Setting up Offshore Which Country is the Best?
By Michael Cadesky, FCA, TEP
Cadesky and Associates LLP (Toronto)
Asking which country is the best tax haven, is a bit like asking which country has the best restaurants. It is difficult to find Swiss fondue in Singapore, or Irish pub fare in Barbados. And while all of these countries are tax havens for certain purposes, the country most favourable to you will most certainly depend on your individual facts and needs.
As you start to explore the offshore world, you will very quickly find that there are dozens of jurisdictions which all claim to be the best tax havens, the most secret, the most confidential, and the most efficient. In general, none of these claims mean much for legitimate Canadian tax planning. Secrecy is irrelevant unless you are planning to commit outright tax evasion, confidentiality is "a given" in dealing with anyone reputable, and a pure tax haven is not always what you want.
The Canadian tax system discriminates greatly between countries with which Canada has a tax treaty and those with which it does not. In general, Canada has treaties with most non-tax haven countries, but not with pure tax havens. If you need a tax treaty country, this limits the selection to the 50 or so countries, which range geographically from Iceland to New Zealand, and alphabetically from Argentina to Zimbabwe. Conspicuously absent from the list are pure tax haven jurisdictions (including the Channel Islands, the Isle of Man, Bermuda, the Cayman Islands and much of the Caribbean, Gibraltar, Liechtenstein and Monaco), as well as Hong Kong and Taiwan. However, treaties could be a possibility with Hong Kong and Taiwan sooner than some people think.
Determining the appropriate jurisdiction to set up within, or to move to, will depend on whether an international tax treaty is required or not. If not, then any tax haven jurisdiction will be suitable. Otherwise, a more refined evaluation is necessary to determine the most suitable place.
Here is a summary of the key attributes of a few countries where we commonly set up arrangements: United Kingdom Contrary to popular belief, we place the United Kingdom at the top of the list for people with capital gains tax problems or lots of investment income. People who are not domiciled in the U.K., but live there and are resident there, are only taxable on income earned in the U.K. and monies brought into the U.K. Therefore, foreign income and capital gains escape tax, and the U.K. has an excellent tax treaty network. However, the new labour government is talking about putting a stop to this "nonsense".
With the right planning, it is possible to leