by the appointed governor gen-
eral. This provides a measure of safety because the governors
general have traditionally been very conservativc. The legisla-
ture is bicameral, the upper house appointed by the governor
general on the approval, recommendation, and joint agree-
ment of the prime minister and the leader of the opposition,
and the lower house popularly elected. The upper house can
delay any legislation, though eventually it must approve it.
The governor general can veto any legislation he deerns
inconsistent with the constitution.
Howcver, there are political snakes in the Bahamian paradise.
The government has created problems both in the granting
of work permits to aliens and in exchange-control matters.
Both difficulties derive from programmes of "Bahamisation of
the economy" and "social development". However, the same
government has also put into force some programmes of
encouragement to forcign investors and tourism, so the situ-
ation is less ominous than some rumours would have it. More-
over, the government has repeatedly promised that it will not
buck the no-tax tradition.
As noted above, the legal system of the Bahamas is grounded
on the English common law. This tradition is implemented by
a four-Ievel court structure: local magistrates, magistrates'
courts for more serious matters, a supreme court, and a court
of appeal. The ultimate court of appeal is that of the whole
Commonwealth, the Queen's Privy Council.
The currency and exchange-control picture is not a rosy
one. The local currency, the Bahamian dollar, is on par with
the US dollar, but it does not freely circulate with it. Exchange-
controls are quite strict, espedally as applied to so-called res-
ident companies: those owned by a loeal resident and doing
business loeally. These companies are only allowed to operate
with loeal dollars and to pay foreign bills with US dollars
34 Tax Havens for International Business
exchanged according to the official rate, each time with an
express Exchange-control permission. This can be an Import-
ant consideration if any local activity is contemplated.
These are ways to avoid this difficulty. One is the formation
of a non-resident company funded by a non-Bahamian com-
pany headquartered in another haven. Another arrangement
is to get a general approval from Exchange-control to convert
freely between local and foreign currencies on the basis of
evidence that the nature of the company requires such free-
dom to do business effectively. Such a license for a resident
corporation involves an extra obligation: an annual report to
Exchange-control on the company's foreign accounts and
transactions.
Onlya non-resident company owned bya non-resident and
operating exdusively outside the Bahamas can do business
with complete freedom of exchange between currencies. This
exchange-control problem, coupled with difficulties that may
be faced in getting a work permit for any non-Bahamian
worker one might wish to employ, may be reason enough for
some investors to look elsewhere for a haven. Still, there are
thousands of corporations registered in the Bahamas, which
indicates that, while they have become slightly less attractive
for a haven, they still have their advantages.
Let us concentrate on these advantages. Whatever profes-
sional services one might need -Iaw firms, accountants, banks,
finance companies, investment advisors, stockbrokers - are
available in abundance. They are of an internationally high
quality, too, based on a long-standing and thriving tax haven
industry.
At; for the tax laws, there are no personal income taxes, no
corporate taxes, no profit taxes, 110 capital gains taxes, no
estate 01' other death duties. On the island of New Providence
there is a tax on the value of improvcd land. A more serious
qualification is the tax on local gambling casinos by which the
government gets its share of this lucrative element of the tour-
ist industry.
In accordance with the general no-tax situation, there is no
withholding tax of any kind.
The lack of any significant taxes in the Bahamas does not
mean that a company will get off scot-free. After all, the local
government does deserve something in return for providing a
Tax Havens with no Income Tax 35
tax haven. Whatever one pays, however, will bear no relation to
his profits. There will be stamp dues on the documents of cor-
porate registration and an annual business-licence fee. The
rates are quite competitive with other tax havens.
There are two basic types of corporations: companies limited
by shares, and companies limited by guarantee. Both types
belong to the general kind of corporate entities discussed
earlier, but there are certain differences. Companies limited
by shares have a fixed, unmodifiable authorised capital. They
cannot buy back their own stock.
Companies limited by guarantee can reduce their share
capital by buying back their shares and cancelling them. This
means that they can present their creditors with an unpredict-
able security situation. The security for bonds, debentures, and
other loans is, of course, the total authorised and real capital
of the corporation.
Offshore funds, with thcir typically expanding-contracting
capital, are therefore incorporated in the Bahamas as compa-
nies limited by guarantee.
Incorporating in the Bahamas requires the services of a local
lawyer,who will prepare and file a memorandum of association
and artic1es of association. Both documents are standard, and
the first inc1udes the name of the company, the address of the
local registered office, its general purpose and objects, a declar-
ation that it has a limited liability of the relevant sort, and the
company's capitalisation (total authorised capital, the number
and kind of shares, etc.). The artic1es of association specify the
number of corporate directors and regulations concerning
annual directors' meetings. On the latter point, the directors
can meet anywhere, not necessarily in the Bahamas. "Alterna-
tive directors" can stand in for the regular directors, and a cir-
cular, agreed to and signed by a majority of the directors, can
have the same official standing as any decision reached by a
majority at a regular directors' meeting.
The local law firm handling incorporation will charge cer-
tain fees: the charges for preparing documentation; the costs
of providing five local nominee shareholders (who will sign a
"deed of trust" turning over their shares to a principal after
incorporation); and costs of maintaining (according to long-
standing, though unwritten tradition) a local nominee director;
and the cost of "office representation" in the Bahamas (a sign
36 Tax Havens JOT International Business
displaying the company name must be posted on the building
in which the registered office is located). In addition, there are
certain statutory requirements that must be met: a register of
directors, a register of shareholders, and aminute book must
bc maintained in the local office, and an annual return must
be submitted to the Registrar of Companies, specifying share-
holders, directors, officers, the address of the registered office,
and amount of share capitaI.
As against government fees, which are fixed, there is some
variation in the fces for the above services. On the average, in-
itial incorporation costs run about $2,500. Of course, one can
shop for the least expensive services and do a bit better.

Bermuda
Bermuda is similar to the Bahamas in many respects. Like the
Bahamas, it is made up of islands, seven main ones, connected
by bridges, and many small coral formations, accessible from
the main ones by boat. It is situated about 600 miles east of
Cape Hatteras, North Carolina, and so, Iikc the Bahamas, it is
close to the East Coast of the United States. Its land arca,
however, is much smaller, a mcre 20.5 square miles, of which
two are occupied by US military bases. The remaining area
is denscly populatcd. Understandably, land purchascs in
Bermuda are difficult, both legally and financially. This is
reflected in office ren tals and so on,
Bermuda is a tourist's delight. Its moderate climate is
warmed by the Gulf Stream. Its area is hilly, with beautiful
banks of flowers and rainbow-hued houses.
It is highly acccssibie. Daily flights connect it with any major
city in the world; it is but two hours from New York. It is
located at the crossroads of the shipping lanes between the
United States, Canada, northern Europe, and South America.
Direct-dial telephone, cables, telex, and airmail services are
excellent.
There are few political differences between Bermuda and
the Bahamas. Bermuda is a self-governing crown colony and
so is not afully independent Commonwealth member. It has a
governor, appointed by the Queen. This iIIustrious official has
largcr responsibilities than his Bahamian counterpart. He
handles foreign relations (in accordance with British policy),
Tax Hatsens with no Income Tax 37
security, and police. All other affairs are monitored by the
democratic institutions of the colony.
The legislature is bicameral, with an appointed upper house
(the Legislative Council) and an elected lower house (the
House of Assembly). The governor heads the cabinet (the
Executive Council). Despite foreign affairs and defence rela-
tions with Great Britain, there exist no governmental financial
relations between the colony and the mother country. All
Bermudian officials, including the governor, are paid out of
local government revenues, and Great Britain gets no lax
money from Bermuda. Thus, the high British taxes have no
bearing on the tax situation in Bermuda. The self-governing
nature of Bermuda means that any changes in the tax laws 01'
other legislation cannot be imposed from without; they can
only emerge from the local legislature.
The legal tradition in Bermuda derives from an ancient, pre-
1612, British common law, modified by locally generated
common law. The legal framework is three-tiered: magistrate
courts, a supremc court, and a court of appeal. As in most
Commonwealth countries, the ultimatc court of appeal is the
Queen 's Privy Council in London.
The local currency, the Bermudian dollar, is on par with the
US dollar. As in the Bahamas, there are exchange-controls on
residents and resident companies.
Bermuda is similar to the Bahamas in having a large range
of high quality professional services available. Very strict bank-
ing legislation has resulted in there being only foul' banks
which, by law, are locally controlIed; local stock ownership,
combined, cannot legally fall below 60%.
The British tradition in Bermuda means that there are
strong ties between accountants, lawyers, trust companies, and
banks. Onee one ehooses his aceountant, say, this gentleman
will "strongly recommend" the lawyer, trust company, and bank
to be used, stressing that he is "accustomed" to working with
them. This may seem a bit restrictive, but it guarantees good
eooperation between firms that otherwise might not cooperate
in one's best interests.
As in the Bahamas, local bank deposits have certain attract-
ive features: the depositor can choose the currency, there is no
withholding 01' other tax on interest.
38 Tax Hauens JOT International Business
Ni for taxes, there is no personal income tax, no corporation
lax, no profits lax, no capital lax, no capital gains lax, no with-
holding lax, no inheritance lax. There are import duties and a
10% property levy on the rental value of houses and land.
Incorporation in Bermuda was made simpler in 1970. Previ-
ously, incorporation required a special private legislative act,
To incorporate one had to offer a petition to the local parlia-
ment through a legal representative. The legislature would
then vote on the proposal and, eventually, approve it. This
superceremonious method of incorporation still exists and
must be used if any aspect of the structure, internal organisa-
tion, or mode of operation of an intended company deviates
from the pattern dictated by the General Corporation Law
enacted in 1970. However, if the corporation is a "normal"
one, incorporation can be accomplished without such legislat-
ive ceremonies by submitting the standard type of documents
for the Registrar of Companies.
There are two basic types of companies recognised by
Bermudian corporate legislation: local companies and exempt
companies. Local companies are those formed by Bermudians
for purposes of internal trade or Bermuda-based international
trade (import to and export from Bermuda). Such companies
have a minimum percentage of local stock ownership, pre-
scribed by law, are subject to strict exchange-control, and have
no guaranteed immunity against future laxes.
An exempt company is free of the first two restrietions
above, and is given an official guarantee against the levying of
future laxes for 30 years. However, an exempt company is
restricted as folIows: (l) It cannot buy, lease, or seil land, rnort-
gages secured by land, or bonds and debentures secured by
land without special permission. (2) It cannot buy shares of
local companies. (3) It cannot locally seil whatever it produces
without special ad hoc permission. These limitations narrow
"business justification" possibilities for Bermudian incorpora-
tion, to say the least, and there is no way around them.
Incorporation in Bermuda is more difficult than in the
Bahamas. Taking into account the various professional services
that are needed for incorporation as weil as the high govern-
ment fees, both incorporation and annual maintenance run to
$2,000-$2,500 a year depending on the specific services
required .
Tax Hatsens with no Income Tax 39
In addition to the financial burdens, there is a "screening" of
incorporation applications. A committee chaired by a member
of parliament examines bank references to eliminate Mafia
types and such. This screening slows things up, and may take a
month.
Even if the disadvantages notcd above do not discourage a
potential investor, the Bermudian political and sodal situation
may. There is a policy of "Bermudisation", There are problems
with immigration and work permits for aliens; renting a local
office is difficult in view of the land restrictions; and the distinc-
tion between local and alien companies is very strict. Local com-
panies pay a 5% "payroll lax", which means thaton each $100 an
employee gets, the company has to pay the government an extra
$5. This does not apply as yet to exempt companies and they
are, moreover, guaranteed against it. But this is a bad sign for a
lax haven. (Remember, US incomc lax started at 5%.)
Thus, given a choice between Bermuda and the Bahamas,
the Bahamas may make the bctter bel. The only advantage
ßermuda seems to have is the extra respectability conferred
on ßermudian companics by the screening process.

The Cayman Islands


To assert that the Cayman Islands are superior to both the
Bahamas and ßermuda as a lax haven is to assert an opinion.
To point out that many lax haven companies, established
firmly for many years in the Bahamas and Bermuda, have
recently transferred their bases of operation to the Caymans is
to point out a fact, a fact worth paying attention to.
Like ßermuda and the Bahamas, the Caymans are - obvi-
ously - a collection of islands. There are three of them, located
475 miles south ofMiami and 200 miles north ofMontego Bay,
Jamaica. Of the three, Grand Cayman, as its name implies, is
the major one; it is there that both the capital and most
business activities are located. Its area is significantly greater
than that of the other two, 76 square miles, as against Cayman
Brac's 14 and Little Cayman's 10. Cayman Brac is east of
Grand Cayman, and Little Cayman lies between the two larger
islands.
This trio is rather hot. The only factor differentiating the
tropical nature of the Caymans from West Africa is the trade
winds, which cool them off - a little.
40 Tax Hauens for International Business
The Caymans are about five times larger than Bermuda and
they are much less densely populated. Thus, the Bermudian
"land sensitivity" reflected in harsh strictures on land pur-
chases by foreigners and in high real estate costs has a very
moderate counterpart in the Caymans.
Being a tax haven is for the Caymans, like Bermuda and the
Bahamas, a tradition based on British rule. Here, however, the
tradition is bolstered by a legend. In 1778 the islanders hero-
ically saved from tragic death at sea a British royal prince and
his mentor, an admiral, and King George 111 gratefully granted
the islanders eternal tax exemption. Scholars may concern
themselves with the authen ticity of the legend, and its legal sig-
nificance at present is dubious. But it is very significant as a
predictor of the future; such a strong tax haven tradition
would make it very difficult to introduce any sort of taxation.
Not that there is any special reason to worry about the Cay-
mans, as there may be with Bermuda and the Bahamas. The
latter two are not, from the point ofview ofgovernmental eco-
nomic and foreign policy, enthusiastically dedicated to being
havens. They bccame so only as a by-product of their total no-
tax tradition. Thc Cayman Islands govcrnment, on the othcr
hand, is very keen on the tax haven industry, a major factor in
local economic growth. Thus, the consideration of expected
future stability favours the Caymans . It is important to see,
thercfore, whether they are inferior to their competition in
other respects.
One can fly to the Caymans from Miami, Houston, Costa
Rica, or Kingston, Jamaica. Thcre are adequate airmail,
telephone, telex and cable services.
Politically, the Caymans are a crown colony by choice. In
1962, when Jamaica became independent of Great Britain and
the Caymans were a dependency of Jamaica, the Caymans
decided by national referendum against independence or a
Jamaican connection and for the status of a crown colony. This
indicatcs a rather unusual traditional conservatism in this
era of "national independence" and the "fight against col-
onialistie imperialism", and it is a strong predictor of stability.
The local population is racially mixed. There is a minority of
pure Europeans (20%) and pure Africans (20%) and a racially
mixed majority (60%). This indicatcs that racial tension, preju-
dice, segregation, and such, were never serious faetors in the
Tax Havens with no Income Tax 41
Caymans and are likely to become even less so. This, again, is
important because governments often come to power employ-
ing racial strife as a major crutch. Here leftists would not have
much to lean on.
The government is headed by a governor, an appointee of
the Queen. He heads the Executive Council, his cabinet. The
council members are partially e1ected, partially appointed by
the governor. There is a one-house legislature, the Legislative
Assembly, elected by universal suffrage. Recent elections and
day-to-day political life do not indieate any basie left-right
polarisation. The Caymans are a politieally quiet place.
The law is British common law modified by locallegislation.
The court structure is similar to those of Bermuda and the
Bahamas. Corporate legislation is modernised and efficient.
Exchange-controls are somewhat less striet than in Bermuda
and the Bahamas. They involve major restrictions on local res-
idents, but a "non-resident" company dealing outside the
islands can be forrned, eliminating all exchange-control con-
siderations. The only restrietion on such a company is that it
cannot use the local currency.
The Caymans' superiority over the Bahamas and Bermuda is
not modified by a comparison of available professional ser-
vices. A broad range of high quality legal, banking, accounting,
finance, and trust services is available.
The Caymans' tax structure is superior to those of Bermuda
and the Bahamas. The onlysources of government revenue are
stamp and import duties. An automatie no-tax guarantee of 20
years is granted to non-resident exempted corporations. There
is virtually no tax department.
Incorporation is quiek, easy, and reasonably priced. A memor-
andum of association, involving three initial shareholders
(whieh a legal representative can supply as proxies), is required.
It has to specify the usual details: name of corporation, address
of its local registered office, statement of purposes, statement
that it has limited liability, and its capitalisation (amount of
authorised capital, division into shares, and par value of
shares). On payment ofa registration fee, the Registrar of'Com-
panies issues an immediate certificate of incorporation and files
the memorandum. There is no Bermuda-type investigation of
bank references. Maintenance of a corporation is reasonable.
An annual fee is required, as are the standard office services,
42 Tax Hauens for International Business
supplied byan agent for a modest fee, This same agent will also
submit the required annual return to the government. This has
nothing to do with finances. It merely specifies the name of the
company, the address of the local registered office, the author-
ised capital, the issued capital (total par value of issued stock),
and the names and addresses of the nominal shareholders. This
annual return is to be accompanied by an annual fee.
Total costs of incorporation run about $2,500 - the only con-
stant being the government fee, while the agent's fees vary.
Annual maintenance averages around $1,500.
All of the above applies to an "ordinary" company. There are
also exempt companies. The above mentioned 2o-year no-tax
guarantee applies only to them. The fact that a company oper-
ates in trade outside the Caymans does not mean it has to be
exempt. It is up to the incorporators to consider the relative
advantages and disadvantages. An exempt company, apart
from the 20-year guarantee, can omit from its name the "Ltd"
required of other companies, can issue shares without par
value, can dispense with the formality of annual shareholder
meetings, and can keep private, with no representation in any
official records, the names of shareholders.
Of course, all these benefits cost. Costs and annual main-
tenance run about 50% higher. Even with these fees, a Cayman
exempt company costs about the same as a Bermudian non-
resident company, and apart from the above advantages, it can
also issue bearer shares, and there is no extra charge in the
form of stamp duties on the transfer of shares.
Another advantage of an exempt company is the possibility
of redeemable preference shares, which at the time of liquida-
tion have priority over ordinary shares in being paid up by the
company to the shareholder but which usually have no voting
power. Such shares can be useful if one wants to finance a cor-
poration not by taking out loans but by issuing new stock with-
out at the same time compromising control of the company.
The reader may have wondered why articles of association
were not mentioned above. The reason is that in the Caymans
there is a "Table A" that substitutes for these uniformly in a
manner that creates only minor inconvenience. This table is
not a curse of uniformity but a blessing of not worrying over
what are usually irrelevant formalities. One can at any time
offer articles of association, modifying Table A as he wishes,
Tax Haoens witk no Income Tax 43
leaving the table to apply automatically to matters not men-
tioned in the modification. The table is thus a legal convention
created to enhance convenience of local incorporators,
The Caymans offer a large range of possible business activi-
ties. The very positive government interest in the tax haven
industry is also a big plus. Whatever the specific circum-
stances, the Caymans are probably the top no-tax haven, as the
transfer there of many firms from the Bahamas and Bermuda
confirms. Moving a corporate base of operations is costly, and
it is not done unless the considerations in favour of the move
substantially outweigh the costs.
6 Tax Havens with no Tax
on Foreign Source
Income

There are many countries that tax only income generated


locally. Foreign income is not locally taxable.
This illustrates an important distinetion in taxing praetiees.
Tax systems can be compared not only in terms of the types of
taxes they impose, the proportions, or rates, they use to deter-
mine the amount of tax due, but also in tcrms of the sourees of
income that are considered untaxable.
Countries that impose no taxes on foreign ineome are not
always tax havens. Most Latin American eountries lax only loeal
ineome, but most of them have a high dividend withholding tax
that would make it impossible to pay out the aeeumulated
profits. Moreover, governments that exclude foreign source
income from taxation are unlikely to face much politieal op-
position if thcy decide to tax such income.
The populations of such specialised havens are used to taxes.
In other words, if there is any guarantee of the eontinuation of
thc practicc of exempting foreign income from taxation, it lies
in a sustained desirc of governments to earn revenues from the
tax haven industry in other ways. Unfortunately, such policies
tend to be as fragile as the governments taking advantage of
them . While the continuation of current policy can bc reason-
ablyexpected in most no-tax havens because of the strong influ-
enee of tradition and simple individual self-interest, no such
automatie projcetion of stability can be made in most no-tax on
foreign source ineome countries.
But there are some exeeptions. Each of them merits
attention beeause all offer the possibility of creating a Iocal
company, the bulk ofwhose investment is abroad and thus free
from loeal taxation, but that is located in a country that does
not possess a tax haven reputation. To be more specifie, if one
has a Hong Kong corporation, he may very well have some

44
Tax Havens witk no Tax on Foreign Source Income 45
very good business (as opposed to tax) motivation for it: cheap
locallabour, excellent possibilities for international trade, etc.
A Bermudian exempt company, however, instant1y suggests tax
avoidance to a suspicious mind.
Another general advan tage of these havens is that their
governments usually want foreign investment. In some of these
countrics, forcign investors get preferential treatment that may
not mcan only tax advantages, but subsidies, marketing privil-
eges, etc. So let us look at these unusuallands.

Panama
Panama deserves first mention here because it is already so
widcly used by corporations as a base for their foreign opera-
tions. It is notable for the combination of tax and business
advantages it offcrs, dcspitc the recent invasion.
A major reason for the popularity of Panama is its location.
It is the link between North and South America, and it
includes the famous Panama Canal, connccting the Atlantic
and the Pacific. Its total land arca is 29,700 square miles, The
majority of the pcople (60%) live off the land. The capital,
Panama City, contains most of the urbanised population and
most of the rest live in the other major city, Colon. Colön's
significance, economically, derives from its freeport facilities,
which wc will discuss later.
A visitor to Panama is in no danger of freezing. The c1imate
is tropical - hot, with heavy rains (50 inches a year on the
Pacific side, 150 on the Atlantic). There is a dry season from
mid-December through to the end ofApril.
One can rcach Panama more easily than virtually any other
tax haven. Many airlincs serve Panama. If sea travel is pre-
ferred, Panama has four cxccllcnt ports: Cristöbal at the
Atlantic end of thc Canal, Balboa at the Pacific end, and Puerto
Arrnuelles and Bahias de las Rouge.
Tclecommunication is extremcly efficient because Panama is
an international crossroads of trade. There is direct telephone
service via satellite and vcry reliable telex, cable, and airmail.
Politically, Panama is a republic. It has a democratic election
system that cvery six years produces a turnover in the
unicameral legislature, the National Assembly, while the "chief
of state", the president, and the vice president are clected by
the assembly. The chief of state is the chairman of the national
46 Tax Havens JOT International Business
cabinet and roughly corresponds to the prime minister in a par-
liamentary government The National Assembly has the job of
cxamining and approving or disapproving legislation drafted
by anational legislative commission. Panama until recentJy has
been a typical Latin American dictatorship run by whoever hap-
pens to be in charge ofthe National Guard (army) , with alI the
republican and democratic trappings as mere window dressing.
Since the US invasion the dcmocratic process seems to be func-
tioning again. However, the military leaders - even the leftists -
never seemed to tinker with the lax and corporation laws.
There is a kind of cconomic freedom absolutely unaffected by
political turnover, The rulers have not slain the goose that lays
the golden eggs.
Another indication of the considerable independence and
stability of economic policy is the structure of the Panamanian
civil service and government. We are used to a public bureau-
cracy in which each department is headed by a political ap-
pointee to a ministerial/secretarial position. In Panama a variety
of governmental functions are handled by purely bureaucratic
agencies. Electridty and hydraulic resources, national telecom-
munications, tourism, social security, all these functions are
handled by semi-autonomous official Institutes, which are not
under any cabinet minister.
Spanish is the official language, but English is very widely
used. Most professionals and businessmen speak English.
A very pleasing feature of Panama is the absolute monetary
freedom. The loeal Balboa is on par with the US dollar and
exehanges freely with it. All paper money is American. The
lack of exchange controls implies that the government cannot
regulate the money supply, and there is no central bank.
Add to this banking legislation comparable to that of the
Switzerland of old: numbered accounts in the eurrency the
aecount holder designates and seerecy laws.
The eentral position of Panama in inter-American as welI as
transoceanic trade means that its professional services -
banking, aecountancy, legal, brokerage - are of the highest
quality and intensely competitive. There are many banks, both
local and international. Name any major international
banking organisation and it has a branch in Panama.
There are many Panamanian management eompanies that
can handle local corporate creation and management in all
Tax Havens with no Tax on Foreign Source Income 47
necessary aspects. They play a role analogous to that of
Bahamian and other trust companies. They will handle any-
thing and everything: incorporation, registration of assets, pro-
vision of all required nominee officers and directors to cover
the various requirements of corporation law, etc. They will
even conduct feasibility studies on the advisability of altern-
ative possible investments.
Panama taxes locally generated income and exempts from tax
all income generated abroad. This policy has existed since the
country was founded in 1903, good reason to believe that the
policy is too weil entrenched to be changed with ease. The
income tax on the local income of residents is progressive
to 46%. If one is in the country less than six months in a year
and generatos local income, he is not exempted from tax
altogether or cven allowed to "spread" his incume over the
whole year. Rather, he pays taxes on a pro rata basis; the ratio of
Panamanian residence duration to a full year is the basis for cal-
culation. Thus, Panama is not ideal for all expatriate branch
managers.
On the bright side, all income generated by movement of
commodities that never pass through Panama (even though
they may be invoieed in Panama and managed from a
Panamanian office) is complctely cxempt from taxation . Thus,
there are good business reasons - "business motivation" - for set-
ting up a Panama-based corporation. Moreover, if dividends are
paid to stockholders residing outside Panama, no withholding
tax applies, provided the profi t underlying the dividends is all
derived from sources external to Panama. Similarly, if one in-
herits property owned by a Panamanian corporation (by inherit-
ing the stock) and the assets themselves are outside Panama, no
inheritance taxes apply.
The fact that overseas operations based in Panama are not
taxed, together with easily demonstrated business motivation
for Panamanian operations, the frec exchange of currencies,
and the economieally strategie position ofthe country account
for the 35,000 corporations, mostly foreign, that are registered
in Panama - more than in any other tax haven. This large cor-
porate presence is, in itself, the strongest guarantee of future
preservation of the tax-free foreign income policy. Any change
of this policy would scare off most of the 35,000 cornpanies,
terminate the flow of monc'y they feed into the Panamanian
48 Tax Haoens for International Business
economy and the government treasury, and thus would be a
vast net loss. The free market situation in the international tax
haven industry, following from the existence of many altern-
ative havens all competing for patronage, should keep Panama
very much "in line",
Panama's principal claim to farne as a haven for foreign
companies is based on the shipping industry. Like Liberia,
Panama offcrs special advantages for ship owners who elect to
fly its flag as a "flag of convenience". The cost of ship registra-
tion in Panama is low. Even if a shipping company regularly
imports and exports from and to Panama, none of its income
or profits (or the salaries of its crews, for that matter) are
subjcct to any Panamanian tax. Moreover, Panama's maritime
labour regulations arc liberal.
Let us now revicw Panamanian corporate law. Fortunately, it
is bascd on thc DeIaware laws of 1927 (without amendments).
As the reader may know, Delaware is one of the best US states
in which to incorporate because ofits very advantageous corpo-
ration laws. In Panama incorporation rcquires two incor-
porators, who must execute the articles of incorporation
before a Panamanian notary public. These two are usually
nominees, employces of a local managcment company. The
articlcs of incorporation arc recorded at the public rcgistry
office, and the latcr costs of maintcnance can be reduced to a
$100 annual fee to a local legal representative. Nominee
"incorporators", though nominally shareholders at the time of
incorporation, will sign a deed of transfer returning their stock
to thcir principal(s) after incorporation has been cffected.
Thc articles of incorporation must include the usual details:
company name, with the standard designation for a corporate
entity, (2) astatement, howevcr general, of the objects of the
corporation, (3) capitaJisation, specifying both the total amount
of authoriscd capital and its division into shares with their
respcctivc par values (shares with no par valuc can be issued, but
then the govcrnment assumes that each sharc has the nominal
par value of $20 for the purpose of computing the registration
tax), (4) specification of thc nature of thc shares - registered or
bearer, common or preferred, voting or nonvoting, (5) names
and addresscs of at least three directors (usually nominees
hired for an annual fee), (6) names and addresses of officers
(again, nominees - who can be the same individuals serving as
Tax Havens with no Tax on Foreign Source Income 49
dircctors), (7) thc duration of thc corporation, which can be a
specificd limited period or "forever", (8) name and address of
the loeal legal representative of the corporation, and (9) the
domicile of the corporation (e.g., Panama City, Panama).
Incorporation costs are usually $1,000-1,200 .
Annual corporate maintenance costs very little, about
$100- $200. The low fces stem from the fact that the loeallcgal
representative has only to exist; he has no reports to file nor
any other work to do,
Thus, neither incorporation nor company maintenance is
very expensive in Panama. It is certainly much less expensive
than the comparative action in Bermuda, the Bahamas, or the
Caymans. And one gets the same tax advantages for income
generated outside the eountry. Moreover, therc is a further
advantage to be enjoyed by Panamanian eompanies that deal
exdusive1y outside Panama. They need keep no financial re-
cords locally, nor do they have to submit any annual financial
reports with the local tax authorities, What has to be kept
loeally is a stock-register book for registered stock and a
minute book for meetings of shareholders. The latter must be
rubricated (for a special fee) by a loealjudgc. It is also bound
in such a way that the minutes must be entered manually;
typed minutcs cannot be filed in it. This, though, is just an
unimportant nuisance, not a serious consideration.
Another nuisance concerns stockholders' meetings. If not
physically held in Panama, these have to be officially sanc-
tioned by the Panamanian consul in the country where they
are held and then registered in the minute book in Panama.
Altcrnative1y, thcy can be made official by the signature of the
corporate secretary, the person whose name is reeorded in the
mereantile rcgistry as the corporation's secrctary. Again, th is is
merely a curiosity of some slight inconvcnience, not a major
problern.
If however, a company does local business in Panama, it
becomes subject to taxes on its locally generated income. In this
case, a generaliedger, a general journal, an inventory, and a bal-
ance sheet must be maintained. A commercial business licence
mayaiso be nceded. This could be bypassed by handling Pana-
manian business through a corporation domiciled in, say, the
Cayman Islands. The Panamanian withholding Lax is lower than
thc corporate income tax on loeally operating companies.
50 TaxHavens JOT International Business
In any event, if a Panamanian corporation is not in any way
directly involved in domestic business activities in Panama, no
annual report of any kind has to be made. Even interest gener-
ated locally on local bank deposits is free from any local tax or
withholding tax. Thus, for a sum of about $1,000 for incor-
poration and $100-$200 a year in maintenance costs, a com-
pany can enjoy virtually complete business privacy - no
reports, no books, no anything.
Another advantage of Panama, apart from its very private
corporations, the low costs ofannual maintenance, and the free
exchange of currencies, is the Colon Free Zone. Located at the
Atlantic entrance to Panama and accessible by air and sea from
every corner of the Western Hemisphere, it is very active eco-
nomically, with an annual trade volume of about $950 million.
It has attracted international companies from the United
States, Japan, and Europe. Its freedom of trade involves com-
plete exemption from duties on merchandise imported into it,
packed, labelIed and/or assembled in it, and reshipped from it.
Moreover, no commerciallicenses are needed.
How to use the freeport facilities depends on the size of com-
mercial operations one intends to conduct from them. Land can
be leased there, and warehouse or other faciIities can be buiIt on
it. The usual lease is for 20 years and is renewable. Warehouse
space can be leased too. Finally, local warehouses are also avail-
able for fees based on the value of the total merchandise stored.
Clearly, the leasing of space and construction of warehouses for
hire is a lucrative business possibility in the Free Zone.
Unfortunately, the freeport although duty-free, is not totally
tax-free. Merchandise that physically passes through the Colon
area and is subject to some form of local processing - re-
packing, labeling, etc. - is taxed by the Panamanian govern-
ment. The tax rates, however, are extremely low. They are based
on a 1954 income tax law, under which corporate income tax
was but 30% on net profit. Add to this a 90% "tax discount"
applicable in the Colon Free Zone, and the result is a negligible
3% tax on net profit from all merchandise that physically passes
through Colon not later sold in Panama. (Standard taxes apply
to all Free Zone goods resold in Panama.)
Summing up, Panama has an impressive array of advantages
over its competition: (1) No exchange controls, no federal
reserve or central bank, complete monetary freedom. (2) No
Tax Hauens witk no Tax on Foreign Source Income 51
taxes and no required financial 01' other annual reports by
corporations doing business exelusively outside Panama. (3)
Relatively low incorporation and annual maintenance costs,
with a rieh array of professional services to take care of every-
thing. (4) The possibility of safeguarding privacy with both
bearer shares and numbered bank accounts in the currency of
the depositor's choiee with tax-free interest. (5) The possibility
of dabbling in the shipping industry with minimal govern-
mental costs, costs that are a low function of tonnage and are
unrelated to profits. (6) The prospects of doing business
through the Colon Free Zone, duty-free and alm ost tax-free, (7)
A tradition ofbeing a tax haven, bolstered by the local presence
of many tax haven corporations, creating a virtual knockout
argument for any future government tempted to impose taxes
on forcign income. (8) Thc ease of supplying a business justifi-
cation for a Panamanian corporation should the need arise.
Of course, Panama is not perfect. As with thc no-tax havens
we dealt with earlier, it is not a good location for a holding
company holding high-tax country stock. Panama has no
double taxation agreement with any country. However, in a
multi-haven arrangement of the sort already discussed,
Panama could compete with a purc no-tax haven, even the
Caymans.

Cyprus
Cyprus is an island country in the Eastern Mediterranean, It
was forrnerly a British colony, but since 1960 it has been in-
dependent. It is a member of the United Nations, the Council
of Europe and the Commonwealth, and has established a re-
lationship with the European Community that wiJI eventually
lead to a full customs union (although not to full membership
in the Common Market) . It maintains politieally and econom-
ieally viable relations with the Arab nations, as weil as consider-
able trade with Eastcrn European countries. Its ties to Britain
and Greece are elose. The fact that the northern portion of the
island has been occupied by Turkish forces, and deelared in-
dependence as the Turkish Republic of Northern Cyprus, is
not thought unfavourable to its tax haven uses.
The majority of the Cypriot population is Greek, with a few
Turks and othcr nationalities making up a minority of the
population. The national languages are Greek and Turkish,
52 Tax Havens fOT International Business
but English is widely used, especially in the legal and business
communities. Communications are excellent, and it is a popu-
lar tourist destination.
As a result of its relationship with Great Britain, Cyprus is a
common law country with its company laws patterned after
Britain's. The costs for organising and maintaining a Cyprus
company are based on Cyprus internal costs that are quite low.
Cyprus is popular for shipping companies, and there are two
ways of using Cyprus for other companies. One is the Cyprus-
rcgistered company, which if owned by non-residents and deal-
ing only with foreign business, pays tax at 10% of the normal
corporate tax rate, which means currently an income tax of
4.25% for the company. The other method is the branch office
of a foreign company, which pays no Cyprus income tax,
The branch cannot use the Cyprus double taxation agree-
ments, although the Cyprus registered company can, because
the latter is a resident of Cyprus .
For Cyprus tax purposes, the offshore company may be a
holding company, a finance company, an investment company,
an insurance company, a management company.
Cyprus has tax treaties with the United Kingdom, Denmark,
Sweden, Ireland, Norway, Greece, the Federal Republic of
Germany, Czecho-Slovakia, Hungary, ltaly, France, Romania,
the United States, Canada, and Bulgaria.
Foreign employees of an offshore company, who are em-
ployed in Cyprus, pay Cyprus income tax at half of the normal
Cyprus tax rates.
Both the company and its employees can import duty-free
motor vehicles, office equipment, and household effects
(other than furniture).
Besides commercial shipping companies, Cyprus is popular
for registering personal yachts. A Cyprus company is formed to
own the yacht.

Malta
Malta has a tradition ofbeing fiercely Independent and neutral
over aperiod of many centuries. An island strategically located
in the western Mediterranean, it has historically been astaging
post, trading point, supply centre and a military and naval
base. Today the former British naval docks are a hub of com-
mercial ship repair and shipbuilding activity, a thriving tourist
Tax Hauens witk no Tax on Foreign Source Inco11U! 53
industry has been developcd and Malta has established itself as
a profitable manufacturing base with a presence of over 130
international companies.
Since 1989 Malta has offered a wide range of tax and financial
benefits to banks, insurance companies, insurance managers,
fund managers, trading companies, holding and personal
investment companies, pension funds, ship owners, and trusts,
An autonomous supervisory body, the Malta International
Business Authority (MIBA) has been established "to balance
the need for confidentiality with safeguards against abuse".
Malta is within easy reach of major European and Middle
Eastern business centres, and is within the European time zone
in line with Frankfurt, Milan, Paris, and Zurieh. By air Malta is
3 hours from London and Frankfurt, 2 hours from Paris and
1 hour from Rome. There are direct flights to 30 eities includ-
ing Zurieh, Brussels, Amsterdam, Athens, Cairo, and Lagos.
Malta has a typically Mediterranean climate, with mild
winters and sunny summers.
Malta is a sovereign European state with a democratie parlia-
mentary system based on the British model. It is a member of
the Commonwealth and its first self-governing constitution
dates back to 1921. There is a total absence of cultural, re-
ligious, ethnic or racial problems.
Malta's judiciary is long-established and independent. Its
laws are bascd on Roman law and the Napoleonic Code, while
more recent fiscal, company and shipping laws are based on
English statute law.
The island has had an Association Agreement with the
European Community since 1971. It has a large network of
diplomatie ties, double taxation treaties, and commercial and
investment protection agreements.
Trading companies are liable to only 5% lax. Non-trading
companies are totally exempt from income lax. Trusts pay a
small fixed annual lax in lieu of a registration fee. Trading
companies are expected to have a physieal and functional
prcsence on the island. This follows from Malta's determina-
tion to establish itsclf as a rcputable international financial and
business centre.
Non-trading companies may opt for non-disclosure of share-
holders and directors, registration being possible in the name
of local nominees. The law provides for the protection of this
54 Tax Havens fOT International Business
privacy in legal proceedings and includes special provisions to
facilitate the transfer of shares in a non-trading company after
death. Such companies need not have their accounts audited,
nor need they file an annual return or a copy of their accounts
with the government.
Non-trading companies include:
(1) Corporate and personal holding companies,
(2) Other companies which limit their activities to the own-
ership, management and administration of property of any
kind, including assets held for the purposes of a pension, prov-
ident or similar fund (other fund and financial management
operations being regarded as trading activity).
(3) Shipping companies which own and operate ships regis-
tered under any flag. The benefit of lax exemption applies
equally to a holding company and to its subsidiaries, each of
which may own one or more ships.
Malta also offers the possibility to owners ofall types ofvessels,
from pleasure yachts to oil rigs, to register their ships under the
Maltese flag. The registration and operation of Maltese ships is
regulated by a Merchant Shipping Act which is based mainly on
UK legislation. There are no restrictions as regards trading, sale
and mortgaging of Maltese-registered ships, or the nationality of
the crew.
No tax is chargeable on any dividend or interest paid by a
trading company or a non-trading company. In fact, there are
no withholding, capital gains, or any other laxes.
No exchange-control restrlctions apply to offshore companies.
They may have their accounts in any foreign currency or bank.
There is no customs duty on company property or on
expatriate employees' personal belongings imported into Malta.
For a regional office this gives Malta advantages similar to
those offered by Greece, Jordan, and Tunisia, with the key dif-
ference being that those three countries offer the privilege only
to branches of foreign corporations, while Malta offers it to a
locallyincorporated company.
No stamp, death or gift taxes are levied in relation to offshore
companies.
All rights, privileges and exemptions are guaranteed by law
for a minimum of 10 years.
Malta has double taxation treaties with all the major European
countries, the United States, Canada, Australia, and others.
Tax Hauens with no Tax on Foreign Source Income 55
There is a readily available supply of qualified professionals
in law, accounting, banking and insurance, among other fields.
Many have considerable international experience and expert-
ise. It is therefore no surprise that all major international ac-
countancy firms are representcd in the country.
The work force is highly educated, diligent and adaptable,
with standards of performance comparable to those in other
European centres, but at measurably lower costs.
The university is over 400 years old , and on a pro rata basis
there are more graduates than in many European nations.
Malta is multilingual. Business is universally conducted in
English. Italian and French are widely spoken. Maltese is of
Semitic origin and akin to Arabic though written in Roman
alphabet, Language is not a problem in Malta.
There is substantial investment in one of Europe's most
advanced telecommunications systems, A full satellite direct-
dialing systern will soon connect Malta with most parts of the
world through a 2,000 port international exchange.
Housing standards are high . Quality office spacc with all
modern facilities is available at rcasonable cost, and first dass
hotel accommodation is plentiful. For people who work 01' do
business in Malta, facilities are on a par with any European city.
Malta's cultural heritage dates back to some time before
4000 BC, and its history has provided it with a varied but solid
foundation. The Phoenicians, Carthaginians and the Romans;
the Byzantines, Arabs and the Normans; the Knights of StJohn;
the French and the British; all have played a notable part in
Malta's history, This gradual assimilation and cross-fertilisation
of cultures has created the exuberant and independent Malta
of the late twentieth century with a unique cultural identity.
The Maltese have preserved their language and special char-
acteristics for which they are weil known: their overwhelming
hospitality; a trading mentality developcd since Phoenician
times; diverse linguistic, professional and business skills; and a
willingness and deterrnination to provide quality service.
These attributes illustrate Malta's highly positive attitude
towards business and life. Furtherrnore, living and working on
the island holds many advantages: a European lifestyle at
reasonable cost; international cuisine; a superb climate; good
leisure and education facilities; a low crime rate; a histor-
ical and cultural environment. All in all, a friendly and relaxed
56 TaxHavens JOT International Business
lifestyle, yet fuHy equipped to meet the most demanding
requirements of international business.
And an individual who receives a residence permit to work
for an offshore company is not deemed to be a resident of
Malta for income tax purposes, thus paying no individual
income tax on income received from offshore companies. The
same exemption applies to their dependants.
The situation is so attractive that Malta has set up a screen-
ing process even more rigorous than ßermuda's, although this
may be a benefit rather than an obstac1e to major multi-
national corporations deciding to use Malta as a tax haven.

1'he [sie oJMan


The Isle of Man, which is about 220 square miles in area, is
located in the Irish Sea roughly 30 miles from the mainland of
the United Kingdom. During the last several years the island's
independent government has sought to promote favourable
conditions to those who seek an operational base in a low-eost,
low-tax environment, and have turned the island into an
important international tax haven.
The Isle of Man is a dependency of the ßritish Crown, yet it
has never been part of the Uni ted Kingdom or its colonies. Its
governmental origins date to Viking culture, and its own in-
dependent parliament, Tynwald, has existed for more than
1,000 years. While the island is tied closely to the United
Kingdom, which insures the island's defence and presides over
international affairs, Tynwald is responsible for all aspects of
domestic legislation, including taxation, The legal system of
the island is similar to that of the United Kingdom, its currency
is the pound sterling, and social and economic links with the
United Kingdom are strong. The island maintains a special
status within the European Community. It is excluded from the
effccts of the Treaty of Rome, other than those relating to the
free trade of agriculture and industrial products within the EC.
The island receives no revenue from the EC, and it does not
contribute to EC funds. Most importantly, the island enjoys
free trade with the EC, thereby enjoying some of the advan-
tages of membcrship while retaining the freedom to develop
as a low-tax area.
The island offers an excellent communications network,
modern facilities, and a work force that is encrgetic and skilled.
Tax Havens unth. no Tax onForeign Source Income 57
It boasts the only freeport in Europe, and is the horne to over
30,000 companies, the largest contributor to the island's gross
national product being the financial sector. AdditionaIly, the
island has the physical space and the infrastructure necess-
ary for the development of both service and manufacturing
industries.
The government maintains a policy of encouraging 10,000
new residents before the end of the century, making the
island the only low-tax financial centre in Europe that actively
encourages new residents. Moreover, the government is access-
ible in regards to new projects. Decision-making is efficient,
and work permits are easily and quickly available.
The °gove rn men t supports the development of the island's
financial sector with much enthusiasm, yet maintains strict
control over the sector through a Financial Supervision Com-
mission and Insurance Commission that licenses banks, in-
vestment adviscrs and insurance companies. Such control
assures the island's integrity as an offshore financial centre.
More than 50 licensed banks, including many international
banks, are present on the island . Their services are com-
prehensive, discreet and confidcntial, comparing favourably
with the banking sectors of Switzerland and Liechtenstein. In
addition to banking, high-ealibre legal, accounting, insurance
and other financial services are available.
Along with these many advantages, the Isle ofMan offers an
attractivc lax structurc. Thc major features are weIl worth
noting:
(l) A flat income tax rate of 20%.
(2) No capital gains lax.
(3) No estate 01' inheritance laxes.
(4) Tax-free holidays for industry.
(5) Offshore lax is generally exempt.
(6) Value added lax at 15%.
Income lax is charged on all income arising on the island,
and on world-wide income of island residents, companies, and
trusts, subject to certain exemptions (as noted above and which
will be discussed in more detail) . Residency for individuals is
determined by the time spent on the island in a particular fiscal
year, typically April to April . (Non-resident individuals are sub-
ject to a lax at a flat rate of 20% of all income arising on the
island which may bc collected by withholding at source. This
58 Tax Havensfor International Business
does not apply, however, to income from approved financial
institutions on the island, or dividends from exempt companies,
exempt insurance companies and registration companies.) For
companies, whether incorporated on the island or not, re-
sidency is determined by the place of central management and
control.
Although resident companies pay income tax, they receive
significant relief for capital expenditures on facilities and
machinery. In addition, the following companies do not pay
income tax:
(l) Registration companies, which are companies that are
incorporated but are not resident on the island. An annual
registration duty of f450 is payable.
(2) Exempt insurance companies, which are resident on the
island but whose income is earned offshore.
(3) Exempt companies, which are companies that are resident
on the island in shipping, investment holding and commodity
dealing (and potentially other activities such as trademark,
licensing, and royalty). Such companies may qualify to be
exempt from income tax on their offshore income. An annual
fee of f250 is required to obtain exempt status.
(4) Trading companies, certain companies in the service or
manufacturing sectors who may be eligible for a tax-free
holiday as an alternative to grants and incentives which typ-
ically are available for aperiod of five years.
Isle of Man resident and non-resident companies can
engage in any activity world-wide, but exempt companies can
only be used for insurancc, shipping, property investment,
investment holding, commodity dealing or the holding of
patents, royalties, copyrights, licences and trademarks, Certain
activities including banking, insurance and Investment advice
require a government licence. There is no requirement for dis-
closure of beneficial ownership of companies to the govern-
ment and "shelf" companies are available.* A company's share
capital can be expressed in any currency and one can have var-
ious classes of share capital with differing rights.
Excmpt and non-resident companies are not required to file
their accounts with the government nor are they subjected to any
• "Shelf companies" are companies that are incorporated in advance by law-
yers or company formation agents, and kept available for sale to clients requir-
ing immediate possession of a company.
Tax Havens witk no TaxonForeign Soutee Income 59
withholding taxes. They pay a nominal fixed exemption fee or
duty each year. No exchange control exists in the island, and
bank accounts can be maintained in any currency, funds being
free1y transferable intcrnationally. Non-residcnts are not subject
10 tax on interest earned on deposits in licensed banks. No inform-
ation regarding the returns of such persons is forwarded to the
government so total privacy in banking matters is assured.
The island has no double tax treaties other than a 1955 treaty
with the United Kingdom which only applies to resident com-
panies or individuals. Under an agreement with the United
Kingdom the island undertakes to impose value added taxes
and customs duties (with a number of minor exceptions) as in
the Uni ted Kingdom.
Investors should be aware that the Isle of Man offers several
investment vehicles, each providing its own advantages and
opportunities.

Exempt Insurance Companies The purpose of the Exempt Insur-


ance Companies Act of 1981 was to encourage the development
of the offshore insurance sector. Under the act, an insurance
company may apply to be exempt from income tax on its profits
earned offshore (or with other exempt insurance companies
on the island) and on any dividends paid to non-resident share-
holders, making the island attractive for captive insurance com-
panies, reinsurance companies, and life assurance and pension
companies. To obtain cxempt status, several conditions must be
satisfied:
(1) The company should have a sufficient cash paid-up
capital.
(2) A solvency margin of at least 15% of the prcmiums
should be maintained. This margin should be written in the
prcvious financial year.
(3) The company's reinsurance support must be sufficient.
(4) The audited annual accounts and the quarterly manage-
ment accounts should be submitted to the Financial Supervision
Commission.
(5) A quorum of directors should be resident.

Exempt companies Companies involved in holding Investment,


shipping, commodity dealing, patents, trademarks, liccnces
and royalties, may apply for exemption of island incomc tax,
60 TaxHauens JOt" International Business
To qualify for exempt status, the company secretary and at
least one director should be island residents. Further, no in-
dividual resident on the island should have any interest in the
company. An annual fee of 1:250is required. If granted exempt
status, a company's offshore income and dividends will be
exempt from island income tax.

Shipping companies Ships may be registered with the Isle of


Man Harbour Board. They will be subject to strict international
safety codes and will fly the British merchant flag. Ships must be
owned or managed by persons or companies resident on the
island or some other UK dominion, but companies that qualify
for exempt status (see above) do not pay income tax on their
offshore income. To qualify for exempt status, ships concerned
must satisfy an additional condition, which is that they do not
operate from, or use, ports on the island regularly,

Non-resident rompanies A company may be incorporated on the


island, but remain non-resident As such it will be exempt from
income tax, though it will have to pay an annual non-resident
duty. There is no requirement that non-resident companies file
annual accounts or disclose the company's owners. Thus, a non-
resident company could be used for protecting assets owned by
an individual resident in another country, This may be desirable
in several possible circumstances, for example, when assets are
held in a politically unstable country, or when one wishes to pro-
tect assets from capital taxes imposed in the country in which
theyare situated. Non-resident companies may serve as trading
cntities with day-to-day administration taking place on the
island, as long as central management and control of the corn-
pany is stationed elsewhere.

Trading companies Various companies in the manufacturing


and service sectors enjoy advantages because of the island's re-
lationship with the EC, existence of a freeport, low costs and tax
structure, and generous range of grants and incentives offered
by the island's government.

Danks Banks have benefited from the general growth of the


financial sector. As the island's government continues to
encourage foreign investment, it is likely that the growth of the
Tax Hauens with no Tax on Foreign Source Income 61
financial sector will continue, adding to the opportunities for
banks. Operation of a bank on the Isle ofMan requires a licence
issued by the Financial Supervision Commission. Licences are
granted only after specific conditions are met, including:
(1) The bank should have a sufficient cash paid-up share
capital.
(2) To facilitate the accumulation of reservcs, a sound dis-
tribution policy should be developed and maintained.
(3) Annual accounts and quarterly reports should be sub-
mitted to the Financial Supervision Comrnission for review.

Bearer shares Under provisions of the Companies Act of 1986,


companies of the island may issuc bcarer shares,
Without question, the Isle of Man offers a variety of advant-
ages for investors. The island possesses political stability, a mod-
ern infrastructure, good communieations, a special relationship
with the EC, established laws favourablc to investors, and low
direct laxes.

Jersey
The island ofJersey is located in the English Channel off the
northeast coast of France. Having an area of roughly 45 square
miles, it is the largest of the Channel Islands, and has a popu-
lation of 75,000. St Helier is the centre of the island's business
activity.
Jersey, along with the other Channel Islands, is apossession
of the English Crown, distinct however from colonial or over-
seas dependencies. The constitutional relationship between
Jersey and the United Kingdom, therefore, is unique - the
United Kingdom manages the island's external affairs, while
the island government legislates domestie matters, including
taxes and revenue.
The island has long been politically and economieally stable.
The politieal system is a conservative one; political parties do
not exist and all elected officials are independents, Issues of con-
trovcrsy or social conflict are absent, and the island enjoys much
respcctability among the international community.
Although jcrsey's economic policy over the years has
focused on improving thc lives of the island's populace, that
poliey has also made the island attractive to investors. The
standard rate of incomc tax has remaincd unchanged at 20%
62 Tax Havens for International Business

since 1940. The currency of the island is the pound sterling,


and while the States ofJersey issue their own currency notes,
these are legal tender only within the island and are easily con-
ver ted to sterling as necessary.
The island also maintains a special status with the EC, being
exempt from many of the aspects of the Treaty of Rome. While
the island is bound by the customs provisions of the Treaty, it
retains its fiscal autonomy and constitutional rights.
Although French was the officiallanguage ofJersey unti11963,
English is now used throughout the island. Most legislation thar
was passed before 1940 is in French, and French is still used
exclusively for real estate transfers. However, English transla-
tions are available for the more important of the French laws
and most legal firms employ staffwho are fluent in French.
While there is no legislation on bank secrecy 01' secrecy of
Information, it is possible, through the use of a numbered
account, to restriet the identification of an account holder to
senior bank officers. It is felt that a legal duty exists to maintain
secrecy, which arises out of the implied contract between
professional advisers, for example, between banks and their
clients. Only through law 01' by order of the Royal Court is
information subject to disclosure. Exchange of information is
provided for by two double tax agreements, one with the
United Kingdom and one with Guernsey.
Investors who wish to form a company in jersey enjoy several
advantages. A company incorporated and controlIed in Jersey
pays income tax at a 20% rate. Although the formation of a
company, for Jersey income tax purposes, requires a declara-
tion of the beneficial ownership of shares, nominee sharehold-
ers are not disclosed to the Company Registry, and the name
of the beneficial owner will not appeal' in any search.
To form a company in jersey, the following is required:
(1) Approval of a company name. (Although this is nor-
mally available in 24 hours, it is advisable to submit at least
three alternatives to ensure a speedy process.)
(2) A minimum of three shareholders are required whose
names will appeal' in the Annual Return, which is filed each
january. Each shareholder must hold three shares. To shield
thc identity of the beneficial owner, nominees may be utilised.
(3) While no provision regulates the offices of director and
secretary, it is usual to provide at least two directors.
Tax Hauens with no Tax on Foreign Source lncome 63
(4) The company's registered office must be maintained on
the island. Further, the statutory books of the company must be
kept at the registered office and be open to public inspection.
Although the annual general meeting must be held in Jersey, it
can be handled by proxy, provided the company maintains
secretarial services on the island.
(5) EachJanuary the company must file an Annual Return.
(6) While there is no need to appoint auditors, a cornpany's
articles typically provide for such appointments. Auditors do
not have to bc residents of the island.
(7) If a company must pay Jersey income Lax, the accounts
must bc ccrtified by an accountant approved by thc Comptroller
of Income Tax.
Amendments to the Incomc Tax Law, effective from 1989,
add to Jersey's appeal as a possible Lax haven.
One of the most significant provisions of these amendments
is the creation of the "exernpt company", An exempt company
is treated as non-resident and thus gains considerable Lax
advantages.
An amendment to Article 123 of the Income Tax Law pro-
vides that from 1 January 1989, all companies incorporated on
the island are to be regarded as resident. The pIace where a
company holds its board meetings no longer has any relevance
in the determination of the company's residence for Lax pur-
poses. As long as a company managcs and controls its business
on the island (i.e. ifboard meetings are held on the island), it is
considered resident even if it was incorporated outside the
island. One may assurne that it follows that such companies
must pay full income Lax on their incomes; however, Article
123A allows for companies that meet certain conditions to be
treated as non-resident. Such designatcd companies are exempt
companies. The conditions for the granting of exempt status
are as folIows:
(1) Application for exempt status, along with the payment
of the exempt company tax, which is f500, must be made
within the necessary time period, not later than 31 March in
the year ofassessment. (A company incorporated in the year of
assessment must make its application within thrce months of
incorporation and annually thereaftcr. A foreign company that
becomes resident in Jersey must make its application within
three months ofbecoming resident and annually thereafter.)
64 Tax Havens JOT International Business
(2) No Jersey resident has any interest in the company. (An
exception here is a collective investment company which, pro-
vided it is in corporate form, is entitled to become an exempt
company upon payment of the lax of f500. Jersey residents
may have a beneficial interest in such companies.)
(3) Satisfactory diselosure of beneficial ownership must be
made to the Commercial Relations Departrnent,
(4) No unpaid corporation lax or income lax is outstanding
from assessmen ts of previous years.
(5) If the company is an income lax company at the time of
application, it must not have been an exempt company for any
prior year of assessment. (Thus, a company is prohibited from
switching to exempt status more than once in its Iifetime,
although the Comptroller has discretion in such matters.)
While no Jersey resident may hold any beneficial interest in a
company applying for exempt status, unless the company is a
collective investment fund, he or she may be a shareholder in,
or a debenture holder of, a company that has a beneficial inter-
est in an exempt company. To satisfy the Comptroller that he
does not hold a beneficial interest in an exempt company, a res-
ident will be required to filc an annual staternent, In turn, the
company will have to make known to the Commercial Relations
Department its beneficial owners. Should a Jersey resident
acquire a beneficial interest in an exempt company, the com-
pany is obligated to inform the Comptrollcr.
The exempt company enjoys various lax advantages. Because
it is treated as non-resident, it is exempt from income lax on
the profits of trade on the island, provided that trade is not
conducted through an established place of business such as a
building site, branch or factory. For example, the agents of an
exempt company can meet on the island and conelude con-
tracts without having to pay income lax on the profits. However,
if the company produces or processes the goods detailed in that
contract on the island, the profits attributable to that activity
would be chargcable to Jersey income lax. Clerical functions,
such as invoicing, in the Comptroller's view, are not apart of the
carrying on of trade and are not chargeable to income lax.
In addition, bcing non-resident means that a company pays
no Jersey income lax on income derived outside the island. It
pays no incomc tax on interest obtained from Jersey bank de-
posits, nor is it required to deduct income lax from payments of
Tax Hauens with no Tax on Foreign Source Income 65
interest or dividends (except in regards of collective invest-
ment funds). Furtbermore, the company need not make a
return of income (except of Jersey income other than bank
deposit interest), and it is not requircd to file accounts (except
in respect of trade carried on through an establisbed place of
business).
The tax law is favourable to non-resident directors of exempt
companies as weil. Directors are not liable toJersey income tax
for fees tbey receive from tbe company. Tbe island of Jersey
offers major tax advantages for investors, particularly tbose
who establish companies and obtain exempt status.

Guernsey
The second largest of the Cbannel Islands, Guernsey lies in tbe
English Channel off thc nortbwest coast of France. St Peter
Port is tbe centre of business activity on the island, which is
approximately 25 square miles in area and has a population of
57,000 .
Like the island of Jersey, Gucrnscy is apossession of the
English Crown, but it retains its own government and legal
system. Guernsey has the right to legislatc on matters of domestic
concern and taxation. Also, much like Jersey, the island enjoys
a special relationship with the Ee. It is bound by the customs
aspects of the Treaty of Rome, which essentially provides a shield
against imports, yet it retains its constitutional rights and fiscal
autonomy; for example, Guernsey retains the right to levy value
added tax.
Until the early twentieth century, French was the language
used in commercial and legal matters; howcver, English has
replaced it and now is the officiallanguage of the island. Until
recently, real cstate transactions were required to be in French,
and all legal firms maintain staff who are fluent in French.
Translations of important laws and statutes written in French
are available.
Guernsey has been stable economically and politically for
hundreds of years. It has no political parties and the members
of Guernsey's States of Deliberation, which is the island's legis-
lative branch of government, are independents. Over the years
the States has promoted policies that interfere with local enter-
prise as little as possible, resulting in a climate that is relatively
free of control. Although British currency is used in Guernsey,
66 Tax Haoens JOT International Business

English and local money circulates. In addition,Jersey curreney


circulates in Guernsey (and Guernsey money circulates in
Jersey), and even French money is sometimes accepted and
exchanged informally,
Along with a favourable lax structure, Guernsey offers other
advantages to investors. Although no locallegislation governs
secrecy of inforrnation, English common law encourages banks
and their personne1 to maintain secrecy. There is also privilege
against disclosure.
A company can be incorporated in Guernsey within seven
working days, Detailed information is necessary, and "shelf"
companies are not available. However, nominees can be used to
preserve the identity of the beneficial owner. The company's
registered office must be maintained within Guernsey, and
notice of the registered office must be lodged at the company's
registry within one month of incorporation. One can select any
name for a proposed company, provided it does not include ref-
erence 01' allusions to the Crown, and is not in conflict with an
existing company. A minimum of seven shareholders are
required, each holding one share, and the shareholders may be
nominees.
Guernsey law provides no statute regarding the officers of a
company. Thus, a sole director might also be the beneficial
owner of the shares as weil as the secretary. Details regarding
the directors appeal' in the Annual Return that is filed every
January, but here again nominees may be used. All persons who
have agreed to be directors of a company must be lodged with
the Company's Registry within three months of incorporation.
The Annual Return must be filed eachJanuary and requires
a filing fee of El 00. Failure to file the Annual Return will result
in the company being taken off the register. Along with the
Annual Return, it is also required that each year a company
swear a Declaration as to its residence.
Ouernsey tax laws are favourable to companies. A company
that has its place of business and that carries out a major
amount of its trade on the island pays local income lax at a rate
of20% on its profits. Companies may obtain non-resident status.
A non-resident company is managed, controJled, and con-
ducts its trade outside Guernsey. Such companies are subject
to corporation lax at the rate of i500 per year, which is due
each January. The corporation lax is payable in advance, the
Tax Hauens with no Tax on Foreign Source Income 67
first payment being made at incorporation. The payment is
then levied pro rata during the year of incorporation from the
date ofincorporation to 31 December.
Although perhaps not as weil known as many of the other
offshore havens, Guernsey offers significant advantages for
investors, including stability, a comparatively free economic
climate, and favourable tax laws for companies.

Gibraltar
Gibraltar, at the tip of southern Spain, is slighdy less than 21/ 2
square miles in area. Its population numbers about 30,000 and
is composed of people of Italian, Genoese, Maltese, English,
and Spanish descent. In addition, there is a small but Import-
ant Jewish population, some Indian traders, and a significant
group of Moroccan workers.
Gibraltar has been a colony of the British Crown since 1704,
being formally ceded by Spain in 1713 in the Treaty of Utrecht.
While its official language is English, most Gibraltarians are
bilingual, speaking both English and Spanish. Gibraltar's con-
stitution gives legislative powers to the governor, who is the re-
presentative of the Queen, and the House of Assembly. Although
it enjoys a substantial amount of self-governrncnt, it is a depend-
ent territory and the formal assent ofthe governor ofthe Crown
is required for alllegislation. The governor is responsible for the
conduct of foreign affairs, security and defence. Ministers, who
must answer to the House of Assembly, manage domestic con-
cerns. The bedrock for legislation is English law, and, on to this
base, laws relating to local circumstances are built,
Although Spain lays claim to Gibraltar, the British govern-
ment ensures the political stability ofthejurisdiction. In the pre-
amble to the Gibraltar Constitution Order, Britain has pledged
that Gibraltar will remain part of the Crown unless and until an
Act of Parliament provides otherwise. Moreover, it is stated that
the Crown will never permit Gibraltar to pass under the sover-
eignty of another state without the democratically expressed
wishes of the people of Gibraltar. In February 1985 the border
between Spain and Gibraltar was reopened, and the British and
Spanish governments have agreed that there will be talks on
sovereignty. However, the British have emphasised that the
wishes of the people of Gibraltar are of greatest concern.
68 Tax HavensJOT InternationalBusiness
Gibraltar is part of the EC, having joined with the United
Kingdom under the provisions relating to dependent ter-
ritories. By concession it is excluded from the common exter-
nal tariff, the common agricultural policy and the requirement
to lcvyvalue added tax.
Gibraltar possesses the support systems needed by modern
companies. With a new telephone system having come into
operation in March 1990, the jurisdiction has excellent
telecommunications, its postal facilities are good, and it has
daily air service to Europe and the rest of the world. Its banking
facilities are likewise good, and are expected to improve as
Gibraltar continues to attract international banks. While
Gibraltar issues its own currency, money of the United Kingdom
is also considered to be legal tender.
Gibraltar is rapidly growing as an offshore eentre. Although it
is a low-eostjurisdiction, it is a re1atively high tax one. Its stand-
ard income tax rate for individuals is 30% with the tax rising to a
maximum of 50%, while its income tax rate for resident com-
panies is 35%. Still, Gibraltar offers three types of eompanies
that provide important tax advantages.
(1) The non-resident company is a eompany that is incor-
porated in Gibraltar but is centrally managed and controlled by
directors who reside outside the jurisdiction. If such a eompany
does not derive its income from within Gibraltar, it will be
outside the scope of Gibraltarian income tax. Unlike otherjuris-
dictions which charge an annual company registration tax or
non-resident company duty, Gibraltar does not apply flat rate
fees against non-resident companies.
(2) A Gibraltar company may apply for exempt status in regard
to Gibraltarian income tax. This is done after ineorporation,
and takes between 10 and 14 days, depending on the company
and the details of the applieation. Onee obtained, the eompany
reccives an Exemption Certificate that is valid for 25 years and
which grants a full exemption from income tax and estate duty
in Gibraltar. In return, the exempt company pays a flat annual
duty. Along with requiring information about the beneficial
owners, including a written reference from a professional and
a statement on the proposed activities of the company, the
authorities requirc that specific conditions be met before
excmpt status is granted:
Tax Havens with no Tax on Foreign Source Income 69
(a) The company conducts trade and business in Gibraltar
only with other exempt companies. (Exceptions are sometimes
possible with the prior consent of the loeal authorities.)
(b) There are no changes in beneficial ownership, sharehold-
ers, or objectives for which the company was formed, unless the
approval of Gibraltar authorities is obtained.
(e) The register ofmembers is maintained in Gibraltar.
(d) No Gibraltarian or resident of Gibraltar holds any
interest in any of the company's shares.
(e) The annual tax is paid in two equal instalments by 31
March and 30 September each year.
Exempt status is available both to resident eompanies, for
which the annual fee is t225, and to non-resident eompanies,
for which the fee is f200. The advantage for a resident eompany
to obtain exempt status is that it is presumed not to be resident
elsewhere.
(3) Q}talifjing companies were created in the Ineome Tax
(Amendment) Ordinanee 1983 for situations where the au-
thorities of a foreign country require proof that apercentage
of tax on profits has already been paid in Gibraltar. The tax
rates for Gibraltar are 2% for income not remitted to Gibraltar
and 17% for ineome remitted to Gibraltar. The eonditions for
obtaining a Certificate are essentially the same as for exernpt
eompanies with the following: (1) a one-time-only fee of t250
is required; (2) a minimum paid up share capital of fl ,000j
and (3) a deposit of fl ,000 must be lodged with the govern-
ment of Gibraltar as a guarantee toward future taxes.
Gibraltar is also attractive for eompany formation. A eompany
must have a minimum of two shareholders and two directors,
but the directors do not need to be shareholders. Although the
details regarding shareholders and directors are listed on the
public record, nominee services may be used to preserve the
identity ofbeneficial owners. An Annual General Meeting ofthe
shareholders must be held in Gibraltar eaeh ycar; however,
other general meetings ean be held outside Gibraltar. The
accounts of the company must be submitted to the Annual
General Meeting; however, these accounts are not filed at
the Registry and are not available to the public. While no
legal requirements exist for a company's aecounts to be
audited, an applieation for exempt status must be aecompanied
70 Tax Hauens for International Business
by a reference as to "residency" from an auditor registered
under the Gibraltar Auditors' Registration Ordinance.
A Gibraltar company must maintain its registered office in
Gibraltar, from which the company can transact business with
non-resident or similar companies. The statutory records of
the cornpany must also be maintained in Gibraltar, typically at
the Registcred Office. An Annual Return must be filed every
January.
A1though its tax rates are high compared to many offshore
havens, Gibraltar still offers several important advantages to
investors, particularly in its favourable treatment of non-
resident and tax exernpt companies.

HongKong
The British Crown Colony of Hong Kong is quite similar to
Panama in many respects. It taxes only locally generated
income, and its tax rates are extremely low by most standards.
Its haven status is subsidiary to its role as an international busi-
ness centre, stratcgically located as "the gateway to the Orient"
and as astation between the West and the vast markets of the
speedily devcloping East,
Hong Kong is in a unique situation since the British have to
hand it back to China in 1997. In thcory, Hong Kong is to con-
tinue to have a free enterprisc system for 50 years after that
date, The residents of Hong Kong obviously don't have much
belief in that, as thcy have been seeking second citizenships
and moving their holding companies to places like Bermuda.
Of course, there could be changes in China before that
which would affect the outcome.
Despite all these problems, Hong Kong is still an attractive
base for trading companies. This is particularly so if one keeps
in rnind, and folIows, the Chinese trading mentality of taking
horne the day's trading profits rather than investing in long-
terrn assets . The Chinese do think long term, but that is very
different from their trading mentality in Hong Kong.
Hong Kong also enjoys incredibly cheap labour, for it lies on
the southeast coast of Communist China, bordering on the
province of Kwangtung. The population of Hong Kong is
extrernely dense, probably the most crowded in the world; 95%
are Chinese. This population makes for an extremely competi-
tive and varied labour market, and no such checks as unions
Tax Havens with no Tax on Foreign Source Income 71
and their like are conceivable. In other words, quite apart from
tax considerations, there are very good business reasons for
setting up shop in Hong Kong.
The Crown Colony's prominence as a trade and manu-
facturing centre means that there are superb transportation
and communication facillties. Major airlines connect Hong
Kong by frequent flights to every major city in the world. Ships
are also available to anywhere, and the British civil service
tradition, coupled with the pressures of demand, makes its air-
mail, telex, and international telephone and cable services
highly efficient, regular, and reliable.
The same applies to professional services of an kinds, and
the fees for these services are kept very reasonable by vigorous
competition.
English and Chinese are the official languages, and an
official documentation is printed in both. Language presents
no difficulty at all for a westerner.
The Hong Kong economy is very free enterprise orientcd.
There are no exchange controls, and the Hong Kong dollar
circulates freely with all world currencies in a completely un-
regulated money market. The economically wide-open nature
of Hong Kong is a product of the political order. As a British
Crown Colony, it has very Iimited independence. The governor,
appointed by the Queen, nominates the two councils of govern-
ment: the Exccutive Council (cabinet) and the Legislative
Council. Unlike the Crown Colonies discussed earlier, there are
no elections here. The cabinet members and the legislators are
"opinion leaders" of the Chinese community, and are econom-
ically conservative; no socialist scheme would find signific-
ant support in the government. Even if the government were
inclined to socialism, there are solid practical reasons why it
would not go far along the collectivist road. For example, the
huge refugee population means that any form of government
welfare would immediately destroy the colony, and thus such
welfarism is inconceivable. The two councils, moreover, have
vcry lirnited power ois-d-ois the governor. He nominates an
their mernbers, and so indirectly controls them. He also has
the power to act against the majority opinions of the
Executive Council, in which case his only responsibility is to
the British Secretary of State for Foreign and Common-
wealth Affairs. He even has direct legislative powers, and
72 Tax Hauens fOT International Business
there is a long tradition of staunchly conservative governors
in Hong Kong.
The legal system is based on British common law, modified
by locallaw. The court system is British in structure.
Hang Kong has preserved the nineteenth century spirit of
free enterprise to an extent that is surprising in this day and
age. Taxes are progressive, but these taxes apply only to locally
generated income. There are no taxes on capital, gifts, or
capital gains, and death duties, which apply to assets physically
located in Hong Kong, are imposed in progressive brackets up
to a maximum of 15%. There is no tax on dividends of local
corporations. The official reason for this is that if the source of
profit is local business, then the company has already been
taxed on its profits and there is no justification for taxing the
stockholders. As for foreign source incorne, the idea of taxing
this is unthinkable. A coroJlary of the happy lack of dividend
taxes is no withholding tax on dividends. One can receive the
profits of a Hong Kong corporation, dealing outside Hong
Kong in, say, Costa Rica without any Hong Kong tax liability of
any kind .
Apart from the above taxes, government revenue in Hong
Kong derives from duties on "luxury" commodities such as
tobacco and alcohol, minor fees on imports and exports, and
stamp duties. The latter apply to transfers of shares, promissory
notes and bills of exchange, and mortgages and debentures.
Campany formation in Hong Kong follows the usual British
pattern. A memorandum and articles of association are re-
quired, and they must include the standard information. All
these requirements are purely formalities, because nominees
can be used for everything. In view of the labour situation in
Hong Kong, (US) $100 a year will cover a nominee director
who is at the same time a registered shareholder as well as a
company officer. There is no scarcity of law and trust firms to
handle all the details .
Annual maintenance of a corporation involves annual
audited accounts, signed by achartered accountant, submitted
to all shareholders, with a copy to the government. This is
required bccause of the taxation of local income; aJl corpora-
tions must be auditcd to makc certain that no such profits are
concealed. A local representative can take care of the audit,
Tax Havens witk no Tax on Foreign SOUTce Inco'TTUJ 73
keep the company seal, display the company name on a sign in
his office, and do whatever else is necessary.
The government charges are vcry low. Thc initial expenses
of incorporation, articles of association, and stock certificates,
and the various uses of nominees can total as little as (US)
$500. Annual maintenance can be as low as $500. Bargains, to
say the least.
Incorporation takes up to foul' weeks to accomplish. It can be
done with complete privacy through nominee shareholders, for
there is no legal requirement that ultimate beneficiary owners
be disclosed.
Just as Panama came out with flying colours as compared
with even the Caymans, so Hong Kong, in certain ways, scores
compared with Panama. There is business justification un-
limited, at lower local tax and corporation costs and with
similar privacy. On the other hand, the exclusion of bearer
shares, the need for annual auditing, and the short time left
until Chinese control in 1997 are negative factors.
7 Tax Havens für Special
Purposes

The Netherlands, Austria, and Luxembourg are all tax havens


for holding companies. In addition, Luxembourg is a base for
international mutual funds and investment companies, as weil
as for banking. The Netherlands and Austria have extensive
networks of double taxation treaties, which make them of par-
ticular interest as a headquarters for an international company
structure. Many multinational corporations could save substan-
tially on taxes by reincorporating their headquarters in one or
the other of them, or by creating an intermediate holding
company in one of them.
In addition, The Netherlands is a very valuable tax haven for
finance companies and for royalty collecting companies licens-
ing patents, trademarks, and copyrights.
Most industrialised countries have a high withholding tax on
dividends and/or interest paid out of the country. The with-
holding tax is not unqualified. A foreign company would hardly
be interested in investing if it had to pay such a tax on top of
taxes imposed by its horne country. Hence, most industrialised
high-tax countries, interested in encouraging foreigners to
invest in them, have double taxation agreements with many
other nations. Such agreements usually include the following
provisions: (l) Reduction of the withholding tax from an aver-
age of 30% to 15%, and sometimes 5% or even 0%. (2) Ac-
ceptance of the withholding tax as a credit against local tax
liabilities, In other words, instead of taxing the 85% of the orig-
inal dividend that remains after deducting withholding tax as if
it were gross income, the foreign investor's horne country treats
the fulI amount of the original income as gross income, applies
the local income tax, and reduces the tax due by the amount
already paid to the source country. (3) An agreement to
exchange information to facilitate the capture of tax evaders.
Most double taxation agreements are not of interest to a
company seeking a tax haven. They are with highly industrial-

74
Tax Havens for Special Purposes 75
ised, highly taxed countries. However, some agreements are of
very considerahle interest. With these thoughts in mind, we
will consider first The Netherlands and Austria. Although
Luxembourg has an extensive network of double taxation
agreements, they do not apply to its tax haven companies.

The Netherlands
Holland, originally referring only to the two western provinces
of North and South Holland which lay between the Rhine and
the Zuider Zee, is now in general use as the popular name for
the Kingdom of The Netherlands, and the two are used inter-
changeably. The people are known as Dutch. This small spit of
land, no more than a pinpoint on the globe, lies to the east of
England across the North Sea, and is bounded by Germany to
the east and southeast and by Belgium to the south . The land is
very low, and at one time in history was in fact known as The
Low Countries. Half of the land itself is below sea level. It lies
across the mouth of the Rhine and is criss-crossed by two large
European rivers, the Meuse and Scheldt, and by its famous
canals, giving it the nickname of ''Venice of the North ", The
picture painted indelibly on almost everyone's mind ofHolland
as the land of windmills will soon be just that - an imagined
scenery - for although there are still colourful windmills whose
arms flash against the sky, most water-pumping work is now
done by modern stations using electric power. The hazards of
the sea, factualised and fictionalised, have made Holland the
land of storied seafarers, barge men, and builders of dikes.
Indeed, it is water that made Holland the gateway to Europe,
providing the main source of the country's present wealth, and
the cause, through directing the warm Gulf Stream along her
coasts, of the country's mild climate.
The Kingdom of the Netherlands is a constitutional mon-
archy with democratic parliamentary government. By this
means, the monarch, government, and parliament together
rule the country. The kingdom includes the Netherlands
AntilIes which has its own tax laws and is not included in this
discussion.
The Netherlands is a highly industrialised nation with little
reliance on agricultural products to holster its GNP. There is
some oil production, but of greater importance recently has
been the discovery of natural gas.
76 lax HavensJOT' International Business
The Dutch economic system might best be described as a
social weJfarc system similar to that of Great ßritain, without
being beset, at present at least, by the industrial problems
afflicting Brltain. The Netherlands, regardless of its own inter-
nal tax structure which compares to that of other heavily taxed
nations, has nevertheJess established itself as a tax haven
through legislative action allowing substantial tax benefits to
companies formed in The Netherlands for specific business
purposes. The Dutch political system is a cumbersome affair
and changes within the system are difficult or impossible to
achieve. Executives of a tax haven company should be weil
advised in advance to so design the operation that it falls
within the structure outlines of Holland's tax haven legislation
and avoids most internal tax liability,
Tax cxemptions are provided within The Netherlands on
specific qualifying activities, and there are treaties maintained
by the government to avoid double taxation.
Generally, the tax treaties will accomplish three reductions:
(1) Reduce the normal Netherlands withholding tax rate of
25% on dividends paid to recipients in the other country to a
lesser rate, i.e., 15% (except in the cases of Czecho-Slovakia,
Hungary, IreJand, Israel, Italy, Surinam, and Thailand, where
the rates may be either more or less than 15%), with an addi-
tional provision that if the company receiving the dividend has
a minimum capital participation - or in some cases, voting
stock - of 25% in the dividend-paying company (with the exclu-
sion of Canada and Italy and with an increase to 50% in the
case of Spain), the withholding tax rate will be reduced even
more. In respcct to the United States and the United Kingdom,
if the recipient company holds 25% of the stock in The Nether-
lands company, the withholding rate is reduced to 5%.
(2) Reduce the withholding tax on interest which a
Netherlands-based finance subsidiary of a foreign corporation
reccives. The withholding rate in the case ofthe United Kingdom
which would normally be 35% of the gross, is reduced to 0% of
the gross, with the net intcrest income being subject to normal
Netherlands corporate tax rate. The US company, which would
normally pay a withholding tax of 30% of the gross, has the tax
reduced to 0% of the gross, with the nct interest income being
subject to the usual Netherlands corporate tax rate.
Tax Haoensfor Special Purposes 77
(3) Reduce the withholding lax rate on foreign source divi-
dends received by The Netherlands participating company,
with an added provision that if the Netherlands company par-
ticipates in the paying company's capital (or in some cases,
votingstock) to the extent of 25% (or 75% in the case of a com-
pany resident in Italy, and 50% in the case of a company
resident in Spain), there will be a further withholding lax rate
deduction. Dividends received from the United Kingdom are
not affected by these provisions, since the United Kingdom
does not have a withholding lax on dividends paid. In regards
to the United States, the normal 30% withholding rate will be
reduced to 15% through the treaty, with an added provision
that if the Netherlands company participates in the dividend-
paying company to the extent of 25%, the withholding rate will
be reduced to 5%. All %age figures apply to gross amounts.
There are three types of foreign companies which can be
benefited by the Netherlands lax haven legislation. These are
the finance subsidiary, the holding company, and the partici-
pating company.

The finance subsidiary The Netherlands-based finance subsidi-


ary has as its primary activity the financing of the operation of
the foreign parent or other closely related companies through
the use of Euro-currency loans. The Central Bank of the Neth-
erlands which issues licences for the formation of companies
formed on behalf of or by non-resident legal entities will under
certain conditions consider the corporation to be a subsidiary
if only 50%, or more, of its shares are owned by the foreign
parent.
Finance subsidiaries have the following restrictions placed
on them by the Central Bank: funds may not be borrowed
from residents of The Netherlands; and funds cannot be kept
in a bank account in the name of the subsidiary. Such funds
inc1ude interest and repayments by borrowcrs.
The finance subsidiary will escape any restrictions on its debt-
to-equity ratio so long as the finance subsidiary borrows funds
from and relends funds to non-resident affiliate companies. But
if funds are borrowed from non-affiliated lenders to be relent to
a non-resident affiliate company, a licence will be required from
the Central Bank, subject to the following conditions:
78 Tax Havensfor International Business
(a) Such borrowed funds, including interest and repayments
received, must remain outside The Netherlands. In order to
open a bank account outside The Netherlands, the finance sub-
sidiary is required to obtain a speciallicence.
(b) The finance subsidiary must hold an issued and paid-up
share capital of at least Dfl1 miJlion (the Dfl (Dutch guilder)
equals approximately US $0.33).
(c) The finance subsidiary may not maintain a debt-to-
equity ratio which exceeds 10 to 1.
(d) Paid-up capital cannot be used by the finance subsidiary
for any purpose t but either must be kept as liquid assets or
placed in a deposit account.
It should be notcd that the four preceding restrictions are
subjcct to favourablc adjustment if thc balance total of the par-
ent company amounts to Dfl 1 billion, and if it guarantees
unconditionally the loans taken up by the subsidiary.
Interest paid on bonds, notes, and other debt obligations are
not subject to any Netherlands withholding tax, When one
adds this benefit to the treaty cffecting avoidance of double
taxation, substantial tax savings can be realised by the Nether-
lands finance subsidiary.
Also, deductible as an expense against the profits of the com-
pany is interest paid by the finance subsidiary, otherwise Iiable
to the normal corporate tax rate after allowable deductions.
. The withholding tax rate on dividends paid by the Nether-
lands-based finance subsidiary to a foreign entity is 25%t unless
subject to a tax treaty.

Holdingcompanies To qualify as a holding company for Neth-


erlands tax purposcs, the company must be a corporation with
virtually no assets other than a majority of shares in other corn-
panies. It must also fulfil an essential function within the oper-
ating structure of the organisation to which it belongs.
The Nethcrlands holding company's chief lax benefit is an
exemption from corporate tax on dividends received by the
company. Moreover, if thc sourcc of dividends paid to the
Netherlands company is a country involved in a tax treaty with
The Netherlands, there will be a decrease of the withholding
tax at its source.
The major consideration, as regards corporate income taxt
is not the qualification as holding companyt but the qualifica-
TaxHaoens J01' Special Purposes 79
tion as "minimum minority-participation" company. This is the
Netherlands participating company whose tax benefits are out-
Iined as folIows.

The participating company To qualify for this category, the


Netherlands corporation must own at least 5% of the outstand-
ing shares of the capital stock of another corporation. For
Netherlands tax purposes, the other corporation is called the
subordinate company. To be exempt from corporate income tax
on dividends and profits received, the participating company
rnust, in addition to its minimum participation qualifications,
meet the following conditions:
(a) The subordinated company must be taxed on its profits
in the country where it was established. (This is one of the
uses for a GibraItar qualifying company, instead of a no-tax
subsidiary.)
Neither the Netherlands participating company nor the sub-
ordinated company may meet the Netherlands definition of
investment company.
(b) The participating company may not participate in the
capital stock of the subordinated company for the purpose of
dividend stripping.
(c) The participating company may be required to accept a
nominal management fee from the foreign parent, which
would be subject to the normal Netherlands corporate tax.
(d) If the participating company's scope of ordinary busi-
ness is to own shares of capital stock of other companies, 01' if
the acquisition of such stock is for public interest, not all of the
above requirements must be met for the Netherlands company
to qualify as a "minimum minority-participation" company.
A participating company has two acceptable ways to finance
participation in the capital stock of other companies. These
are (1) through use of equity capital, and (2) through use of
borrowed funds. Interest and other expenses attendant upon
borrowed funds used for capital participation in other com-
panies are not considered a deductible expense for Nether-
lands corporate income tax purposes. On the other hand, the
interest on borrowed funds that are relent is a deductible
expense.
If through the alienation of capital stock of a subordinated
company, the participating company realises capital gains,
80 Tax Haoens for International Business
such gains will be exempted from taxation. However, if capital
losses are incurred in such transactions, such losses are not
considered deductible expenses for corporate income tax pur-
poses unless the losses are in connection with the dissolution
and liquidation of the subordinated company.
There are two types of Netherlands companies under which a
corporation can be organised. One is a Naamloze Vennootschap
(NV) which is like the US corporation or the public limited Iiab-
iJity company in the United Kingdom. The other type is the
Besloten Vennootschap Met Bepericte Aansparlrelijkheld (BV) which can
be compared to the private company in the United Kingdom.
Before aNetherlands corporation can be established by a
non-resident individual or legal entity, a special licence must
be obtained from the Central Bank of the Netherlands, and
until the licence is issued no transactions whatsoever can take
place. Regarding exchange control, the bank has a liberal
policy of allowing current payments in both directions, as weIl
as stock exchange transactions, free of any fee. There are
banks and brokers officially authorised by the Central Bank
through which payments or transactions must be channelled.
Generally, the bank will issue a Iicence in alm ost every case.
However, there are instances wherein the licence is issued
subject to certain conditions, which are a corollary of the
objects of the corporation.

Corporate tax rate Corporate tax is levied upon both resident


and non-resident taxpayers. Companies are considered as res-
ident if they are effective1y managed and controlIed in the
Netherlands. Corporate taxpayers are deemed to be resident
when incorporated under Dutch civil law, even if actual man-
agement is abroad. Dual residence of a company is normally
avoided by tax treaty provisions in favour of the country where
the company is effective1y managed and controlled. Resident
corporate taxpayers are subject to Dutch tax on their world-
wide income. Such companies mayaiso be subject to foreign
corporate tax on thcir profits earned outside The Netherlands.
To avoid double taxation, Dutch tax law contains various rules
that exempt income which has already been taxed or is subject
to taxation in another country. This avoidance of double tax-
ation is provided for in the participation exemption, bilateral
tax treaties, or the Unilateral Decree.
Tax Havens JOT Special Purposes 81
Non-resident corporate taxpayers are those entities not
established in The Netherlands, whose capital is wholly or
partly derived from shares. Non-resident corporate taxpayers
are only subject to tax on thcir Dutch source earned income:
(1) business income from a permanent establishment, and (2)
income from immovable property located in The Netherlands.
The profits of a Dutch permanent establishment are deter-
mined following Dutch rules, as if it were an independent
enterprise. Interest or similar charges (e.g., royalties) from the
head office are non-deductible, unless it can be proved that
these charges are based upon transactions made by the head
office specifically on behalf of the permanent establishment. A
deduction from the taxable profit is allowed for head office
expenses wh ich can be attributed to the activities of the perma-
nent establishment.
Dutch corporate tax law, in general, does not distinguish
between capital or other gains. All gains are in principle part of
the taxable income for the year during which they are gener-
ated. Annual taxable income should be calculated in accord-
ance with sound business practice and in a consistent manner.
A change in accounting method is allowed if and insofar as it
conforms with generally accepted accounting principles.
These rather general tax law provisions allow Dutch tax
authorities to apply a pragmatic attitude toward taxable profit
calculations. It is common practice to negotiate advance agree-
ments regarding elements of the method used to calculate
taxable profit, such as the moment of profit recognition, inter-
company transfer pricing and inter-eompany cost-sharing
arrangements. Thus, considerable freedom exists in adopting
a suitable system as long as it is in accordance with standard
methods of accounting.
Dutch corporations, including holding companies, enjoy
participation exemption, which means they are exempt from
Dutch corporate lax on "benefits" connected with certain qual-
ifying shareholdings. "Benefits" include cash dividends, divi-
dends in kind, bonus shares, "hidden" profit distributions and
capital gains realised on disposal of the shareholding. A capital
loss resulting from disposal of a shareholding is similarly non-
deductible (although a loss upon liquidation of a subsidiary is
deductible). The fact that capital gains are exempted by the
participation exemption facilitates reorganisation of a group
82 TaxHavens fOT International Business
strueture and thus inereases the flexibility of the group as a
whole.
To qualify for the participation exemption, the following
eonditions for a shareholding must be met:
(a) The participation must reprcsent at least 5% of thc
nominal paid-up capital of the subsidiary.
(b) The shares must have been held since the beginning of
the aceounting year.
(c) The subsidiary company should not be a Duteh quati-
fied investment companYi this eompany itself is exempt from
corporate tax,
If the subsidiary is foreign, some additional conditions apply:
(d) The subsidiary must be subjeet to a foreign profits tax.
The relative tax %age levied is unimportant. Also, the existenee
of a tax holiday does not affect availability of the exemption.
(e) The shareholding of foreign subsidiaries cannot be a
mere "portfolio investment". Advance rulings ean be obtained
from the Dutch tax authorities which establish this fact.
Before 1 October 1988, taxable profit was subjeet to a flat
corporate rate of 42%. Following recent international develop-
men ts, a reduced corporate tax rate became effective on 1
October 1988. For taxable profit up to Dfl 250,000, a 40% rate
will be applied. Taxable profit in excess of Dfl 250,000 will be
subject to a redueed rate of 35%.
Dutch tax law also has provision for loss carry over, allowing
an 8-year earry forward and 3-year carry back of losses. How-
ever, losses incurred during the first 6 years of a company's
existence can be carried forward indefinitely. Losses are offset
in the sequence in which they occur, with the provision that
normal (i.e., non-startup) losses are compensated first. Losses
are first offset against the oldest profits.
The avoidance of double taxation by treaty or Unilateral
Deeree normally does not take the form of a foreign tax eredit
against Dutch tax on world-wide ineome. Instead, an exemp-
tion is granted for Duteh tax on the forcign source income,
even if the forcign tax is very low or non-existent. Contrary to
most treaties, however, the basie principle applied in the Un-
ilateral Deeree is that ineome is exempt for Dutch tax purposes
only if such ineome is subject to a tax on income by the foreign
state, regardless of the tax rate applicable in such astate, or
that no foreign tax has actually been paid.
Tax Haoens Jor Special Purposes 83
Corporate tax: subsidiary uersus branch In considering the
establishment of a company in The Netherlands, one is weil
advised to weigh the advantages and disadvantages of proceed-
ing either with a subsidiary or a branch (see Table 7.1). While
in general, the subsidiary is more expensive, complicated
and time-consuming, the liability of shareholders is Iimited to
the extent of their ca pi tal contribution and, unless otherwise
agreed to by contract, the foreign parent company is not
responsible for the debts, obligations, and Iiabilities of the
Dutch subsidiary. Moreover, Dutch nationals often prefer deal-
ing with a Dutch subsidiary instead of a foreign branch office.

Table 7.1 Establishing a company in the Netherlands (subsidiary


versus branch)

Subsidiary

Pro Contra
• LiabiJity of shareholders is • More expensive,complicated
limited to the extent of their and tlme-consurning
capital contribution
• Unless agreed otherwise by • Withholding tax on remitted
contract, the foreign parent earnings (usually 5% on
company is not responsible for dividends)
debts, obligations and liabiJities
of the Dutch subsidiary
• Dutch nationals often prefer • Publications of financial
dealing with a Dutch subsidiary statements in full is mandatory
as opposed to a foreign branch for a medium-slzed or large
office company
• If no remittance of profits • Uability to various Dutch
to the parent is necessary, taxes mayarise when the
further taxation can be company Iiquidates and the
deferred by reinvesting shareholders have not acted in
subsidiary's earnings good faith
• Intangible assets can be • A capital tax of 1% is
amortised for Dutch tax payable on the (valueof)
purposes capital contributions
cont. (JrJerleaj
84 Tax Havens JOT International Business
Table 7.1 FstabUshlng a company in the Netherlands (subsidiary
versus branch)(continued)

Branch

Pro Contra
• Relatively easy to set up and • Operates as a foreign company
costs are generally lower and has no Dutch identity;
acceptance by Dutch nationals
• No withholding tax on may be affected
remitted carnings
• Foreign parent company is
• No requirement to publish the fully responsible for debts,
financial result of the branch obligations and liabilities of
(except foreign insurance the Dutch branch
companies and banks)

• Results of Dutch branch may


be utilised for compensation
with results of the foreign
head office.

• No capital tax is due

Major advantages of the branch are that it is relatively easy to


start and that its costs are usually lower than a subsidiary. How-
ever, the foreign company is fully responsible for any debts,
obligations and liabilities incurred by the branch.
In determining whether to establish a subsidiary or branch,
potential lax implications should also be examined. Bilateral
lax treaties concluded by The Netherlands generally provide
that withholding lax on dividends from a Dutch subsidiary to
its foreign parent is in many cases 5% (see Table 7.2). Assum-
ing that the 5% rate applies, total effective Dutch income lax
on remitted earnings would approximate 38.5%. In the
absence of a treaty the dividend withholding lax rate is 25%.
A Dutch branch of a foreign company is also subject to lax at
35%. However, no withholding lax on remitted earnings is
due. Therefore, the initial advantage of a branch is that the
Tax Havensfor Special Purposes 85

Table 7.2 Foreign withholding tax

Foreign Forei[fl1 Forei[fl1


withholding withholding withholding
taxon taxon taxon
dividends interest royalties
paid to paid to paid to
a Dutcb aDutch aDutch
company (%) company (%) company (%)

AustraJia 15 10 10
Austria 10 0 0/10
Belgium 5 0/10** 0
Canada 10 0/15 0/10
China 10 0/10 10
Denmark 0 0 0
Finland 0 0 0
France 5 0/10/12 0
Germany 25** 0 0
Greece 5 8/10 5/7
Hungary 5 0 0
Indonesia 10 10/20 5/10/20
Ireland 0 0 0
Israel 15 10/15 5/10
ltaly 0 0/20/30 0
Japan 10 0/10 10
Luxembourg 2-1/2/0 0 0
Malta 5 10 0/10
Morocco 10 10/25 10
Netherlands AntilIes 7-1/2/5 0 0
New Zealand 15 0/10 0/10
Norway 0 0 0
Pakistan 10 10/15/20 15/5
Poland 0 0 10
Romania 10 10/0 0/10
Russia 15 0 0
Singapore 0 10 0
South Africa 5 10 0
South Korea 10 0/10/15 0/5
Spain 10/5 10/15 6
Sri Lanka 10 10/0 10
Surinam 15/7-1/2 5/10 5/10
cont. ouerleaf
86 Tax HavensJOT International Business

Table7.2 Foreign withholdlng tax (continued)

Swedcn o o o
Switzerland o 0/5 o
Thailand 10/15/20 10/25 5/15
Turkey 15 0/10/15 10
United Kingdom 5 o o
United States 5 o o
Zambia 0/10 10 10

• Provided the Dutch comp:my holds at least 15% ofthe shares ofthe distributing
company. Sometimes additional requirernents apply regarding the ownership of
shares.
•• Provided the Durch company holds less than 25% of the Belgian company.
••• 15%. if the Durch company owns less than 25% of the shares in the German com-
pany.

total Dutch effective income tax rate on remitted earnings can


be limited to 35% rather than 38.5%. If initiallosses are antici-
pated, the Dutch branch of a foreign company has another
advantage . For Dutch tax purposes these losses can be com-
pensated with future Dutch profits. For foreign tax purposes,
the losses can often be utilised by the head office in its current
year tax return.
Use of a Dutch branch may not be advantageous in situ-
ations where it is anticipated that the operation will initially
break even, or both the Dutch branch and the foreign head
office are profitable, as the branch income is subject to current
taxation in the foreign country. However, in many cases, the
Dutch source income will be tax exempt in the other country.
Alternative1y, use of a Dutch subsidiary may avoid or defer
foreign taxation simply by not paying dividends to the foreign
parent company and reinvesting the Dutch subsidiary's
earnings.
Still another advantage of a Dutch subsidiary is the amortisa-
tion of intangible assets (e.g., technology) over its economic
life, generally in 5-10 years. Ifintangible assets are transferred
(and contributed as equity) by the parent company to its
Dutch subsidiary, such assets can be amortised for Dutch tax
purposes. Note that a 1% Netherlands capital tax is due on the
value of the capital contribution. If intangibles are transferred
Tax HauensJor Special Purposes 87
in exchange for shares in the Dutch subsidiary, the parent
company is often not subject to taxation in its horne country
upon receipt of such shares. Thus, depcnding on dividend pol-
icy, a tax deferral ofup to 35% of the intangiblc asset value can
be achieved. Issues concerning the amortisation of intangible
assets require justification of the amounts involved, and should
be discussed with the tax inspector.
The Netherlands currently enjoys more than 40 bilateral
income tax treaties with the industrial and developing nations
throughout the world. A list of treaties and the applicable with-
holding tax rates on dividends can be found in Table 7.2.

Corporate taxation oJ regional headquarters, seroice companies and


branches Regional headquarters are generally established to
supervise the operations of European and/or Middle East sub-
sidiaries. Typical activities of regional headquarters inc1ude:
sales coordination, administration and accounting, advertis-
ing, and public relations as weil as holding shares in subsidiar-
ies, group financing, and licensing.
As the activities of such entities are usually only of an admin-
istrative and supporting nature (as opposed to profit generat-
ing activities like actual sales), the Dutch tax authorities are
generally willing to issue advance rulings pursuant to which
the taxable profit of such a company or branch is fixed on a
"cost-plus'' basis (between 0% and 25% of the Dutch opera-
tional cost such as salaries, leasing of office space and general
office expenses). These rulings may be granted for aperiod of
three to five years, and may be extended for additional periods
unless the circumstances have changed materially.
Ordinarily, a subsidiary or branch established in The Neth-
erlands, which carries on supporting, preparatory and auxili-
ary activities for one or more foreign affiliated enterprises,
would be liable to taxation at typical rates and conditions.
Examples of such auxiliary activities include: administrative
functions at the executive level, the keeping of an area to store
or display goods, purchasing, advertising, the collecting and
supplying of information, and the carrying out of scientific
research. However, the Ministry of Finance has issued a regula-
tion concerning the tax treatment of inter-cornpany services
pcrformed in The Netherlands by or on behalf of multi-
national groups. Based upon this regulation, it may sound
88 Tax Hauens for International Business
attractive for (from a corporate tax standpoint) a non-resident
company to incorporate a Dutch subsidiary or open a Dutch
branch to perform such services. The regulations indicate that
where a business, liablc to taxation in The Netherlands, carries
out transactions with affiliated businesses, the conditions
agreed upon with the affiliated businesses should be in agree-
ment with the arm's length principle. However, the primary
yards tick for applying the arm 's length principle, comparative
market price, is lacking in many cases. Where it is inapplicable
or where it cannot be unconditionally applied, the preferred
methods for determining the profit of activities, as described
above, is the so-called "cost-plus" method. An advance ruling
can be negotiated with the Dutch tax inspector establishing
the terms for application of the cost-plus method.
AB an example of arrangements for which a comparative
market price is unavailable, the regulation specifically rnen-
tions cash management. In this case, cash management might
vary from centralised bookkeeping and administrative activi-
ties to the actual management and application of all liquid
resources of a group and the preparation and determination
of the relevant policy management of currency exchange risks,
centralisation of insurance and reinsurance activities (not
including underwriting activities) .
For the activities discussed above, the costs which form the
basis for a ruling are generally all costs directly connected to the
activity performed by the Dutch business, including cost of ac-
commodation, office costs, salaries and reimbursement of em-
ployment expenses, an arm's length return on equity as well as
interest expense on borrowed funds. The Ministry of Finance
has stated that activities of a supporting, preparatory or auxiliary
nature are to be taxcd on a 5% cost-plus basis. Should more
than insignificant business risks be attached to activities per-
formed in The Netherlands, a profit mark-up of more than 5%
may be rcquircd by the tax inspector. According to these rul-
ings, any profit actually attributed to the Netherlands activity
which exceeds the cost-plus profit will normally be taxable as
weIl. This means, for instance, that interest income received by
the Dutch entity will be taxablc at the normal rate, and that
an actual profit mark-up exceeding 5% will not be tax exempt.
It should be noted that a Dutch permanent establishment
has no treaty protcction with regard to income receivcd from
Tax Havens J01' Special Purposes 89
sources in third countries (not being the country where the
head office is situated). However, most tax treaties concluded
by The Nethcrlands provide that a branch for tax purposes
shall not be deemed to ex ist (and thus no Iiability for Dutch
income tax even on a cost-plus basis), if:
(a) Facilities are used J01' thesole purpose ofwarehousing, dis-
play, or delivery of goods or merchandise.
(b) A stock of goods or merchandise is maintained Jor the
sole purpose of warehousing, display or shipment, processing or
conversion.
(c) A fixed place ofbusiness is maintainedforthe sole purpose
of purchasing goods, collecting information, advertising, pro-
viding information, or similar activities for the benefit of the
foreign head office, which are of apreparatory or supporting
nature.

The use oJDutch intermediate companies Jor holding, financing, and


licensing activities The Netherlands is frequently used as a
location for intermediate holding companies, principally
bccause of the participation exemption (see above), but also
because it can be advantageous to route financc and royalty
activities through a Dutch company. These activities can also
be combined in one company.
The Netherlands has a more extensive tax treaty network
than most Common Market countries. A regional headquarters
can benefit from these treaties in collecting dividends, interest
and royalties from subsidiaries. The treaties provide for an
exemption from or areduction offoreign withholding taxes on
dividends, interest and royalties. Moreover, The Netherlands
do not levy a withholding tax on interest and royalties. The
favourable tax treatment of these activities is described below.

Holding oJ shares in subsidiaries Holding companies do not


have aseparate tax status under Dutch law. Tax benefits wh ich
are available can be enjoyed by any type of company which
holds shares in foreign subsidiaries. Dividends receivcd by a
Dutch company from both resident and non-resident subsidi-
aries are fully exempt from Netherlands income tax under
the participation exemption. The exemption also includes
capital gains made upon disposal of the subsidiary's shares.
Capitallosses, on the other hand, are not tax deductible (except
90 Tax Havens JOT International Business
for capital losses sustained upon dissolution and subsequent
liquidation of the foreign subsidiary).
Tax treaties concluded by The Netherlands generaJly pro-
vide that withholding lax on dividends distributed to a Dutch
company holding at least 25% of the shares in the distributing
company is reduced or even eliminated. The treaties also pro-
vide that Dutch dividend withholding lax on dividends distrib-
uted by the Dutch company to its foreign parent (normally
25%) is generaJly reduced to 5% or zero.
The conditions which a company must meet to qualify for
the participation exemption have been dcscribed above, A spe-
eific problem in this area is dctermining whether the participa-
tion constitutes a portfoJio investment. To avoid disputes of
a factual nature, under certain conditions a ruJing can be
obtained from thc tax authorities establishing that the partiei-
pation is not such an investment. In return, the holding com-
pany is obJiged to pay corporate lax at the nominal rate on an
agreed minimum taxablc profit normally equal to 25% of the
costs related to the holding's activities.

Group jinancing The Nethcrlands is particularly attractive for


group finaneing activitics because its lax treaty network typ-
icaJly reduces or even eJiminates the foreign withholding tax on
interest paid to a Dutch company. Moreover, The Netherlands
do not impose any withholding tax at source on interest paid
to non-Dutch creditors, nor any duty on thc issuance ofbonds.
Tax ruJings available to a Dutch finance company generally
provide for income tax on a minimum nominal spread of gen-
erally 1/8 % or 1/4% between incoming and outgoing interest. For
very substantial loans, thc sprcad can bc reduced to Ih6% or
even 1/32%.
Furthermore, no debt/equity ratios need to be observed for
legal, exchange-control or lax purposes. Agreement mayaiso
be reached with the lax authorities on a favourable treatment
of central invoicing, leasing and foreign exchange clearing
within the group.

Licensing In order to benefit from the tax treaties, an inter-


mediate royalty company is often set up between payer and
recipient. The Dutch tax treaties often provide for areduction
or elimination of withholding tax on royalties received by a
Tax Haoens Jor Special Purposes 91
Dutch resident. In addition, The Nethcrlands docs not levy a
withholding tax on outgoing royalties. As a result, royalties can
flow through a Dutch company at nominal cost. For tangible
and intangible licensing purposes, the Dutch authorities are
usually willing to issue rulings according to which Dutch sub-
sidiaries offoreign companies engaged in licensing will be sub-
ject to tax on a spread between 2% and 7% of incoming and
outgoing royalties. The percentage is determined according to
a sliding scale, as in Table 7.3.
For film royalties, a flat rate of 6% ean be applied.

Foreign withholding tax Tablc 7.2 (pp. 85-6) summarises with-


holding tax rates applieable to incoming dividends, interest, and
royalties under tax treaties eonc1uded by The Netherlands.

Property tax (rates) Property tax is a loeal tax, levied yearly by


the municipality. The primary basis for taxation is the owner-
ship and/or use of buildings and land. Property is assessed at
its real value on thc market in an unoeeupied condition or at
an approximate cost of rebuilding if market value is not obtain-
able due to the special character of specifie real estatc.
A levy of Dfl 15 for eaeh Dfl 300 of this ealculated value is
payable for combined ownership and use. This latter amount
varies per municipality but does not usually exceed Dfl 20. If
the prcmises are leased, this levy is partly paid by the owner
and partly by the user. Property tax in The Netherlands is

Table 7.3 Spread, royalties and income

spread Royalty Income


(%) (Dfl mln) (Dfl mln)

7 2
6 2 4
5 4 6
4 6 8
3 8 10
2 10 or over,
92 Tax Haoens JOT International Business
therefore of minor importance and very low in comparison
with surrounding countries.

Depredation Generally, all assets owned or used by a corpora-


tion for purposes of its trade are depreciable if the values of
those assets necessarily diminish with time. Depreciation is cal-
culated on cost less residual value.
The basis for depreciablc costs is the purchase price or pro-
duction cost. This basis may not be rcgularly adjusted for
depreciation of the currency. Depreciable basis must be de-
creased, howcver, by amounts received as capital grants (cash
grants) from the government as an encouragement for capital
investment (e.g., the Investment Premium Regulation).
Depreciation allowances may bc taken during years in which
an asset is uscd in the business. The time at which the asset is
ordered or the purehase price is paid is not, therefore, de-
cisive. However, any reduction in commercial value between
the time at which an asset is ordered and the time it is put into
use may be deducted immediately. Permissible depreciation
methods inc1ude the straight line and dec1ining balance meth-
ods and methods based on thc intensity of use, Deprcciation is
compulsory; no deferral is permitted.
Depreciation rates are usually based on the expected eco-
nomicallife of an asset. Rates can be negotiated with the local
lax authorities. Typical rates allowable for the more common
business assets are detailed below:

Office buildings 2-3%


Industrial buildings 2-5%
Office furniture 10- 20%
Office machines up to 100% on small machines,
others, 20 - 50%
Motor vehic1es 25 -33 1/5%
Small tools 100%
Intangibles 100, 20 - 100%

Taxation oJ foreign employees Employees transferred to The


Netherlands (who are not Dutch nationals) can apply for a spe-
cial tax concession known as the 35% ruling. When granted,
the foreign employees are treated by the Netherlands lax
Tax Haoens for Special Purposes 93
authorities as non-resident taxpayers, both as regards to wealth
tax and income tax (including wage tax, which is an advance
levy on income tax) . As of September 1, 1988, a revised 35%
ruling has become effective for expatriates. Moreover, expatri-
ates can now request a personal income tax assessment regard-
less of their taxable income, whereas under the prior ruling no
assessment was available below a specified taxable income.
The new 35% ruling contains several requirements:
(a) The contemplated stay must be of a temporary nature
with a maximum duration of60 months. The Secretary ofState
for Finance will, upon request, extend the 60-month period for
the senior management of a company setting up a new estab-
lishment in The Netherlands. As under the 1986 version of the
ruling, employees can reapply for the 35% conccssion for the
full 60 months as long as their previous stay in The Nether-
lands ended more than 5 years before their present engage-
ment. Whether they have made use of the 35% ruling in the
former period is irrelevant.
(b) In principle, the employee may not have Dutch nation-
ality. Dutch nationals can qualify for the concession if their
roots are outside The Netherlands.
(c) The employee must be transferred temporarily to a
Dutch affiliate or permanent establishment, as part of his ern-
ployment with an international concern; or be recruited abroad
with the preconceived intention to be transferred to The Neth-
erlands within the framework of a career with such a group. In
contrast to the 1986 ruling the revised version allows applica-
tion for the 35% ruling by persons employed by a business
which does not have a share capital (like an NV or BV) if:
- this business is part of a group of cooperating businesses
and,
- it is based in The Netherlands, and
- it has decisive power with respect to the activities of the
group of cooperating businesscs.
Within four months after the employee's arrival, a foreign
employer must rcquest the Tax Inspector at Brunssum to des-
ignate him as a Dutch taxpayer for wage and sodal security tax
purposes. As a result, the 35% ruling will bccomc cffcctivc
from the date of arrival if thc condition mentioned below is
met. If the filing date is overdue, the 35% ruling can only be
94 TaxHavensfOT International Business
implcmented after the wage and social security taxes have actu-
ally been withheld and paid to the Tax Collector.
(d) The employee must apply for the 35% ruling with the
lax inspector at Brunssum within four months of arrival in The
Nethcrlands. Ir the request is not filed in time, the 60-month
period will be reduced by the period of time between arrival
and filing.
The consequences of the new 35% ruling include:
(a) Under the 35% ruling, employees who are resident for
Dutch lax purposcs in The Netherlands will be treated differ-
ently from those whose stay is ofa temporary nature. Thc latter
are considered to be fictitious foreign taxpayers and are there-
fore only taxable on their salary income from work pcrformed
in Thc Netherlands. Employees who are actually resident in
The Netherlands are treated as (national) non-resident taxpay-
ers. As a result they are taxable on their world-wide salary
income. In addition only Dutch source investment income will
be taxable, including:
- income from Dutch real property;
- income from mortgage loans on Dutch real property;
- income from shares of a Dutch company in which the
non -resident has held a substantial interest over the past
five ycars.
Other capital income will not be taxable for income tax and
wealth tax purposes.
(b) The 35% ruling allows employees to make anational
cost dcduction of 35% of their gross salary for both income tax
and social security lax purposes. In addition they can deduct
costs of a purely businesslike character. Mortgage interest paid
in connection with Dutch real estate is also deductible. Re-
imbursements ofschool fees are excluded from the calculation
of the wage or salary. AJlowance paid by the employer for ex-
penditures which are partly related to the employee's private
life are fully included.
(c) Employees residing in The Netherlands are entitled to
additional allowances in computing their taxable income,
while ernployees who are here temporarily are entitled to the
work allowance ("arbeidstoeslag") only,
(d) Ni regards income from ernployment which is attribut-
able to anothcr country or countries, an employee can gencr-
Tax Haoens for Special Purposes 95
ally claim tax relief in The Netherlands to avoid double
taxation. Such relief is available under either domestic law or
by bilateral treaty.
(e) The new 35% ruling is applicable to expatriates arriving
in The Netherlands after August 31, 1988. Persons who re-
ceived a concession under the prior rules are not affected by
these changes.
Another set of new rules was announced in August 1992, to
take effect on September 1, 1992. For new applicants, the fol-
lowing changes apply:
(a) Employers may reimburse 35% of qualifying employees'
salary free of tax (instead of a deduction of 35% from
income); this reduces the tax-free amount from 35% to 26%.
(b) In principle, the concession will apply for aperiod of
eight years; however, a review will be conducted after four years
to determine whether the concession can be continued for thc
rcst of the period (instcad of a non-extendable period of five
years) .
(c) To qualify, an employee must have a highly specialised
education or offer skills that are not readily available in the
Netherlands (the current criterion is assignmcnt to the Neth-
erlands by an in ternationally operating group) .
Employees to whom the old rules currently apply will remain
subject to the old rules for the duration of the five-year period.
Employees who applied for 35% treatment before September
1, 1992, can apply the old rules for the full five-year period, or,
under certain circumstances and conditions, they may opt to
apply the new rules if those are more advantageous. At the end
of the five-year period in which the old ruling applies, they
may apply the new resolution for an additional threc years.
The Inspector of Direct Taxation handles applications for
the 35% concession. The address is: Inspectie der Directe
Belastingen (Buitenlanders), Akerstratt Noord 69, Postbus
300, 6440 La Brunssum, tel.: 045-217333.

Legal [orms 01 business enterptises Therc are three principal


forms of business enterprise in The Netherlands: (1) public
limited liability company (NV); (2) private limited liability
company (ßV); (3) the partnership.
(1) Thc public limitcd liability company (NV) is a legal entity
with its capital divided into shares, Shareholders are not person-
96 Tax HavensJor International Business
ally liable for corporate debts or obligations which exceed the
amount of their shareholding. A NV is established by legal deed
containing the articles of association ("Statuten"), which must
be in the Dutch language. These statuten are subject to the
approval of the Minister ofJustice, and an announcement of the
formation must be made in the Official Gazette (Nederlandse
Staatscourant) .
A public limited Iiability company can be established by one
or more individuals or corporate entities. After establishment,
one person or corporate entity may own all of the issued shares.
There are no discriminatory rules about the nationality of
shareholders or officers of the NV. The financial statements of
all NVs are subject to an annual audit requirement, and the
annual publication of balance sheet, profit and loss account,
explanatory notes and the auditor's certificate is obligatory. Min-
imum capital to be issued and paid up initially is Dfl 100,000.
(2) The same rules generally apply to a private Iimited
liability company (BV) . The minimum paid-up capital for a
BV, however, is Dfl 40,000. In addition, there are two other
important differences:
- The transferability of shares of a BV is restricted by law,
and can be further restricted in the articles of association.
The BV is not allowed to issue bearer shares; rather all
shares must be registered .
- Only medium and large BVs are subject to an obligatory
audit and must publish their financial statements in full.
In order to set up a private Iimited company in The Nether-
lands ("Besloten Vennootschap"), the following information is
required:
(a) Name of company to be formed.
(b) Statement of the amount of capital to be issued and
paid up initially. The company may have an authorised capital
of five times this amount, which means that the capital may be
increased to the amount of the authorised capital without
amendment of the articles of association.
(c) The company's founder may choose between using
managing directors only or have both managing directors and
supervisory directors.
(d) Full names, private addresses, date and place of birth
and nationality of the future directors.
Tax Haoensfor Special Purposes 97
(e) Recent finandal statements of the shareholders and
preferably a corroborating statement of their bankers.
(f) A short description of the object of the company, which
can be rather broad (e.g., engineering of and trading in waste
heat recovery devices for industrial applications and all activi-
ties related to such object).
(g) The finandal year to be observed by the new company
(e.g., 1July to 30June).
Apart from legal fees, wh ich are dependent on the amount
ofwork involved, the incorporation costs for a ßV company
with a minimum capital of Dfl 40,000 are as folIows:
Oft
• capital duty (1 % of paid-up capital) 400
• name clearance by Trade Register 250
• statement of no-objection from
Ministry ofJustice 150
• notary fee (minimum) 2,500
• Trade Register fee for first year 175
(3) The third type of business enterprise in The Nether-
lands is the partnership, of which there are two kinds: general
and limited.
A general partnership, 'Vennotschap Onder Firma" (usually
called VOF 01' Firma), may be formed by individuals 01' cor-
porate entities. The necessary regulations - comparable to the
artides of association of a NV 01' BV - are summed up in an
(informal) agreement conduded by the partners ("vennoten") .
Each general partner is personally liablc for the obligations of
the partnership. Like corporations, partnerships must reveal a
certain amount ofinformation for the Trade Register.
The same rules apply to a limited partnership 01' "Comman-
ditaire Vennootschap" (CV). A CV is a partnership of one 01'
more general and one 01' more limited partners. Limited part-
ners are only liable for thc amount of their respective capital
contributions, provided they do not take part in the manage-
ment of the partnership.

Value added tax Value added tax (VAT) is levied in The Nether-
lands on entrepreneurs on the delivery of all goods (both mov-
able and immovable) and services rendcred in Thc Netherlands
and, generally, on the importation of goods. Thc term "delivery"
98 TaxHavens JOT International Business
includes the transfer of title goods, lease/purchase agreements
and the disposal of goods for non-business purposes.
VAT is levied at each stage ofproduction and distribution on
the basis of amounts invoiced to the purchaser, including ship-
ping, handling and insurance charges but excluding the VAT
tax itself and cash discounts for prompt payrnent or deposits
on returnable containers. For imported goods, the taxable
basis is the import value as determined for customs duty pur-
poses, together with all import duties and inland freight. The
delivery of goods is deemed to be a taxable event if the place
where transportation begins or where the goods are located at
the time of delivery is within The Netherlands. Services are
normally considered to be supplied where the supplier of the
services is established or has a fixed establishment. However,
numerous exceptions exist for specific services.
The following tax rates are currently in force:
(a) A standard rate of 18 1/2% applicable to all goods and ser-
vices not exempt or subject to the reduced rate or zero rate.
(b) A reduced rate of 6% for those goods and services con-
sidered essential (i.e., necessaries oflife) .
(c) A zero rate for goods rclated to export and import (e.g.,
any activities within bonded warehouses or their equivalent).
VAT is charged to the customer and must be stated on the
invoice for all goods and services supplied. VAT is paid to the
tax authorities through a tax return that must be filed on a
monthly or quarterly basis as decided by the local tax inspector.
The return and related payment are sent to the tax collector
within one month after the end of the applicable period.
VAT is paid to suppliers on purchased goods and services
(input tax), and is deductible from the VAT charged to custom-
ers (output tax). Both amounts must be stated on the tax return.
If the VAT paid exceeds the VAT charged, the excess is
refunded by the tax authorities. The right to deduct VAT paid
from VAT charged arises when the invoice is received and not
when it is paid. Conversely, VAT charged is payable to the tax
collector at the time when the invoice is rendered to the cus-
tomer and not at the time when payment, is received.
Although The Netherlands should not be considered as a tax
haven country in any general sense, it does offer considerable
advantages to holding and finance companies. In appropriate
circumstances, formation of a Dutch company might be the cor-
Tax Havens Jor Special Purposes 99
reet choice as a vehicle to finance other companies in a group,
while it may at the same time function as a holding company.

Austria
Austria has holding company legislation that is in many ways
similar to that of The Netherlands for receipt of dividends
from subsidiaries. Austria is a neutral country with strong trade
ties to Eastern Europe, which may be useful for a holding com-
pany making investments in that area. It is not a member of
the European Community, and thus is outside the common tax
policy, but that could change in the future as Austria is consid-
ering membership.
Austria has an extensive system of double taxation agree-
ments, too, covering nearly 40 countries. In the 1989 tax reform
in Austria normal corporate taxation was reduccd to 30%.
A corporation is subject to Austrian tax on its carnings
world-wide if the head office or registered office of the com-
pany is in Austria. The head office is assumed to be where the
centre of senior management is situated. The registered office
is the place defined by law, where an Austrian corporation is
headquartered.
Corporations that have neither their head office nor their
registered office in Austria are subject to tax in Austria on their
domestic earnings.
If a corporation (parent company) has a holding in another
Austrian company (affiliated company) all of the parent com-
pany's profit-sharlng is tax exempt. This tax exemption applies
both to disclosed dividend payouts and to disguised profit
distribution.
Apart from the general exemption for holding earnings in
Austria, there is also what is known as the "international inter-
company tax concession", An Austrian corporation is exempted
from paying Austrian corporation lax on any form of profit-
sharing from a holding in a foreign corporation provided the
following conditions are met: the foreign corporation must be a
corporation (not a partnership or other form of enterprise);
and the Austrian corporation can show evidence to have directly
possessed a holding interest of at least 25% in the shares of the
foreign corporation continuously for at least one year before the
balance sheet date applicable to the income assessment.
100 Tax Hauens JOT International Business
An Austrian holding company may thus collect dividends
from its foreign subsidiaries tax free. The "international inter-
company tax concession" covers both disclosed dividend pay-
outs and disguised profit distribution.
The "international intercompany tax concession" does not
contain an "activity clause". It is thus of no consequence whether
or not the Austrian holding company or its subsidiary have
active earnings - in other words, whether or not they are
actively engaged in business transactions.
Once the requirements for the "international intercompany
tax concession" have been met, not only the regular dividends
but the capital gains generated in Austria which arise from the
sale of such qualified affiliated holdings are tax exempt. Tax
exemption for capital gains applies only to holdings in foreign
companies, however. The capital gains arising from holdings in
Austrian corporations are entirely subject to taxation.
There are no provisions stipulating that mere holding compa-
nies are excluded from the privileges provided for in Austria's
double taxation agreements. On the other hand, Luxembourg's
double taxation agreements contain such provisions.
If an Austrian corporation pays dividends to a foreign corpor-
ation a withholding lax of 25% is withheld (some double tax-
ation agreements provide for lower rates of withholding lax).
This raises obvious problems in paying the money from Austria
to a pure tax haven . Of course the problem only arises if and
when there is a need to pay out a dividend, rather than reinvest
the money.
The conversion of interest into dividends and vice versa often
makcs sense for taxation purposes. For exarnple, if a Swiss com-
pany purehases bonds, any intercst thercfrom is fully liable to
taxation in Switzcrland. If thc Swiss company instcad cstablishcs
a subsidiary in Thc Notherlands Antillcs and the subsidiary
earns intcrest thercon which is taxable in the Netherlands
Antilles at a maximum level of 3%, the subsidiary subscquently
pays the Swiss parent company dividends, which are not subject
to withholding tax in the Nethcrlands AntilIes. In Switzerland
the dividends received are lax exempt. In this case the interest
was converted into dividends in the Netherlands AntilIes.
Converting interest into dividends and vice versa is generally
possible in Austria (provided no fake transaction or breach of
the law is involvcd) and may weil payoff.
Tax Havens fOT Special Purposes 101
For example, a Saudi Arabian company wishes to invest in a
Dutch company. As Saudi Arabia has not concluded any double
taxation agreements, dividend payments from The Nether-
lands to Saudi Arabia are subject to a withholding tax of 25%.
On the other hand, the Saudi Arabian company may establish
an intermediate holding company in Austria which in its turn
acquires a holding in the Dutch company. By terms of the
Austrian-Dutch double taxation agreement, dividends can be
transferred tax-exempt from The Netherlands to Austria. In
Austria neither these dividends nor any capital gains arising
out of the sale of the holding are subject to tax.
However, the tax-exempt transfer of the dividcnds to Saudi
Arabia is not possible, since Austria has not concluded a double
taxation agreement with that country. But it is possible to con-
vert dividends into interest. The Saudi Arabian company first
establishes a second subsidiary (sister company ofthe Austrian
holding company) in a country which levies cither no tax or
only low levels of tax on interest and no withholding tax on
dividends (e.g., an offshore company in the Channel Islands 01'
the Netherlands Antilles).
The Saudi Arabian company provides this offshore company
with the appropriate equity capital. The offshore company
passes on this equity capital as a loan to the Austrian holding
company. The latter acquires the Dutch companywith the loan
from the offshore company. Dividends and capital gains frorn
the holding in The Netherlands are temporarily invested in
Austria tax-exempt. The profits temporarily invested in Austria
are transferred out of Austria in the form of interest payments
on the loan from thc offshore company. This flow of profits is
exempt from tax, because such interest payments are not sub-
jcct to tax in Austria. The offshore company, too, receivcs the
interest tax-exempt. The interest is again convertcd into divi-
dends and is transferred exempt of withholding tax to Saudi
Arabia.
In the above example the withholding tax is lowered from
25% to 0%. It should be noted, however, that arrangements Iike
this need to be examined very closcly to ensure that they are not
classified unilaterally as fake transactions 01' abusive practices.
By contrast with most countries' lax law systems, Austria's
commercial and tax laws do not prescribe minimum debt/
equity ratios.
102 Tax Havens JOT International Business

Luxembourg
Luxembourg is a full member of the Economic Community.
Most Luxembourg taxes are the same as in its neighbouring
countries, Belgium, France, and Germany. However, Luxem-
bourg is especially well-suited as a tax haven for specific
purposes.
The Holding Company Act of 1929 makes Luxembourg an
attractive tax haven for the holding company, provided it
meets prescribed qualifications: It must be a "pure" holding
company; it cannot conduct "actual business"; and it cannot be
a "commercial establishment open to the public". The "no
actual business" clause is interpreted to mean no industrial
activity. In effect, this mcans that there are many business activ-
ities in which the pure holding company can participate. Sev-
eral thousand holding companies are presently located in
Luxembourg, with the number constantly increasing.
For the purpose of tax havenry, it is important to make the
distinction between the mixed holding company and the pure
holding company.
(1) Mixed holding company. The mixed holding company is
defined in Luxembourg as one that administers an investment
portfolio, takes participating interests, develops patents, and
also engages in direct industrial and/or commercial activity.
The Holding Company Act of 1929, and the lax advantages
that it provides, does not apply to the mixed holding company.
(2) Pure holding company. In Luxembourg, the pure holding
company is defined as one whose "sole object is the taking of
participating interests, in whatever form, in other Luxembourg
or foreign undertakings, and the administrating and develop-
ment of such participating interest, so however that company
shall carry on no industrial activity, nor maintain a commercial
establishment open to the public", The Holding Company Act
of 1929 applies specificaHy to this type of holding company.
The pure holding company may only hold negotiable secur-
ities as assets. This is not as restrictive as it may first appear. It
does not mean that the company must be an inactive body with
a fixed portfolio; it can, for example, seil a portion of its secur-
ities to dispose of some participations, and can, in turn rcinvest
the proceeds of the sale by taking participating interests in
another enterprise. Again, the distinction is that the company
has not engaged in any industrial activity, nor attempted to do
Tax Havensfor Special Purposes 103
business with the public. Further, the pure holding company is
permitted to develop its interests by supervising the financial
administrations of its affiliates, even to the extent of exercising
technical and commercial control.
Moreover, it is expected that the pure holding company will
take an active interest, either as a shareholder or as a lender, in
its affiliate firms. Thus, the legal interpretation of the c1ause
"administration and development of such participating inter-
ests" is that the holding company can grant long-term and
short-term loans to the various enterprises in which it takes a
participating interest, as weIl as guarantee increases in their
capital. However, such loans must be terminated if and when
the holding company withdraws from participating in the
enterprise. Also construed as loans for the purpose of this pro-
vision are any advances that a holding company might make to
an enterprise, the securities of which do not make up a suffi-
cient %age of the holding company's portfolio. (This is not
applicable, however, to finance holding companies that were
formed in accordance with regulations that the Minister of
Treasury issued on September 9, 1965.)
Although the holding company may hold participating
interests in other undertakings, "in whatsoever form", Luxem-
bourg legislation does not permit holding company associ-
ation with a partnership firm, or permit a holding company to
be a partner in a firm .
The one exception to this is a holding company acting as a
"sleeping partner" in a partnership limited by shares.
The intent of the 1929 legislation is that the holding com-
pany cannot own real estate, with the rare exception in which
real estate is necessary to accommodate the company's adminis-
trative departments. However, its portfolio may contain shares
of areal estate company.

Capitalising the holding company The holding company is capi-


talised in much the same manner as the stock company, by issu-
ing eithcr shares or bonds. This may or may not be by public
issue, and the bonds may be sccurities for either long- or short-
term loans. The notable restriction placed on the capitalisa-
tion of the holding company is that it cannot operate a "com-
mercial office open to the public", and is therefore not allowed
104 TaxHauens JOT International Business
to operate as a banking institution that solicits deposits from
the public.

Liabilities The holding company is expected to have Iiabilities


just as any other company. The creditors of such commitments
are the company's shareholders, or banking institutions. So
long as the liabilities are considered normal, and are a result of
activities consistent with the articles of association, the cred-
itors are liable for no taxation under Luxembourg legislation.
The intent here is that the revenue authorities want to pre-
vent a disproportional difference between the capital of the
company and the amount owed to creditors. A "dispropor-
tional difference", for example, would be liabilities that are two
or three times greater than the normal amount of capital.
However, finance holding companies are exempt from this law.

Holding Company Act oJ 1929 The wording of the 1929 law


refers only to "holding companies". However, the intent of the
legislation was not to restriet the effects of the legislation to
standard holding companies, but extend it to "financial partici-
pating companies", of various functional capacities. Among
these are controlling companies, investment trusts, and finance
companies. Luxcmbourg law follows the standard practice of
other countries in using the generic term, "holding company",
to encompass institutions of various kinds, even though such
institutions may not have a common character.

The finance holding company Tax advantages to thc Luxem-


bourg finance holding company become obvious when we con-
sidcr that sevcral countries (Germany and the United States,
for example) lcvy a withholding tax on interest accruing to
foreign bondholders.
This would be an inhibiting factor for the purchasc of bonds
on the international markct from companies domiciled in
such countrics. By contrast, the Luxembourg financc holding
company, which need not withhold tax on intcrest paid out, is
in an excellent position for an international bond issue. The
parent company would, of course, guarantee the bonds issued
by thc Luxcmbourg holding company. To qualify as a holding
company, however, the finance company launehing the bond
Tax Havensfor Special Purposes 105
issue is required to hold an adequate percentage of affiliated
companies that are multinational company subsidiaries.
Under a new system introduced in 1965, the concept of the
financial or industrial group controlling several related compa-
nies that are linked by economic, financial and legal interests,
was created. This concept came about through the influence
of American firms that formed holding companies with large
amounts of capital, which ultimately resulted in the formation
of international industrial and financing groups. Under this
system, a holding company is permitted to extend loans to
non-subsidiary companies, provided the following conditions
are met:
(a) The constitution of the finance holding company must
be as a public company.
(b) So that Luxembourg authorities can ensure that suffi-
cient and permanent economic links are in force between the
holding company and the founding companies, the parent
company (or companics) forming the financial or industrial
group must be stated as the foundcrs on the deed of constitu-
tion . Also, articles of the constitution must provide for the regis-
tration of the shares issucd by thc finance holding company.
(c) Persons outside the group cannot profit from the sale of
shares in the finance holding company until thc company has
repaid all its borrowings; however, shares may be assigned .
The finance holding company's portfolio must consist of the
stock of companies in the same financial or industrial group.
(d) If a company is to bc the recipient of a loan from the
finance holding company, it must meet the conditions for
membership in the group.
(e) If debenture loans are to be issued, the articles of associ-
ation must include a clause stating that the yield from the loans
can only accrue to the benefit of companies in the financial or
industrial group in which the holding company is participating.
(f) Authorities must be consulted before any company that
intcnds to use these facilities is formcd.
The September 9, 1965 ruling by the Minister of the
Treasury allows Luxembourg holding companies to finance
companies belonging to the same group, without the necessity
of holding an adequate percentage of the shares of such com-
panies. This ruling had the effect of enabling the holding com-
106 Tax Havens for International Business
pany to participate in the capital market. However, to derive
benefit from this ruling, the following conditions must be met:
(g) The Luxembourg holding company first be established
as a public Iimited company.
(h) The parent company or affiliates or the groups must
appear as founders of the Luxembourg holding company.
(i) The Luxembourg holding company's shares must be in
registered form.
(j) If bond issues are outstanding, the shareholders must
not seil their equities to third parties.
(k) The Luxembourg holding company's portfolio must
contain shares that are issued by enterprises belonging to the
same group. This condition is met when the parent company's
equity investment in the Luxembourg holding company is
paid for by controlling shares of the parent company. This is
called cross-shareholding between the parent company and
the holding company.
(I) Proceeds from a loan must be used only for enterprises
of the group in which the holding company has participating
interests. This restriction must be explicitly stated in the arti-
eIes of association.
Still another way that the finance holding company differs
from the ordinary Luxembourg holding company is that it
may issue bonds in the ratio of 10:1 to the share capital, as weil
as having Iiabilities of three times its share capitaI.

Management holding company The management holding com-


pany is another ofthe various entities c1assed under the general
term "hold ing company", Since there is no specific legislation
in Luxembourg that applies to open-end investment funds, the
management company functions as the trustee and administra-
tor of such assets invested in these two funds. In absence of
such legislation, the open-end investment trust has no legal
status; therefore, when third party transactions are called for,
the management company acts on the trust's behalf.
Adhering to the American principle of the distinction of
competencies, the open-end investment holding company con-
sists of thrce separate organs: the management company, the
joint trust, and the trustee bank.
The management holding company is a capital share com-
pany, usually assuming the form of a public holding company.
Tax Havens JOT Special Purposes 107
The Minister of Treasury, together with certain Luxembourg
legislation, has imposed the following rules on such companies:
(a) Their only purpose must be to form and administer the
joint investment trusts for which they were constituted.
(b) At the time of constitution, they must be capitalised in
the amount of at least 5 million francs, subscribed and paid in
fuH.
(c) Their shares must be registered.
(d) Their assets must be managed so as to provide a guaran-
tee for the bearers of the investment trust's certificates. In
effect, this means that they must employ their own funds.
(e) The shareholders, or persons for whom the investmen t
funds are originated, must provide a joint guarantee to' comply
with the administrative regulations in any undertakings that
are initiated.
At the outset of its formation, the management holding com-
pany is subject to the standard tax system. However, there is a
reduction of the annual subscription duty, to six-tenths of 1% of
the inventory value of the portfolio of the funds administered,
payable in four quarterly instalments. The fiscal privileges pro-
vided to holding companies by Luxembourg legislation are
equally applicable to both the management company and the
open-end investment company it administers.

Joint investment trust The joint investment trust is an organic


joint possession that has a specific legal status. Persons or en-
tities with holdings in the trust are considered co-owners of its
underlying assets, with ownership rights, represented byeither
bearer or registered stock. instead of being considered as own-
ers of corporate shares, This would be equivalent to units of
beneficial interest in a British or an American trust. A holder
in the trust has the privilege of demanding redemption of his
stock at any time.
The Minister of Treasury must approve the administrative
regulations when the company is formed. Holdings in t.he
trust are contingent upon adherence to these administrative
regulations.
Thc regulations outline the rights and obligations of the
holders, as weil as the conditions under which the manage-
ment company is mandated. It is essential that the regulations
define (1) the issuing and redemption conditions for the co-
108 Tax HavensJor International Business
ownership stock, (2) the method and frequency for assessing
the value of the shares, (3) the method and costs of adminis-
tering the trust's assets, and (4) the rules that apply to the
spreading of assets.
Concerning the spreading of assets, however, there are cer-
tain restrictions that must be complied with in any case, as
regards the amount of the trust's assets that are invested in
stock issued by one company, or in unquoted stock. Still
another restriction imposed by Luxembourg legislation is that
the open-end joint investment trust cannot borrow from or
hold shares in other investment trusts.
To make a public issue, or to be quoted on the stock exchange,
an investment must have assets of at least 100 million francs.
The trustee bank holds the assets of the investment trust, and
jointly guarantees adherence to administrative regulations. An
investment trust may utilise more than one trustee bank.
Luxembourg authorities must approve the bank or banks that
are chosen.

Closed-end investment holding company The constitution of the


c1osed-end investment holding company calls for the form of a
public holding company, in which shareholders own shares of
the corporation rather than shares of the underlying assets.
This form of the Luxembourg holding company would not be
unique, except for its recent rapid growth, and the resultant
issuance by Luxembourg authorities of the following recom-
mendations concerning its form:
(a) At the outset, the concept of authorised capital is
acceptable and, at a general meeting of the investment com-
pany's shareholders, authorisations may be given to the board
to increase the registered capital up to a given amount. The
generation of this increase must bc by thc most suitable
methods, and be consistcnt with capital requircments. How-
ever, this resolution must be submitted within five years to the
extraordinary general meeting for ratification regarding the
portion of authorised capital that may not have been
subscribed.
(b) On the date ofthe company's constitution, the subscrip-
tion pricc for issued shares may not include a premium that is
overly large in comparison to the nominal value of the stock.
Tax Havens JOT Special Purposes 109
Previously, nominal value of the stock has always represented
at least 10% of the initial subscription price.
(c) At the time of a capital increase, the subscription price
for the offered shares must be equal to the net value of the
shares that were issued previously (including any expenses) .
(d) Ir certain persons are granted special financial advan-
tages - preference shares, bonus shares, or options - in return
for their assistance in the formation or development of the
company, such advantages will be allowed only on the condi-
tion that a detailed and accurate description of them is given
in the prospectus.
Further, the results of granting special financial advantages
must be specified individually in the financial staternents, and
explained in the periodic reports to shareholders.
(e) A distinction must be made between actual funds, on the
one hand, and registered capital and legal reserves on the other,
if the company elects to buy back its own shares, subject to the
following provisions: (i) Actual funds must be used for the pur-
chase; (ii) The company's articles of constitution must a1low for
such transactions; and (iii) Equal treatment must be afforded
shareholders in applying for and repurchasing the shares.
(f) In the event that the company repurchases shares, it
must then provide accounts and reports to the public that
c1earlyoutline the terms of the repurchase.
The methods for implementing repurchases of shares vary.
Some investment companies do their own repurchasing, while
others prefer to form subsidiaries for that purpose. The sub-
sidiary, whose only purpose is to repurchase the parent com-
pany's shares, is also c1assed in the holding company system.
The repurchased shares no longer confer a voting right, or dis-
tribution right in thc event of liquidation.
Unlike joint investment trusts, c1osed-end investment com-
panies face no restrietions in the choice or spreading of the
investment.
For example, they may hold stocks and shares in investment
trusts or other investment companies in their portfolios. Fur-
ther, if the general provisions applying to holding companies
are adhered to, the c1osed-end investment company may
employ capital other than that received from the sale of ordin-
ary shares. The c1osed-end company is subject to the same
taxation as are holding companies.
HO Tax Hauensfor International Business
Wc can therefore say that the closed-end investment com-
pany is a sort of hybrid of the open-end investment company
and pure holding company. Because it is subject to fewer
restrictions than the open-end investment company, it is
becoming a preferred form for an increasing number of inter-
national promoters. As a typical comparison, the open-end
company is not permitred to borrow money, either on a short-
or long-terrn basis, and is therefore not able to use the "lever-
age" technique in the managemcnt of the fund's assets.
From a legal viewpoint, the closed-end investment com-
pany's capital structure and general form are briefly as follows:
based upon adecision taken by the general meeting of share-
holders, the board of directors is given the authority to
increase capital up to the specified amount ofauthorised capi-
tal. This increase is effected over aperiod of time determined
by the subscriptions that are received by the company. Such
subscriptions may be made to the board of directors at specific
intervals.
The essence of this procedure is that new shares may be
issued continuously. The successive increases of the issued cap-
ital are recorded periodically, by deed established by a Luxem-
bourg notary public, and are required to be published in the
Official Gazette. The duraLion of the effect of the shareholders'
original decision is five years; at the expiration of this period, if
the authorised capital has not been issued in its entirety, the
decision must be renewed.
In order that the closed-end investment company operate to
fulfil its corporate objective, certain standards regarding share
values have to be set. Since the net worth of the company's
assets is established (in most cases) daily or weekly, it is essen-
tial that the subscription price, as paid by the investors, corre-
sponds exactly to the net worth of the share. To effect this, the
issuc price is made up of two factors : the par value of the share,
which is constant; and the par value plus the addcd premium,
which varies according to the issuc price.
The premium serves the following function : the closed-end
investment company must be able to rcdeem its shares at net
asset value any time shareholders present such shares for
rcdemption, just as does the open-end investment company.
To do this in accordance with Luxembourg law, thc redemp-
tion can only be financed by a specific reserve account pro-
Tax Havens JOT Special Purposes 111
vided by the premiums collected from subscribers, but not
through the firm 's capital or legal reserve accounts.
The relation between the par value of the capital and the pre-
miums ofthe investment companyvaries from 1:10 to somewhat
less. According to Luxembourg law, premiums should not be
overly disproportionate to the par value of the capital, with a
ratio of 1:15 being considered in the tolerable range for the
purpose of the repurchase company pursuing redemption.
We have a1ready touched upon the functions of the repur-
chase holding company, which is also subject to the Luxem-
bourg lawsapplicable to holding companies. While the decision
to utilise the purchase holding company is optional, its use is
recommended by both Luxembourg authorities and the pro-
moters of c1osed-end investment companies. As a practicality,
the repurchase company can be a holding company, owned in
its entirety by the closed-end investment company.
The repurchascd shares cannot be resold to the public, and
do not have a voting or liquidations dividend right. They can
be managed separately from those owned by shareholders of
the closed-end investment company. The net value of the
repurchased shares must be deducted from the total nct assets
value of the shares of the c1osed-end investment company.
Luxembourg law is fairly stringent regarding the information
that must be published by the closed-end investment company.
This information must be complete and detailed. The ruling
applies specifically to yearly and periodic reports, which should
c1early state the amounts of the issued and authorised capital,
the par value and premium of the investment company's issued
shares, the number of shares redeemed by the repurchase com-
pany, the balance sheet of both the parent company and the
repurchase company, and a detailed statement ofthe assets and
securities that the company holds in its portfolio.

Patents Patent holding is an important function of the invest-


ment holding company, with patents being considered as
much a security in the portfolio as are shares and bonds. Pa-
tents must be exploited by ordinary commercial and industrial
enterprises. When this is done, the holding company is the
ideal form for the patent business. This has resulted in the for-
mation of many holding companies whose primary purpose is
112 Tax Havens for International Business
to hold patents; moreover, with the advent of the Common
Market, the number of patent holding companies will surely
increase. The portion of Luxembourg legislation that applies
to patents is specific in decJaring that patents are commercial
securities with a special character, and appropriate as a means
of financial participation in commercial enterpriscs. 800n
after the legislation was passed, the Luxembourg revenue
authorities made the following points:
(a) One of the most effcctive operations that a holding com-
pany can participate in, from the viewpoint of increasing the
value of its securities, is the purchase of patents for the specific
purpose of granting Iicences to affiliates or other companies.
The granting of patents may be implemented by exchanging
them for shares, or cash payments in any form (such as annual
payments), or for a %age of the profits, a %age of the turnover,
or by whatever means is viable for the principals concerned.
(b) A holding company can acquire patents, either by
outright purchases, or by taking them on a royalty arrange-
ment. The acquisition of patents is looked upon as much
the same as increasing securities by acquiring cash, whether
such cash is acquired through loans, granted credits, or by
an increase in capitaI. In the case of patents, they may be
acquired either through third parties, or through affiliated
companies.
(c) The holding company can only transfer patents to third
parties (whether individuals or companies) in which the hold-
ing company does not have substantial holdings if certain
requirements are met - the transfer must be a method of rais-
ing funds that will be used within a year to purchase securities.
When this is done, no taxation is applicable during the year,
allowing the company sufficient time to convert patent sales
revenues into company securities.
(d) The foregoing requirernent is flexible to the extent that
a holding company may make one of several isolated patent
transactions to third parties without reinvesting the proceeds
of the transactions into securities, and without losing its hold-
ing company status so long as it continues to conform to the
Holding Company Act of 1929. Thus, the law recognises the
possibility that a reinvestment of funds in securities may, under
certain circumstances, be too costly to be practical, or may be
impossible. (This concept of flexibility in the Luxembourg law
Tax Hauensfor Special Purposes 113
is much the same as that of other countries where holding
company patents are considered special cases, to be dealt with
by special rules.)
(e) Luxembourg law also permits the holding company to
assurne the role of an agent in the sale of patents that belong
to affiliated companies.
(f) If, in transactions involving the purehase and sale of pa-
tents, holding company actions imply that it is operating a
patent agency, such action can be construed as commercial
activity. The company would no longer benefit from holding
company legislation. The holding company must therefore
attempt to reinvest the proceeds of patent sales into securities
within a reasonable time, or show sufficient cause why this
cannot be done.
(g) If either foreign or horne patents are transferred, the
transfer must be registered at a flat registration fee,

Engüsh equiualent to the Luxembourg holding company In its legal


structure, the Luxembourg holding company mayassume one
of the following English equivalencies:
• General partnership
• Limited partnership
• Partnership limited by shares
• Public limited company (joint stock company)
• Private limited company (limited liability company)
• Cooperative society.

Public limited, joint stock company The most commonly encoun-


tered type ofholding company is the public limited,joint stock
company, which may be organised as either a closed-end or
open-end company. It may utilise a management company, a
repurchase company, and a trustee bank. The assets of the
investment trust are kept in the trustee bank. A relatively small
operation may forgo the management company and trustee
bank; however, in any case, arepurehase holding eompany
may be used as a vehicle for acquiring patents. It may be as
diversified as any stock eompany; however, to use the stock
exchange for a public share issue, it must have assets of at least
100 million francs.
114 Tax Hauens for International Business
Signing the deed If a holding company is to be a joint stock
company, it must be formed under a notarial deed. Founders
who live in another country may give powers of attorney to
third parties for the signing of the notarial deed, thereby
relieving themse1ves of thc necessity of being present at the
signing. These third parties who attend the signing of the deed
(before a notary) may be entered on the deed as nominecs. It
is noted, however, that such nominees have no spccific man-
date, and that the subscribed shares will be transferred to the
principals.

Residente requirements Luxembourg legislation recognises that


the founders, directors, auditors, managers, managing direc-
tors, etc . may be of any nationality, and moreover, may be
residents ofanother country.

Books of account Company books, which may first be initialled,


and subsequently signed by compctent authorities, must be
kept at the registered office.

Shares Shares of the company are registered shares, and must


remain registercd shares until they are paid, or until bearer
shares are issued. There is no legal necessity to provide printed
shares. The capital of the company and the nominal value of
each share may cither be expressed in Luxembourg francs, or
in any other currency.

Tenn The duration of the company's term is 30 years. This term


may be renewed repeatedly, so long as it is done with adherence
to legal requirements (renewals are also for 30-year periods) .

Meetings The joint stock holding company must hold ordin-


ary, annual meetings at its registered Luxembourg office, and
must submit the company's accounts to the shareholders. In
the case of absentee shareholders, proxy attendance is permit-
ted, with no expense incurred to the shareholder who does
this, The presence of a notary public is not required at the
ordinary meetings. However, in the event of an extraordinary
meeting, convened to amend the articles of constitution, a
notary public must be prescnt.
Tax Hauens JOT Special Purposes 115
Publication The joint stock holding company must publish its
annual balance sheet, and an abstract of its profit and loss
accounts in the Luxembourg Official Gazette. This publication
must also state the composition of the board of directors and
auditor or auditors. Luxembourg law does not require that a
list of the company securities be published in the Gazette.

Luxembourg Services Both foreign and domestic banks are on


the increase in Luxembourg. Much of this increase is because
the Luxembourg Stock Exchange is extensively used for the
issuance of Eurodollar bonds. Because of the highly developed
business atmosphere of this tiny country, a complete range of
legal and accounting services is available.
There are no exchange controls.

Taxation Luxembourg has double taxation treaties with


Holland, France, Austria, the United States and the United
Kingdom. Generally, since Luxembourg holding companies
are not really being doubly taxed, they are not qualified for a
reduced withholding tax.

Summary Luxembourg legislation is designed to attract hold-


ing companies. The establishment of a holding company can
result in a considerably reduced expense budget for a corpora-
tion, As evidence of this, consider the following:
(a) Regardless of a company's profits, there is only a single,
small annual tax.
(b) The judicial system of Luxembourg, which is liberal, is
geared toward the needs of the holding company.
(c) All the principals of a company, such as the promoters,
directors, auditors, managers, etc. may be of any foreign
nationality and may reside in other countries.
(d) There is no communal taxation.
(e) There is no Luxembourg tax levied against dividends
distributed by the company, either against the company ltself,
or against foreign shareholders.
(f) There is no Luxembourg tax levied against coupons of
foreign securities - such as shares and bonds - that are held by
the company.
116 Tax Havens for International Business
(g) There is no taxation on the proceeds of liquidations.
(h) The law does not require the publication of the list of
company securities.
(i) Luxembourg revenue authorities do not examine or
supervise the books of holding companies.
8 Special Legislation für
Regional Offices of
Multinational Companies

Several countries have passed legislation to attract regional


offices of multinational companies, and one tax haven has a
tax structure which unintentionally accomplishes much the
same purpose.

Philippines
In an effort to bolster the local economy, the Philippines has
enacted legislation that incorporates certain restrictions and
provisions which may ultimately make the Philippines of little
value as a tax haven. The body of the legislation is Decree 218,
"Prescribing Incentives for the Establishment of Regional
or Area Hcadquarters of Multinational Companies in the
Philippines". Companies that qualify for tax benefits under
this decree usually establish regional offices in the Manila area.
The essence of Decree 218 is that any regional headquarters
organised in the Philippines that is managed and controlled
from outside the country, and that does not derive local income,
may be entitled to a 100% tax exemption. The intent of the law
is to make the regional office act only in a supervisory,commun-
ications or coordinating capacity for other affiliates or branches
in the Asia-Pacific area. This means that the parent company
must be extremely careful to segregate and limit the functions of
the regional office. Some provisions of the decree are:
(1) Either a Philippine commercial attache or a Philippine
consul in the horne country of the multinational firm must
present certification to the Philippines government that the
foreign firm is a legal entity engaged in international trade
with affiliates, subsidiaries, or regional offices in the Asia-
Pacific area.
(2) A principal officer of the multinational firm must
present a certification to the Philippines government stating

117
118 Tax Haoens for International Business
that the multinational firm has been authorised by its board of
directors to establish regional offices in the Philippines. This
certification must state that the regional office will act only in a
supervisory, coordinating, or communications capacity for its
affiliates, subsidiaries, and branches in the Asia-Pacific area;
and further, that no income will be derived in the Philippines.
(3) The multinational firm must agree to spend at least US
$50,000 (or equivalent) annually, to cover the expenses of its
operation in the Philippines. Within 30 days of receiving the
Certificate of Registration from the Securities and Exchange
Commission, the company must present to the Securities and
Exchange Commission a certificate of inward remittance from
a local bank of at least US $30,000 (or equivalent). Thereafter,
within 30 days of the anniversary date of the establishment of
the regional office, the company must present to the Securities
and Exchange Commission a certificate of inward remittance
of at least US $50,000 or equivalent. The currency used must
be converted to Philippine currency.
Furthermore, the Philippine office will be permitted to
operate only at the discretion of the Bureau of Internal Revenue
that judges on such matters as the source of income, and func-
tions of the branch office.
If the regional office meets the qualifications, it receives the
following tax exemptions:
(1) It is cxempt from Section 191-3% tax on gross receipts
of contractors, proprietors or operations of dockyards and
other activities.
(2) It has 100% excmption from an income tax in the
Philippines.
(3) It is exempt from an licences, fees,local taxes, etc.
(4) Its executive personnel qualify for areduction of the
normal withholding tax that is applicable to their wages. The
normal tax is 30%, which is reduced to 15%.
(5) There are no import duties on equipment necessary to
maintain the local office, or on household items of foreign
personne1 who manage the office. Furthermore, normal im-
migration requirements are relaxed so that foreign personnel
may have free movement into the Philippines.
The normal corporate tax rate of the Philippines is 35% on
taxable income, with forcign branches and resident corpora-
tions paying an additional 20% on profits remitted abroad. The
Special LegislatumJor Regional OJfices 119
income lax rate on Philippine individuals is graduated on a pro-
gressive seale, beginning at 3% and going to 70%, with fixed
amount exemptions for single persons and dependent children,
as weIl as a standard 10% deduetion. Corresponding amounts in
US dollar equivalencies are somewhat lower than in the Uni ted
States, reflecting the lower per capita ineome of the Philippines.

Jordan
jordan, a small Arab nation strategieally loeated near the Red
Sea, Mediterranean Sea, and the Arab markets of the Middle
East, is making a bid, through special lax haven legislation, to
induce international business firms to loeate regional head-
quarters there. Now that Beirut is no longer available as a
regional headquarters for international trading companies,
jordan may weIl achieve the status of a major tax haven and
regional headquarters loeation for trade in the Middle East.
The jordan law is caIled the Foreign Companics Registration
Law. Under the law, a foreign company ean establish ajordan-
based branch for engaging in business outside jordan. The fact
that thc law does not permit the foreign company to conduct
business in jordan should present no obstacle to thc enterpris-
ing firm that can use sueh a strategie loeation to reaeh Arabian
Gulf markets.
As apart of the oil-producing Arabian region, jordan's
physieal location provides aecess to the Persian Gulf, the
Mediterranean trade routes used by oil-producing companies,
as weIl as to the Red Sea and the Indian Oeean routes that serve
Asia, Africa, and Australia. It also has excellent highwaysand air
services to link it to Europe and neighbouring eountries. Its
loeation gives access to a consumer population eomparable to
that of the United States, with a combined national product of
approximately $150 billion.
jordan's business community seems to have a stronger base
in the principles of free enterprise than other countries in the
region. Combined with a history of economie stability, high
educational standards, a high literaey rate, and excellent living
conditions, the jordanian penchant for free enterprise should
provide the elements for important economic growth.
Because of its importance in the industrial and commercial
world, Jordan officials have made English a mandatory sub-
ject in government schools. Eight years of English-Ianguage
120 TaxHavens for International Business
instruction is required for all secondary and vocational school
graduates. Moreover, the jordanian business and professional
community (including government offices) is staffed with
English-speaking jordanians, many of whom are graduates of
American or British colleges and universities.
Banking facilities are good, with a large network of commer-
cial banks - including several foreign banks - and many special-
ised credit institutions to provide short- and long-terrn money
for qualified business firms.
A1though not much can be said for the efficiency ofjordan's
seaports, which seem to be continually clogged with ships, the
excellent network of highways in the area provides a viable
transportation system. Also, jordan's air service from many
major airlines piaces it within a few hours of European and
Arab capitals. The only executive jet service in the Middle East
is located in jordan.
jordan maintains a dependablemail service, with air mail
from the United States arriving in four or five days. A direct-
dial telex system is connected with the major international car-
riers. The direct-dial system for telephone calls to the United
States and Europe is constantly being improved - new satellite
telephone equipment has been installed. jordan gives priority
to any foreign company that requests telex services.
Amman, the capital, has international schools for elernen-
tary and post-elementary students, Hospitals and other medi-
cal facilities are modern. Churches are of many denominations
because jordan has a large Christian population. Local shops
and supermarkets are stocked with familiar American and
European household items and products. Shopping or dining
out is easy, with storekeepers and other businessmen speaking
English. There are French, Chinese, Polynesian, and Turkish
restaurants in addition to the more familiar American and
Arabian ones.
Amman also offers cultural events found in any major city -
concerts, art exhibits, lectures, and films. The entire country is
somewhat like an open museum because Greeks, Romans,
Nabateans, Canaanites, Persians, Crusaders, Arabs, and Ottoman
Turks have, at various times throughout history, held or da-
minated some or all of jordan. jordan differs from most Arab
countries in that it engages in and provides equipment for a
variety of sports activities, including tennis, basketball, soccer,
Special Legislaiion for Regional Offices 121
horseback riding, hunting, horse racing, squash, cricket, fishing,
sailing, water skiing and scuba diving.
Amman provides de luxe housing at rates below the average
for the area. Housing consists of single dwellings with attractive
gardens. A variety of modern apartments are also available.
Foreigners may be pleasantly surprised to find that household
servants work at modest wages.
A company registering under jordan's Foreign Companies
Registration Law will find itself in line for many tax benefits,
including: total excmption from income and social security
taxes; exemption from registrations with the Chamber of Com-
merce, and from the paymen t of business registration taxes;
exemption from customs dutics on the furnishings and equip-
ment for thejordan branch office; and exemption from duties
on the importation of commercial sampies. jordan also grants
non-resident exchange control status to the regional office so
that it may maintain bank accounts in foreign currency.
Not only does the jordan-based regional office receive direct
tax benefits, its employees also receive substantial privileges
from the Jordan governmcnt. These include exemption from
social security and incomc taxes for non:Jordanian employees;
an cxemption on customs duties on houschold furniture
importcd by the non:Jordanian employees; duty-free Import-
ation of a car every two ycars, granted to each employee; and
the availability of residential and work permits for the non-
jordanian employees,
It seems likely thatjordan's bid to attract international bus-
iness will be successful. Some years ago Greece offered a similar
package of tax bencfits and experienced an influx of regional
headquarters of multinational companies. jordan's tax exemp-
tion law for foreign companies, together with the many other
concessions and incentives that are offered, should create a
healthy international business scene in the Arab kingdom.

Greece
Greece consists of the mainland, a few large islands, and many
smaller islands. The mainland is bordered on the north by
countries of southeastern Europe, and on the south by the
Mediterranean Sea. A major portion of its external bound-
aries comprise the shorelincs of thc Ionian, Aegean, and
Mediterrancan Seas. The largcst of the islands is Crete, lying
122 Tax Havens fOT International Business
southeast of the mainland in the Mediterranean. The capital
city of Grcece is Athens.
Greece's tax haven laws, especially as they affect foreign
firms with shipping interests, have been responsible for the
sound economic growth of the nation. Apart from the tax
haven industry, there has been a gradual but decided tran-
sition from an agriculturally-based economy to one that is
divided bctween industry and services. And, as has been the
case for many centuries, shipping plays an extremely Import-
ant role in Grecce's economic development. The gross
national output is making steady annual increases.
A majority of the general populace speaks the Greek lan-
guagc; however, many pcrsons in thc business community have
a working familiarity with English.
Except for the specially designed tax havcn laws, wh ich
exempt qualificd regional headquarters of multinational co m-
panies from tax, taxation in Greece is a reality of life (the
corporate tax rate is in the neighbourhood of 40%, and inher-
itance tax rates are on a progressive scale that reaches 75%.
Tax evasion in Greece is a risky venturc.)
In addition to extremely well-developed facilities for ship-
ping, Greece has a well-deve1oped banking system, inc1uding a
ccntral bank, sevcral commercial banks, investment banks,
credit institutions, and branch offices of foreign banks. Many
major airlines servc Greece. The country has a good cornmuni-
cations system, as weil as an efficiently operated postal service.
The national currency is the drachma.
Any foreign commercial or industrial company that estab-
lishcs a regional office in Greece, under Law 89, will receivc
100% excmption from income tax, as weil as other significant
tax benefits. Thc titlc of this Greek tax law in its entirety
is "Establishment in Greece of Foreign Commercial and
Industrial Companies",
Thc establishment of a Greck regional office is subject to the
approval of the Minister of Coordination, who approves or dis-
approves thc application within several days. Approval is con-
tingent upon granting power of attorney to a permanent
Greck resident who will act as thc foreign company's legal
rcprcscntativc. Thc law requires that a Greek consular officer
in the horne country of the foreign company authenticatc
Special LegislationJor Regional Offices 123
tbe power of attorney wbicb must be translated into tbe Greek
language.
To effect tbe power of attorney, a statement must be written
in tbe borne country, stating that tbe party gi'ving the power of
attorney is a duly constituted corporation. Tbis statement must
be notarised bya local notary public. Tbe foreign parent com-
pany mayaiso be asked by the Minister of Coordination to file
a copy of tbe annual balance sbeet and profit and loss state-
ment (your local attorney mayaiso suggest sending a copy of
tbe parent company's articles of incorporation).
Tbousands of foreign companies that operate sbipping
fleets bave establisbed Greek regional offices to take advantage
of the tax benefits on non-Greek source income from around
tbe world.
Provided that the regional office is legally structured in ac-
cordance witb Law 89, and provided that it derives no income
from Greece, it receives the following benefits:
(1) Exemption from all Greek taxes.
(2) Exemption from income tax on earnings of foreign
personnel who work for the regional office.
(3) Exemption from all customs duties, stamp duties, im-
port taxes, and luxury taxes on items imported to equip the
regional office.
(4) Exemption from duties on the importation of house-
hold items by the firm's foreign personnel.
(5) Exemption from any requirement to keep books in the
Greek language.
(6) Exemption from requesting the approval of the Post
Office to post registercd letters abroad.
(7) Exemption from any export-import duties relating to
sampies of advertising material by the regional firm.
(8) Exemption from tax on interest received from deposits
in Greek banks or from government bonds.
(9) Exemption, for certain specified enterprises, from a tax
on the profits from sale ofsecurities.
(10) Exemption from any tax on interest from loans
granted by foreign banks or firms to certain Greek entities,
regardless of whether or not Greece has a double taxation
treaty with the horne country of the foreign firm granting the
loan.
124 Tax Hauens JOT International Business

(11) Exemption from duties on the conversion of bond or


preference shares of corporations, and on the replacement of
share or bond certificates.
(12) Two-year work permits for foreign personnel, with
extensions obtainable.
Undcr Creek Law 89, and other laws that supplement it, a
shipping company established in Greece will enjoy the twelve
benefits listed above . Approval for the establishment of the
regional shipping firm must comc from both the Minister of
Coordination and the Minister of Mercantile Marine.

Tunisia
In 1989, Tunisia passed legislation authorising a package of tax
exemptions for international service companies, following the
same basic pattern as the Creek andJordanian legislation. The
one major difference is that approval can be obtained to do
some local business, which is taxed at the normal local rates. It
is too early to tell how weil Tunisia witt devclop as a regional
headquarters site. The climate is lovely, and it is an attractive
tourist destination, but it does not have the advantages of
Jordan as being in the centre of a booming market. However,
as developmcnt programmes continue in the western North
African countries, Tunisia may become an interesting base.

Puerto Rico
Puerto Rico is a US-controlled tax haven in the enviable posi-
tion of enjoying the advantages that an alIiance with the
Uni ted States can bring, but with an internal tax system that is
separate and distinct from that of the Uni ted States. There-
fore, Puerto Rico has traditionally been able to offer substan-
tial lax haven bcnefits to corporations. As a result of the
Industrial Incentivcs Act, and various amendments, Puerto
Rico has become weil known for the tax holidays granted to
manufacturing and hotel investment firms. Of course, many
countries offer such tax holidays for new enterprises, hut that
is not within the scope of this book. Certain locally-hased
service corporations also can qualify under these incentive
acts, usually receiving a 50% tax holiday for aperiod ofyears.
For a regional headquarters, an inadvertent result of the
unique political status of Puerto Rico has made it a popular
Special Legislation lor Regional Offices 125
base for regional offices covering Latin America, and many
large American corporations use Puerto Rico for this purpose.
Puerto Rico is not apart of the United States for income tax
purposes; therefore, for income lax purposes, it considers US
source income as foreign source income. A unique tax advan-
tage becomes obvious. Puerto Rico does not lax foreign source
income of a foreign company that has a branch in Puerto Rico.
From this, we can readily see the lax saving potential of a lax
haven corporation, formed in a jurisdiction such as Panama or
the Cayman Islands, with a branch office registered under
Puerto Rican corporate law. The Puerto Rican branch could be
used for the company's international business, and only the
income actually earned in Puerto Rico would be subject to
Puerto Rican taxation.
One large American manufacturer of air conditioners has
used Puerto Rico in this way for many years. The Latin
American sales subsidiary is incorporated in Panama, but act-
ually operates from an office in San Juan, the capital of Puerto
Rico. The sales representatives cover all ofLatin America from
the SanJuan base, and the profits are entirely tax-free,
Puerto Rico's access to the Latin American consumer rnar-
ket, together with its unique lax advantages, place the cor-
porate office in a more enviable regional position than would
be the case in Miami or other mainland headquarters. SanJuan
has become a major air transportation hub for the region,
making travel between a San Juan base and both North and
South America extremely easy. It is about 2112 hours flying time
to Miami, and 3,1/2 hours to New York.
Mail-order companies, publishers, consultants, service firms,
and many others who are looking to explore the Latin
American market, should find a Puerto Rican-based enterprise
to be profitable.
The Puerto Rican trade zones offer another business poss-
ibility. These trade zones, which are outside US customs ter-
ritory, rent such facilities as warehouse and assernbly space.
These are important assets for a company working into the
Latin American market. Together with the export manufactur-
ing exemption, available for ten years to a loeal manufactur-
ing company, . this provides a tax-free and duty-free base of
operations within the jurisdiction of the United States. There
126 TaxHavens fOT International Business
is no other place in the territorial limits of the Uni ted States
that provides such an advantageous base for the exporter.
Except for its ineome lax status, Puerto Rieo is as mueh a
part of the United States as is any state. This means that it is
within the customs territory of the United States, allowing
equipment, supplies and goods to be transferred from the
mainland without duties. Sinee Puerto Rieo is part of the
United States, US immigration laws apply to posting foreign
personnel there, although for an American citizen a trip is no
more restrieted than a trip from one state to another.
Another extremely important consideration is that Puerto
Rieo is included in the US postal system, with domestic postage
rates applieable to mail between the United States and Puerto
Rico.
Benefits from government aid programmes such as employ-
ment training or loans from the Economic Developrnent
Administration and Small Business Administration that are
available to US business, are equally available to Puerto Rican
enterprises. Thus a Puerto Rican subsidiary or branch can
apply for the various forms of assistance available under these
fcderal government programmes.
9 Switzerland - not all that
it is Alleged to be

Switzerland is a civillaw country, with an extremely stable polit-


ical and economic system. While many businessmen associate
Switzerland with tax havenry, there are many other tax haven
countries that are currently offering more lucrative tax ad-
vantages. Switzerland gained the reputation as a tax haven
through its secret bank accounts, and Swiss banks still have
many foreign depositors, despite the fact that it imposes a high
withholding tax rate.
Switzerland has adopted a tight policy on immigration, and
to implement this, has made residence permits virtually im-
possible to obtain. This makes it impossible to transfer foreign
employees to a Swissoperation.
The Swiss franc is one of the most stable currencies in the
world.
The Swiss federal constitution guarantees an economic
system based upon the principle of free trade and commerce;
however, in recent years, the principle and practice of this con-
cept has diverged somewhat. There is no doubt that, because
ofits lack ofraw material (although it does have an abundance
of hydro-electric power), together with an inadequate agricul-
tural system, its economic survival depends upon elose cooper-
ation with other nations. The extensive import of certain
consumer goods is, of course, a necessity; however, Switzerland
exports many manufactured items, most of which are con-
sidered world-wide as being of the highest quality.
One of tbe strongest economic ties between Switzerland and
other nations is in the area of service. Tbc tourist business
accounts for large net foreign currency receipts. Since World
War 11, Switzerland bas developed into one of the world's fore-
most financial centres, primarily by strengthening its financial
position in the various fieJds of international capital exchange.
Its development as a financial fortress is evidenced now by its
favourable international investment position.

127
128 Tax Havens fOT International Business
Switzerland was among the founding members of the
European Free Trade Association (EFTA). In 197~ it signed an
agreement with the European Community for the establish-
ment of a free -trade zone for industrial products.
Switzerland has a well-devc1oped system of banking that is
responsible for a large portion of foreign assets and liabilities.
By the nature of most business conducted in Switzerland, its
banks are forced to compete with international banks. Their
success is largely attributable to the soundness of the Swiss
franc,
Many Switzerland-based insurance companies operate in the
international insurance sphere, constituting another Import-
ant aspect of the Swiss financial community. Some reinsurers
obtain as much as 97% of their premium income from other
nations.
Work and residence permits are required for foreigners. A
temporary or permanent residence permit is required for for-
eigners who wish to establish a Swiss residence, with a work
permit bcing required for employment or activity in one's own
business. Residence permits are regulated by federallaw, but the
cantonal authorities are, in most cascs, authorised to issue res-
idence permits. Generally spcaking, temporary residence per-
mits are gran ted for aperiod of one year, and may be extended
upon application. A permanent residence permit, usually
granted only after continuous residence for ten years (the per-
manent permit may be granted after a shorter time, depending
upon the applicant's nationality), is granted for an unlimited
duration. Both permanent and temporary residence permits are
validonly in the canton where they are issued, unless a treaty
with the applicant's country specifies otherwise. Thus, if the for-
eigner wishes to move from one canton to another, he must
apply for and obtain a ncw residence permit. (Information
about Swiss residence permits is in fact only of academic interest
because Switzerland now rarely issues residence permits).

Forming the Swiss Company


The legalities of forming a company in Switzerland are fairly
simple, with the conceptof frcedom of trade and commerce
invoked in most cases. All pcrsons, inc1uding foreigners, are
held to havc the constitutional right to establish a business
and/or engage in business activity.
Switr.erland 129
Company names Swiss law, for the most part, allowsfreedom of
choice when naming a new company; however, the name must
clearly indicate the structure of the firm . Typical legal struc-
tures inc1ude single owner, partnership, company limited by
shares, or cooperative. The following rules apply to the
naming of firms:
(a) A firm's entry into the Register creates certain legal pro-
tectlon, as weil as obligations. Among these are protection
against infringement on the firm name; an obligation for the
firm to maintain books of account; liability to bankruptcy pro-
ceedings and special proceedings to enforce payment of bills
and exchange.
(b) An Register entries must contain the name of the firm;
the firm's domicile, the owner's name, if a single owner firm;
the partners' names, if a general or limited partnership; and,
in thc case of limited liability companies, the amount up to
which the principals are liable. In the case of a corporation,
the amount of capital stock must be entered along with the
shares' nominal value, the names of management and board
of directors personnel, and the names of persons with the
authority to sign or act on behalf of the corporation.
(c) Entries concerning the location ofthe firm's head office
are also made in the Register. Branch offices are rcgistered at
their locations, as weil as at the locations of their head offices.
Cantonal authorities keep the Register, subject to the super-
vision of the Federal Office of the Register of Commerce.

Company forms Swiss business enterprises are allowed in such


forms as:
(a) The single owner firm .
(b) The general partnership, which is an association of two
or more individuals. It has unlimited liability to the creditors of
the organisation. It can be formed under a firm mandate for
the purpose of operating a trading enterprlse, an industrial
enterprise, or other enterprise that is based on commercial
principles. The contract of partnership, written as a result of
such a business alliance, must be entered in the Register of
Commerce. Although not considered a corporate body, thc
general partnership can acquire rlghts, assume liabilities, in-
stitute legal action, sue and/or be sued.
130 TaxHavens JOT International Business
(c) The limited partnership.Must have at least one general
partner, but with one or more partners who have limited liabil-
ity and no voice in management.
(d) The corporation. This is the legal form most often used
to incorporate holding companies and investment companies.
It is considered the best legal form for an enterprise that par-
ticipates in foreign business interests.
(e) The limited partnership corporation. Not often en-
countered, it has some characteristics of both the corporation
and the limited partnership. Under the limited partnership
corporation, one or more persons may assurne management
of an enterprisc as partners (in the case of more than one
person) with fullliability to creditors. In order for such an
entity to raise additional capital of limited liability shares are
offered for subscription. This is a recognised legal form in
Switzerland,
(f) The limited liability company. This is an association of
two or more persons or companies with a firm name and fixed
capital, having its own legal personality. Each partner contrib-
utes a fixed amount of capital; however, this capital is not
considered the same as a joint stock company share. The
registered capital of such a company must be at least 20,000
francs, but not more than 2 million francs, and each partner
may, in certain cases prescribed by law, be held liable for up to
this amount (in exccss of his own capital contribution) . When
the company is forrned, each partner must pay at least 50% of
his capital contribution, either as cash or non-eash capital.
Thus, the Iimited liability company may be considered a hybrid
ofajoint stock company and a personal partnership. However,
it is not often encountered in Switzerland since it does not pro--
vidc any specific advantages over the regular corporation (as
the German GmbH does) .
(g) The Swiss cooperative. Structured much like the corpor-
ation, it usually consists of several persons or companies, with
the primary purpose of promoting and protecting the business
interests of its mcmbers. The capital is not fixed in advance,
and unless the by-Iaws state otherwise, its liabilities are limited
to its own assets.
(h) The ordinary partnership. This is a loose form of organ-
isation, usually formed to serve a specific purpose. It is not
entered in the Commercial Register. Essentially, it is a contract
Switurland 131
of association, outlining the joint and several Iiabilities of the
partners. It does not assurne a proper firm name.

The Corporation
The Swiss legal entity known as the corporation is a company
with its own firm name. Its capital is divided into shares, and its
liabilities are exclusively covered by its assets.
The minimum allowable capitalisation of a Swiss corpora-
tion is 50,000 francs, at least 20,000 francs of which must be
paid in cash, or provided in subscription by non-cash capital at
the time of incorporation. In the case of fully paid-up capital
stock, the corporation can issue either registered or bearer
shares; if the capital stock is not paid up, the corporation can
issue only registered shares. The par value of a share must be at
least 100 francs. The "no par value" share is non-existent under
Swiss law.
Traditionally, Swiss companies have sought to generate a
large share of investment funds from international sources,
thus placing the operation on asound financial basis and
assuring continuity in times ofrecession.
At least three prospective shareholders are the legal require-
ment for forming a Swiss corporation. If one of the share-
holders wants to remain unidentified, he may, under certain
conditions, have a third party subscribe as his trustee.
Corporation by-Iaws must contain provisions relative to:
(1) The firm name.
(2) The location of the head office.
(3) The number and par value of the registered shares of
capital stock, and the bearer shares of capital stock.
(4) The time, place, etc. of the shareholders' meetings.
(5) The board of directors, auditor, and the forms of
notification.
The corporation is organised through a general meeting of
shareholders, the board of directors, and auditors.
The functions of the shareholders' meetings are: to approve
the profit and loss account; to approve the balance sheet and
the annual report; to adopt resolutions concerning the dis-
tribution of net profits, especia11yas it applies to the dec1aration
of dividends; to elect directors and auditors; to approve board
of directors' actions to amend the by-laws of the constitution;
and to determine liquidation procedures.
132 Tax Havens for International Business
The board of directors is made up of one member, or several
membcrs, a11 ofwhom must be shareholders.lfthere is only one
director, he or she must be a Swiss nationalliving in Switzerland.
If the board of dircctors consists of several persons, the majority
must be of Swiss nationality and live in Switzerland. The board's
activities are outlined in the by-laws of the corporation's con-
stitution, which must be written in accordance with Swiss law.
One or scveral auditors are elected at the shareholders'
meeting. Auditors are not required to bc shareholders. The
auditor(s) may be individuals or corporate entities, such as a
fiduciary company or an auditing association.
When a foreign corporation transfers to Switzerland, the
question of liquidation and re-establishment must be decided.
Generatly, the by-laws of a corporation set forth its domicile.
The by-laws must be written in accordance with the national
law that applies to corporations. Thus, if the laws of the
country where the corporation is originally formed are such
that transference to another country implies liquidation, then
liquidation, before subsequent re-establishment in the new
domicile, is mandatory. Likewise, if the laws of the country to
which the corporation is being transferred specificatly state the
necessity of reincorporation, liquidation and re-establishment
would be mandatory; however, the Federal Council of
Switzerland is authorised to grant permission to a corporation,
under such circumstances, to transfer to Switzerland without
prior liquidation, subject to the following provisions:
(1) The corporation must prove that, according to the laws
of the country where it was formed, it had a legal personality.
(2) The figures of the most current, approved balance sheet
must indicate that the capital stock is fully covered byassets.
(3) The transfer of the corporation's domicile must have
been validated through a resolution, in accordance with the
by-laws,
If the Swiss Federal Council refuscs permission to a forcign
corporation to rcdomicile in Switzerland without prior liquida-
tion, it must liquidate, and reincorporate in Switzerland to
acquirc legal status there. This re-establishment is called
"qualified incorporation", which rnust be accompanied by a
transfer of assets and liabilities to the corporation's Swiss
domicile. If the Federal Council permits such a transfer, entry
of the corporation in the Register of Commerce is required,
Switr.erland 133
and its by-laws must be adapted to Swiss law within six months.
In the case of one delay, the Federal Council may grant an
extension of time; if the second term elapses before the neces-
sary constitutional revisions are made, its entry in the Register
of Commerce is officially cancelled.
If a foreign corporation wishes to establish a branch office in
Switzerland, Swisslaw presupposes that a head office of the cor-
poration is domiciled elsewhere. A foreign corporation cannot
establish a Swissbranch in anticipation of isolating it from Swiss
commerce and Swiss law. This means that the branch must, if it
is to protect its business operations, adapt to Swiss rules and
regulations. The following principles must be adhered to:
(1) The admission, existence, and activities of a foreign
branch in Switzerland are regulated by Swiss law.
(2) Entry in the Register of Commerce by the Swiss branch
of a foreign corporation is required in exactly the same manner
as that of a Swissfirm.
(3) The Swiss branch of the foreign corporation is obliged
by Swiss law to keep books of account, and prepare financial
statements periodically.
(4) The branch office must be represented byan authorised
person of Swiss residence.
Rules for establishing a branch office in Switzerland must be
followed when the actual administration of a corporation is
transferred to Switzerland, and its centre of operation remains
in the foreign domicile. If, however, the centre of operation
also transfers to Switzerland, the rules for transferring a cor-
poration are effective.
In so far as Swiss law is concerned, the expenses incurred in
forming a corporation are the stamp duty levied on the newly
issued shares, the fees for entry in the Register of Cornmerce,
and the cost of the notarised certificate of incorporation. Add-
itional expenses might include fees for an attorney or other
qualified counsel to aid and advise you in establishing the cor-
poration, and the appointing of a director who must be paid
for his services. The cost depends, of course, upon the activity
and complexity of tbe enterprise. Special, more mundane
services, such as maintaining an office, bookkeeping, tax
accounting, and general correspondence also have to be paid
for. For on-the-spot advice and assistance in the forming of a
Swiss corporation, contact a Swisslawyer or a Swiss bank.
134 Tax Hauens JOT International Business
Taxation
Switzerland has a somewhat complex system of federal taxation.
Due to its federal structure, taxes are levied concurrently by
three different authorities: the federal government, the cantons,
and the municipalities. Generally speaking, the Swiss federal tax
laws are uniform throughout the country but the laws of the
cantons and municipalities may differ. Therefore, tax rules and
tax Jiabilitiesare likely to vary from one place to another.
In principle, Swiss companies are taxed at the three levels -
federal, cantonal, and municipal- on their profit and capital;
however, the rates as weil as the methods of taxation differ
according to the firm's legal structure. Although Swiss civil
law acknowlcdges only one form ofjoint stock company, there
are three different forms as regards fiscal treatment: the op-
erating company, the holding company, and thc domiciliary
company.
(a) An operating company is one that engages in an indus-
trial, manufacturing, or service activity. Such a company is
liable for a federal tax called a defence tax, on net earnings,
capital stock, and open and undisclosed reserves. Stamp duties
amount to 2% of the paid-in capital stock.
(b) Swiss law defines a holding company as one whose main
purposc is to participate in other companies through invest-
ments. The holding company is almost always legally struc-
tured as a corporation. The Swiss fedcral tax system, as weil as
those ofmost ofthe cantons, grants holding companies certain
tax privileges:
(1) The regular tax is reduced.
(2) The taxable capital is computed on a reduced basis.
(3) In lieu of options (1) and (2), a proportional tax on
capital, in combination with a tax exemption on earnings, is
appJicable.
However, for the Swiss holding company to gain tax privi-
leges offered holding companies by the fcderal tax system, a
corporation must meet the requirements outlined by federal
tax regulations. Otherwise, the federal tax system treats the
holding company the same as an operating company.
(c) The domiciliary company has its legal domicilc in
Switzerland, but has no office space. It does not engage in
business activities in Switzerland. Such a company is usually
limited by shares.
Switzerland 135
The domiciJiary company is often established in lieu of a
holding company, when the requirements for a holding com-
pany cannot be met. Domiciliary companies are often sales
agencies or patent and/or copyright marketing companies.
Any tax benefits to the domiciliary company come from the
canton. The federal tax system does not recognise it, but taxes
it as an operating company (if certain conditions are met, the
federal system may grant the domiciliary company similar
deductions to that ofthe holding company). As regards canton
taxation, the pure domiciliary company enjoys more extensive
tax advantages than the so-called mixed company; however,
variations on the domiciliary company do obtain some tax
advantages in the cantons. Shareholders' dividends paid by the
domiciliary company are subject to a withholding tax that is
currently 35%.
The Swisscommercial banks adhere closely to policies estab-
Iished by banks throughout the world . From the purely local
viewpoint, Swiss credit policies apply to virtually all types of
loans; however, credit extended to foreign customers is limited
to top-ranking companies, and to the financing of exports
from Switzerland. Loan terms vary with such factors as the
value of collateral, but are generally more favourable in
Switzerland than in many other countries.
To a large extent, the amount ofbank credit that a company
can get depends upon how much confidence the company can
generate in the banker's mind; therefore, each individual case
is subject to different treatment. To this end, a typical, business
oriented Swiss bank go es to considerable trouble to analyse its
c1ient's needs, and provide solutions that are fitting to the cap-
ital requirements of each case. To customers domiciled in
Switzerland, the following services are typically offered:
(1) Short-terrn credit of all kinds is extended, whether
secured or unsecured. This may be in current account form, or
as a fixed advance in either Swiss francs or foreign currency.
(2) Mortgage loans.
(3) Leasing and factoring.
(4) Refinancing of leasing operations.
(5) The discounting of acceptances, including the financ-
ing of medium-term receivables, that result from the export
business.
(6) The opening ofletters of credit.
136 Tax Havens JOT International Business
(7) Guarantees, sureties, and bonds for public authorities
and/or private persons.
To broaden their scope in the world money market further,
Swiss banks place the following facilities at the service of Swiss-
domiciled c1ients:
(I) Direct, short- to medium-term loans, wh ich may be in
Swiss francs or other convertible currencies, on a fixed interest
or a roll-over basis.
(2) Financing of Swiss merchandise (together with an
export risk guarantee by the Swiss government) .
(3) "ßridging" loans as a means of preliminary financing,
prior to capital market transactions in Switzerland and on the
Euromarket.
The banks of Switzerland not only assist corporations, but
business and private clients as weil, in specialised ways. Advice
or other services through some banks include:
(1) Transfer of payments in the national and international
sectors.
(2) ßuying and selling bank notes and paying instruments
in foreign currencies.
(3) Negotiation of stock market transactions internally and
abroad.
(4) Securities management and custody.
(5) Establishment of trusts, and counselling in investments.
Extremely sensitive to and knowledgeable about business
and commerce conditions in Switzerland, Swiss banks help to
establish contacts necessary to launch a Swiss enterprise. So me
publish brochures and booklets containing detailed informa-
tion on economic and business conditions. Such publications
also provide information on special features and on specific
regional industries. Some major banks have branches through-
out Switzerland, as weil as in London, Tokyo, New York,
Luxembourg, and Panama. The typical major Swiss bank has
representation in most major financial centres, and can be in
continuous communication with thousands of correspondent
banks world-wide
Switzerland has been a most successfully neutral country in
many European wars and both world wars, so in modern times
its cconomy has ncver been devastated by war-time destruction.
Also, it is a basically free enterprise country with little govern-
ment regulation and economic control and relatively low laxes.
Switr.erw.nd 137
The country is geographica11y in the centre of Europe,
where major continental roads from east, west, north and
south intersect. Its internal roads and railways are exce11ent,
and a11 Swiss transportation services are punctual. It is also
accessible by river barge directly from the sea, Airline service is
without peer, and telecommunications are the very best avail-
able. Needless to say, professional services are of the highest
quality and reliability.
Ag we have noted, Switzerland is politica11y stable, as is weil
attested to by its history, legal structure, and present soeioeco-
nomic situation. Its basic constitution, enacted in 1848 and
slightly revised in 1974, gives the country a confederation sys-
tem, It has 123 articles, speeifying rights and duties ofboth cit-
izens and the government. The 25 cantons have inalienable
constitutional rights that cannot be usurped by the federal gov-
ernmcnt. There is a seven-man national cabinet, nationally
elected. Foreign policy has for centuries heen peaeeful neutral-
ity concerning all international conflicts. The legal system is
grounded in the eivillaw tradition.
Switzerland is multilingual: German, French, Italian and
Romansh are official languagcs. German is the most wide-
spread tongue, having a variety of loeal dialects. English and
French are univcrsally taught in the high sehools, and the busi-
ness community is widely conversant with them.
All taxes on world-wide income add up to usually 25-35%.
Switzerland is clearly no tax haven.
The special treatment for holding eompanies applies to
merely "passive" sources (dividends, interest, ete.). Such tax
exemptions are highly limited, however; for instance, they do
not apply to interest from loans and royalties from leases paid
by companies in which one has stock ownership.
Even with a purely Investment-holding eompany, there is
one huge liability: a 35% withholding tax imposed on divi-
dends paid to foreign stockholders. It applies indiscriminately
to dividends, interest on bonds, and interest on bank deposits;
only royalties are exempted.
On the surface, the extensive Swiss network of double taxa-
tion treaties would seem to offer relief from this problem. The
treaties usua11y reduce the withholding taxes to 15% or 0%.
Howcver, the Swiss government has taken special mcasures to
restriet the usability of the agreements for tax minimisation
138 Tax Hauensfor International Business
purposes. If more than 50% of the profits of a Swiss company
derived from treaty country sources are paid to aliens, no with-
holding tax benefits can be c1aimed. One may think that the
way out is not to distribute dividends from the Swiss company
and instead reinvest all profits. However, another law requires
a company to pay as dividends at least 25% of the gross income
derived from tax-relief benefits. Thus, there are narrow limits
to using the treaties.
On top of these disadvantages, Swiss incorporation is
expensive.
Ir all this is not enough, neither the joint stock company nor
the private Iimited liability company offers any particular tax
advantages.
10 Liechtenstein - A Special
Case

Liechtenstein, one of the smallest independent principalities


in the world, has been a sovereign state since 1806. Despite its
small size (65 square miles), its government, a constitutional
monarchy based upon democratic and parliamentary proced-
ures, encompasses all the principles and practices of a modern
government, based on the rule oflaw. It governs on the princi-
pie of separation of powers where legislation, administration,
and court actions are concerned. In civil law, it conforms
in part to the Austrian, and in part to the Swiss, system.
Liechtenstein codified a company law in 1926 that is highly
regarded as one of the most modern in Europe. Many regula-
tions on legal procedure guarantee the impartiality and fair-
ness of the law.
Because Liechtenstein maintains no army (the fron tier
defence is provided by its neighbour, Switzerland), there is no
military budget to appropriate. Thus, the financial condition of
this tiny principality is excellent - there is no national debt.
Moreover, the international political conditions are stable, with
a marked absence of political tensions. This stahle condition
can be attributed to the small physical size of Liechtenstein,
which precludes the politically warring factions so obvious in
larger nations. As a result of these favourable conditions,
Liechtenstein levies no income taxes against any company that
is domiciled there, if the company does not receive Liechten-
stein source income. There are, however, low registration and
annual capital taxes on such companies. Bearer shares are per-
mitted; foreign banks and mutual funds are not.
Liechtenstein 's largest attraction as a tax haven is its favour-
able legislation regarding famHy fortunes (as opposed to tax
benefits for multinational corporations). Many special legal
forms, such as the famed anstalt or establishment, have been
developed to cater to this famHy business. But regular cor-
porate forms are also available.

139
140 Tax Havens JOT International Business

Lieehtenstein's national ties and nearness to Switzerland


ereate a unique situation in which Lieehtenstein ean maintain
its political independenee while at the same time enjoying
many economic benefits. Part of these benefits derive from
the maintenance of a customs and currency union with
Switzerland. Liechtenstein patterns its banking laws upon
those of Switzcrland and, in fact, provides strieter banking
seerecy than Switzcrland.
One of the factors that providcs ceonomie unity bctween
Liechtenstein and Switzerland is the Customs Union Treaty
that was cstablishcd in 1923. By the tcrms of this treaty,
Liechtenstein adopted the Swiss franc curreney. Everything in
Swiss legislation that applics to customs tariffs, foreign trade,
and currency, applies similarly to Lieehtenstein. Among thc
provisions of this legislation are thosc that apply to deerces
and regulations (including those that govern Switzerland's
paymcnt transactions with forcign countries) . Also included in
the common legislation are international trade treaties and
foreign exchange agreements. Thus, Liechtenstein is in a pos-
ition to derive many of the benefits of Swiss economie policies,
as weil as those derived by use of the Swiss franc, whieh is mon-
etarily strong and fully convcrtible.
Because of this favourable economie link to its neighbour,
Liechtenstein's economy has taken a somewhat dramatic turn
in recent decades - from primarily agricultural to primarily
industrial. As a result, it is prcsently one of the most highly
industrialiscd nations, as rc1ated to its population, in all of
Europe. Licehtenstein industries produee textiles of high qual-
ity, as weH as manufactured metals, pottery, chernicals, and
pharmaecutical drugs. Most of these produets are exported
because Licehtcnstein consumes only a small portion of its
gross national output.
Lieehtenstein's ncighbour to the east is Austria. Switzerland
administcrs eustoms with that nation, with eustoms laws that
are applicable to entry into and exit from Lieehtenstcin.
Between Switzerland and Lieehtenstein there are no eustoms
barriers. Lieehtenstein's only diplomatie representation is its
Bern , Switzerland Embassy. If specially requested, Switzerland
provides diplomatie representation for Liechtenstein. It pro-
vides eonsular services on a permanent basis.
Liechtenstein 141
The top rate for personal income taxes in Liechtenstein is
7.5%. The taxes on company profits vary from 5% to 12%, in
accordance with a ratio of profit to net worth. Persons who are
considered residents of Liechtenstein for tax purposes must
pay taxes on all "income from gainful activity" that is derived
from a partnership. mernbership, or proprietorship of any
enterprise that has an office registered in Liechtenstein. For-
eigners and Liechtenstein nationals who have their permanent
residence in a foreign country (persons resident abroad) are
not required to pay taxes on income derived this way. Such per-
sons are also exempt from propcrty taxes on the share of an
enterprise that they might hold.
Liechtenstein has a double taxation agreement with Austria.
Aside from this, it has no such agreement with any othcr
country, ineluding Switzerland.
All the banks of Liechtenstcin maintain elose alliances with
Swiss banks. Liechtenstein banks have a world-wide network of
correspondents to ensure that all financial and stock exchange
transactions are carried out promptly and efficiently. The
phenomenal development of the nation's economy since
World War 11 has resulted in an expansion of banking facilities
unprecedented in European financial history. An almost ten-
fold increase in the banking balance sheet totals of all of
Liechtenstein's banks attests to this growth.
Liechtenstcin's laws are extremely progressive regarding the
formation of a company. In essen ce, any person, whether res-
ident or non-resident, is entitled to establish a Liechtenstein
company, in any legal form, without obtaining any sort of
government permit. However, there are a very few, specific
exceptions to this principle (the formation of banks, for
example, requires a Iicence from the government) .
Liechtenstein law allows an almost unlimited variety of trust
organisations. The foundation, which most Europeans, British,
and Americans think of as non-profit, can be formed in
Liechtenstein for any economic purpose. Moreover, trusts and
foundations may participate in any business activity, cither in a
direct manner, or as holding companies. A holding com-
pany must file with the Office of Public Registry; otherwise,
no trust organisation, not engaging in business, is obligated
to publicly reveal its existence.
142 Tax Hauensfor International Business
Unlike the laws governing the formation of companies in
many countries, Liechtenstein legislation, with certain excep-
tions, does not require a minimum number of company
members. Excepted from this rule are certain kinds of organ-
isations, such as the cooperative sodety (genossenschaft), and the
club (verein), which by their structure require two or more per-
sons . Thus, except for these associations, any person or body of
pcrsons can form a company. Moreover, a duly authorised rep-
resentative, or trustee, can perform the actual formation ofthe
company.
In prindple, the naming of a company may be done through
free choice. In practice, there are certain government regula-
tions that must be followed such as requiring the firm name to
c1early indicate the legal form and nature of the enterprise,
Also, national, regional, and territorial names are not permit-
ted . It is permissible to adopt unusual or fanciful names, or
abbreviations, but they must include an indication of the form
of the company. However, the government has been known to
permit exceptions to these rules.
To enter a company name in the Liechtenstein Public
Registry, it must have "exclusivity" and "distinguishability". In
other words, it must be a new name, and cannot have been reg-
istered for any other company. The "distinguishability" pro-
vision is generally interpreted to mean that the name should
be dearly distinguishable from any and all other existing firm
namcs.
Company administration can be performed by one of more
membcrs, who may be either individuals or bodies corporate.
However, the law does require that at least one member of the
administration, who is vested with the authority of conducting
business, have ordinary residence in Liechtenstein. This law
also applies to the administration of foundations. Such a res-
ident mernber may have the authority to sign for the company,
either singly or jointly with one or more members. There are
no restrictions regarding the nationalities or residences of
additional administration members.
The authorised resident member must record a legalised
signature specimen and proof of his residence with the Public
Registry. Alternate methods of providing proof of residence
are to incorporate it into the document containing the
legalised signatute specimen, or in aseparate document. If it
Liechtenstein 143
is incorporated into the signature document, the legalising
authority must confirm the exact residential address of the
resident member. The documents are retained, as private
papers, with other records of association.
For certain economic reasons, relative to Liechtenstein's
relationship with neighbouring Switzerland, permits are neces-
sary to live and work in Liechtenstein.
A residence permit is required for anyone establishing a
residenee; a work permit must be obtained as aprerequisite to
working. Work permits are issued to foreign applicants if and
when an equal number of foreign workers leave the country.
This procedure adheres to Swiss practice for obvious economic
reasons. The government can make exceptions to these rules
when an enterprise undergoes major structural reorganisa-
tion, or if new industries are formed. Still another exception is
that Swisscitizens are not subjected to cither of the permit regu-
lations, and may live and work in Liechtenstein as they wish.
The domicile permit is granted to persons who have no less
than ten years of ordinary residence in Liechtenstein. This is
an unconditional permit, not subject to a time limit after it is
granted. The domicile permit enables an individual to work
without a work permit.
All the facts concerning residence permits, work perrnits,
and business enterprises must be registered in the Public
Registry. These recorded facts are in the public domain -
anyone can inspeet the records. However, those portions of the
Registry's records that comprise, in the case of a business, the
formation documents, articles of association, etc, can only
be examined by consent of the Registrar, and then only
upon proper authority, or upon presentation of credentials
furnished by the company itself.
The only companies required to make entry in the Public
Registryare those that issue shares, the anstalt (establishrnent),
the trust engaging in business, and the stiftung (foundation)
engaging in business.
The Registrar places on record only the essential facts about
a company - the date of entry, the firm name; the address of
the registered office; the duration, object, and capital of the
company; members of the board of directors and persons
empowered to act as eompany representatives; and the method
of signing the company name. The law requires that the entry
144 Tax HauensJOT International Business
of a company into the Public Registry be published in the
Official Gazette. Holding companies and domiciled enterprises
are exempt from this requirement, but must post a notice of
registration on the court notice board. This notice board pub-
lication contains only those facts that are entered in the Public
Registry (documents of formation and articles of association
are not made public).
In cases of trusts and family endowments that do not engage
in a commercial enterprise, notification to the Registrar is all
that is required. The formation documents (copies only,
because they are not returned), such as the articles of associ-
ation, must accompany the notification. Or, if the formation is
based upon last wills or contracts of succession, legal copies of
these documents must be provided. The documents are not
published, and the registration is not open to the public.
Legislation regarding Liechtenstein-formed companies re-
cognises a variety of enterprises and company forms. The
most suitable forms to be used as holding companies are the
anstalt (establishment), the aktiengesellschaft (company limited
by shares), and the registered trust (commercially engaged
in business). Liechtenstein has designed legislation that is
particularly favourable to the protection and administration of
financial structures.
Liechtenstein tax legislation defines holding companies as
enterprises that exclusively (or mainly) administer capital or
assets such as shares or bonds of other enterprises.
Domiciled enterprises are companies that maintain regis-
tered domiciles in Liechtenstein. This may or may not include
the maintenance of an office and representative. With the
exception of the registered domicile, these companies conduct
their business exclusively abroad.
The underlying principles of tax legislation, as it applies to
holding and domiciled companies, is that neither is subject to
an earning tax. Howevcr, if either the holding or domiciled
company engages in Liechtenstein enterprises or operating
companies, the invested capital and earnings from it will be
liable to taxation (just as for operating companies).
Provided that the holding or domiciled company is formed
as a legal personality, and is entered in the Public Registry, it is
afforded special tax privileges:
Liechtenstem 145
(1) Tax exemptions on all assets and income.
(2) Reduction of the capital tax.
(3) Exemption from all taxes on profits and earnings.
(4) Reduction of the formation stamp duty.
(5) A further reduction of the capital tax for the foundation
(stiftung), with high capital.
(6) Absolute secrecy regarding tax matters,
Holding and domiciliary companies are required to keep a
permanent representative in Liechtenstein. Usually, this re-
presentative is a permanent appointee, who is available to
receive communications from local authorities. He is not an
organ of the company. Further, unless specially vested with
authority, the representative performs no actions on behalf of
the company.
In conclusion, Liechtenstein's tax legislation is extremely
favourable for the formation of holding companies. It is a
highly industrialised nation, with a healthy economy, and a
firm belief in the principles of free enterprise. Its banks pro-
vide the same secrecy regarding foreign accounts as does
Switzerland, and all tax matters are treated with a high degree
of confidentiality. This is not to say, however, that Liechtenstein
provides an atmosphere of ''whee1ing and dealing" for indi-
viduals and families seeking tax avoidance. On the contrary,
the legislation of Liechtenstein is designed for specific pur-
poses, and must be adhered to.
For example, in addition to provisions for recording in the
Public Registry, all firms that are so registered are required to
keep proper books. This law applies to holding companies and
domiciled enterprises, as weil as branch establishments of
foreign enterprises. The definition of proper bookkeeping
includes maintaining inventory records, drawing up annual
balance sheets, and keeping account books. The financial state
of the business, along with its net worth, should be discernible
from these accounts. Commercial rules, as generally recog-
nised, apply to drawing up the balance sheet. The account
books must be preserved for ten years after the date of the last
entry. Holding companies and domiciled enterprises are per-
mitted to draw up a balance sheet exclusive1y in foreign
currency.
Index

accounts and accounting method: &stolen Venncotschap Met BejJerlcte


Gibraltar 69; HongKong 72. Aamparkelijkheld 80, 95-7
73; Liechtenstein 145; bonds 79,100,103-6
Luxembourg 114,116; Isle of branches: Netherlands corporate
Man 61; Netherlands 81; taxation of 83-4, 87-9; in
Switzerland 129. See also Switzerland 133. See also
auditing regional offices
airline companies, tax havens British Virgin Islands 5, 6, 12
for 19 Bulgaria: tax treaties 52
aJctiengesellfchafl 144 'business purpose',legitimate and
Amrnan.jordan 120-1 plausible 14,32,38,47.51.73
anstal: 139,143,144
Asia, markets in 27 Canada: tax treatles 52. 54, 76, 85
association, articles and Capital exchange, Swiss activities
memorandum of 14-16 in 127
auditing of accounts 54, 63. 69, 72. capital gains: in Austria 100,101; in
132 Netherlands 79-81.89; in
Australia, tax treaties with 54, 85 US 5; no lax on 34, 38. 54,
Austria: as tax haven 30,74.99-101; 57, 72
withholding tax 85; tax capitallosses 80, 81. 89. 90
treaties 115; customs laws capital participation 76, 77, 79, 82.
and taxation agreement with 83
Liechtenstcin 140.141 capitalisation of companies 14. 15;
Bahamas 35,
Bahamas 12,19,21,26.32-6 Luxembourg 103,104,106,
banks and banking: Bermuda 37; 108; Netherlands 78.96;
Greece 122;Jersey 62. 64. Panama 48;
65;Jordan 120; Switzerland 129-31
Liechtenstein 140, 141; cash management, costs of 88
Luxembourg 74; Malta 53, casualty insurance 22
55; Isle ofMan 57-61; Cayman Islands 12-16,21,26-7,
Panama 46; 32.39-43
Switzerland 127, 128, 135, 136 China: withholding tax 85
Barbados 20 citizenship, as basis for income
Belgium: withholding tax 85 tax 7,18
'benefits', Dutch tax on 81 civillaw 11
Bermuda: screening of foreign Co16n. Panama. freeport of 27, 45,
corporations 10; tax 50,51
exemptions 13,21,23,26, commercial activity, of Luxembourg
36-9, 45; shipping holding company 102, 103,
companies 19; travel 113
business 20 commodity dealing companies 58

147
148 Index
common agrlcultural policy, co m- Denmark: lax treaties 52, 85
mon external tarlff (EC) 68 depreciation rates
common law 11,12 (Nelherlands) 92
company: status and advantages of 2, dlrectors 13, 15, 16: Bahamas 36;
8,11-17; structure and forms Gibtaltar 69:jersey 62,65:
of 13-16; Bahamas 3lHJ; Nelherlands 96:
Bcrmuda 38-9; Switzerland 129, 131, 132
Liechtenstein 139,141-5; disdosure see confidentiallty
Luxembourg 102-13; dividends: of Austrian
Nelherlands 78-80, 89, 90, subsidiaries 99-101; of
95-7: Switzerland 130-35. See Luxembourg companies 115;
also cOIporalc lax; Dclaware; withholding lax rate on 76--8,
holding companies: 89,90
incorporation Dominican Republic: lax holidays 20
confidentlality for dients 6; Cayman
Islands 13: Guernsey 66; employees, taxation of: Cyprus 52;
Hong Kong 73;jersey 162: jordan 121;
Liechtenstein 145; Malta 53, Netherlands 92-5
54: Isle of Man 58-60 English language, use of:
controlling companies Gibraltar 67: Greece 122:
(Luxembourg) 104 Hong Kong 71:
cooperatives 130, 142 jordan 119-20: Panama 46;
copyrights 21,29,58,74 Switzerland 137
corporate lax: Austria 99-101; Eurocurrencyloans
Greece 122; (Nelherlands) 77
Liechtenstein 141; European Community, status in and
Netherlands 78-90 with: Gibraltar 68:
corporation see company Guernsey 65:jersey 62;
cost-plus basis of taxing profit 87,88 Luxembourg 102: Malta 53:
credit institutions (Jordan) 120 Isle of Man 56, 60
creditors, of Luxembourg European Free Trade
companies 104 Association 128
currencies, trust funds for exchange controls: avoidance
holding 22 of 9-10; Bahamas 33-4:
customs duties: Greece 19; Hong Bermuda 37: Cayman
Kong 72;jersey 62: Islands 41: Hong Kong 71:
Malta 54; Panama 27, 50: jordan 121; Malta 54; Isle
Puerto Rica 125-6 of Man 59: Netherlands 80;
customs union between Liechten- Panama 46,47,50
stein and Switzerland 140 exempl status for companies 13,
Cyprus: shipping companles 19: as 14,26-7: Bermuda 38;
lax haven 28,51 -2 Caymans 41,42:
Czecho-Slovakia; lax treaties 52, 76 Gibraltar 68, 69;
Greece 122-3;jersey 63-5;
debenture loans 105 Jordan 121:
debt-to-equity ratio of subsidiary Liechtensteln 145: Isle of
78,90,101 Man 57-60:
dced, notarial 114 Netherlands 76;
Delaware corporation laws 12, 48 Philippincs 118-19
/1UÜX 149
expatriates, Dutch taxation of 93, 95 89-90: Switzerland 130, 137.
expert companies 22 See also finance holding com-
pany; intermediate holding
fake transactions 101 company; qualifying company
family business Hong Kong:manufacturing enterprise
(Liechtenstein) 139,144 in 8, 27: shipping companies
finance holding companies 104-6 in 19:company lawand capital-
finance companies: isation of companies 14,16: as
Netherlands 29, 74, 77-8: tax haven 27, 44-5, 70-73
Luxembourg 104 hotel building 9, 20
financial services (Isle ofMan) 57-61 Hungary: lax treaties 52, 76, 85
Finland: withholding tax 85
flags of convenience 19, 48, 54, 60 immigration laws:
foreign source income, countries Philippines, 118; Puerto
with no tax on 27-8, 44-73 Rico 126: Switzerland 127
foundations 141, 142, 143 import duties : Bermuda 38
France: tax treaties 52,85, 115 income tax: basis for 7-8: Cayman
free-tradc zone (Swiss) 128 Islands 14: Gibraltar 68:
French West Indies: tax holidays 20 Grecce 19,122;
Guernsey 66; Hong Kong 72;
gambling caslnos, tax on 34 Jersey 61,64. 65;Jordan 121;
genossenschaft 142 Liechtenstein 141: Malta 53,
Germany: tax treatics 52, 85 56: lsle of Man 57-9;
Gibraltar: exempt status for, Panama 47; Philippines 119:
corporations 13,27,28; as lax tax havens with none 26-8,
haven 67-70; use ofqualifying 31-43
company 79 incorporation, Jaws and process
Greece: complex lax laws 29: lax of: 2,10-17; Bahamas 35-6:
treaties 52, 85; regional Bermuda 38-9:
offices, legislation for 29, Caymans 41-3: Gibraltar 69:
121-23: shipping Guernsey 66; Hong
companies 19,29 Kong 72-3: Jersey 62-4;
group financing: Netherlands 90: NethcrJands 95-7:
Luxembourg 105,106 Panama 48-51:
guarantee, companies limited by 35 Switzerland 128-33, 138
Guernsey: relationship with EC 65: Indoncsia: withholding lax 85
no lax on foreign source industrial activity, of mixed holding
income 27,28: lax agreement company (Luxembourg) 102
withJersey 62 information, exchange of 9, 74
inheritance lax: Greece 122: laIe
Haiti : lax holidays 20 of Man 57: Panama 47
headquarters: location of 24-5: re- insurance companies: Malta 53;
incorporating in lax havcn 74 Isle of Man 58, 59:
holding companies: legislation 22: Switzerland 128
Austria 30,74,99-101: intangible assets, amortisation
Liechtenstein 141,144, 145: of 86-7
Luxembourg 30,74,102-16: interest: conversion to
Malta 28, 53, 54: dlvidends 100: withholding
Netherlands 29, 74, 77-9, tax on 76,78,89,104
150 Index
inter mediate holding companies Luxembourg: as tax haven 30, 74,
(Dutch) 89 85, 100, 102-16
'international intercompany tax
concession' (Austria) 99-100 Malta: screening offoreign corpora-
investment trusts and tions shipping companies 19,
companies 19-20:Jersey 64; 52; as tax haven 28, 52-6;
Luxembourg 30, 74, 102, withholding tax 85
104,106-11; Malta 53; Isle of Man, Isle of: exempt status for
Man 57-9; Switzerland 130 corporations 13,27,28;
Ireland: tax treaties 52, 76, 85 shipping companies 19; as
Israel: tax treaties 76, 85 tax haven 56-61
Italy: tax treaties 52, 76, 86 management holding company
(Luxembourg) 106-7,113
Jamaica: tax holidays 20 manufacturing companies, tax
Japan: withholding tax 85 havens for 18,27
Jersey, as tax haven 13,27,28,61-5 Morocco: tax holidays 20; wlth-
joint investment trust holding tax 85
(Luxembourg) 106--8 multinational corporations, use of
Jordan: tax benefits for regional tax havenry by 18,74. See also
offices 29,119-21 regional office
mutual funds In offshore tax
labour, skiIled, access to 18,27 havens 19; Luxembourg base
land: tax in Bahamas 34; restric- for 74
tlons in Bermuda 38; leasing
in Colon 50 Naamloze Vennootschap 80, 95, 96
Latin America, markets in 8 name of company 15, 16,36,62,
lawyer, use of in incorporation 17, 129, 131, 142
35, 72 Nauru 12
leasing companies 20 Netherlands: as tax haven 29, 74-99;
liablllties, of Luxembourg holding taxatlon treaties
company 104 Netherlands Antilles 75, 85
liability, Iimited 15 New Zealand: withholdlng tax 85
Liberia: corporation laws 12; nominees, use of in
shipping companies; no tax on incorporation 16, 35, 48, 53,
foreign source income 21,27, 62,66,69,72,73,114
28 non-resident companies 9-10,18,
Iicensing companies 58, 59, 90-91, 69
112 Norway: tax treaties 52, 85
Liechtenstein, as tax haven 139-45
Iimited liability companies: office, registered 16;
Netherlands 95-7; Austria 99; Bahamas 35;
Switzerland 130 Gibraltar 70; Guernsey 66;
liquidation, on transfer to Jersey 63: Luxembourg 114
Switzerland 132-4 offshore tax havens 18-25, 52, 54,
loans: by Luxembourg holding 56,57,101
companies 103, 105; by Swiss
banks 135-6 Pakistan: withholding tax 85
losses, in Dutch taxatlon 80-82, 86, Panama: corporatlon laws 12,
89,90 48-51; shipping companles 19;
Index 151
as tax haven 8,20,21,27, regional office of multinational
45-51 companies 29, 117-26
participating companies registration companies (Isle of
(Netherlands) 77,79-80 Man) 58
participating interests residence: as basis for income
(Luxembourg) 102, 103 tax 7,9-10, 18,68; rules for
participation exemptlon 80-82, (Guernsey 66;jersey 63;
89,90 Liechtenstein 141-3;
partnershlp: Netherlands 95, 97; Luxembourg 114; Isle of
Luxembourg 103; Man 57,60;
Swilzerland 129-30 Netherlands 80, 92-5;
patents 21,29,58,59,74, 102, Switzerland 127, 128)
111-13 reinvestment see Investment trusts
pension funds (Malta) 53 repurchase company 113
Philippines: legislation for regional returns, annual, legal requirement
offices 29,117-19 for 16, 36, 42, 49, 50, 62, 63,
Poland: withholding tax 85 66,70
political stability 9, 27, 29, 32, 40, Romania: tax treaties 52, 85
41,67,71,139 royalties: tax haven advantages
porlfolio Investment 90 for 21,29; companies for (Isle
premiums of Luxembourg of Man 58, 59;
investment companies 111 Netherlands 74); withhold-
professional services: Bahamas 34; ing lax on 89-91
Bermuda 37,38; Russia:withholding tax 85
Caymans 41;HongKong 71,
72; Luxembourg 115; securities of holding company
Malta 55; Panama 46,51 ; (Luxembourg) 102, 111-13,
Switzerland 135-7. See also 116
banks service companies: tax haven advan-
profit, taxation of: Austrla 101; tages for 21,23; Netherlands
Netherlands 81,82,87 corporate taxation of 87
property investment (Isle ofMan) shares and shareholders: in public
58 and private companies 13-16;
property, management of Bahamas 35-6; Bermuda 38;
(Malta) 54 Cayman Islands 41-3;
property tax: Bermuda 38; Gibraltar 69; Greece 124;
Netherlands 91 Guernsey 66; Hong
public and private corporations 13, Kong 72-3;jersey 62;
14 Liechtenstein 139, 143;
public IImitedjoint stock company Luxembourg 103-5, 107-11,
(Luxembourg) 113-14 114; Malta 54; Isle of
publication of company details Man 58,61;
(Luxembourg) 115,116 Netherlands 78, 79, 82, 83,
Puerto Rico 5,12,20,124-6 95-7; Panama 48, 49;
Switzerland 131, 132
'qualifying company' 28, 69, 79 'shelf companies' 58, 66
shipping companies: tax havens
regional headquarters, Netherlands for 19,28,52-4; in Isle of
corporate taxation of 87-9 Man 58-tiO; in Greece 122-4
152 Index
shipping facilities: of Cyprus 52; of Unilateral Decree
Panama 8,48,51 (Netherlands) 80, 82
Singaporc: withholding tax 85 United Kingdom: attitude to tax
social security taxes, exemption from havenry 5: corporation
Uordan) 121 law 13; control of offshore
South Africa: withholding tax 85 activities 18: tax agreements
South Korea: withholding tax 85 and treaties 52, 59, 62. 76, 86,
Spain: tax treaties 76, 77,85 115
Sri Lanka : withholding tax 85 United States: attitude to tax
stock exchange transactions, fee- havenry 5, 6; basis of income
free (Netherlands) 80 tax 7, 8; control of offshore
subsidiary: compared with actlvitles 18; tax treaties 52,
branch 83-4, 86; 54,76,77,86,115
Austrian 99-101
Surinam: tax treaties 76, 85 value added tax: Gibraltar 68;
Sweden: tax treaties 52, 86 Guernsey 65; Isle ofMan 57,
Switzerland: capitalisation of 59; Netherlands 97-9
companies 14; wilhholding Vanualu: screening of foreign
tax 86; as tax haven 127-38; corporations 10
taxation system 134-5 vehicle reg lstration fees, Greek
Syntex Corporation 21 legislation on 19
Vennolschap Onder Firma 97
tax avoidance, legalilyand rnorality verein 142
of 3,4
tax haven, definition of 1 warehousing: facilities in
tax holidays 20,23,57,58,82 Colon 50; use of branches for
tax treaties and agreements 2. 9. 11. (Netherlands) 89; in Puerto
85-6; Auslria 30.74.91-101. Rico 125
115.141; Cyprus 28; withholdlng lax: on US bank
Liechtenstein 141; interest 5; for non-
Luxembourg 115; Malta 53. residents 7; Latin
54; Netherlands 74, 76, 78. 80, America 44, 47;
82, 88-90; Switzerland 137-8 Luxembourg 104: Malta 54;
Thailand: tax treaties 76, 86 Isle ofMan 59; Panama 47,
trade marks 29,58,59, 74 49; and double taxation
trading and non-trading companies: agreements 74, 76-8, 84-6,
Malta 28, 53-4; Isle of 89,90.100. 101;
Man 58.60 Switzerland 127, 137, 138
travel business 20. 21 work permlts: Bahamas 33, 34;
trust funds and organisations 22, Jordan 121;
141,143,144 Liechtenstein 143;
lrustee bank 106, 108. 113 Greece 124; Switzerland 128
Tunisia: legislation for regional
offices 29, 124; lax yachts, registration of 52
holidays 20
Turkey: wlthholding tax 86 Zambia: withholding tax 86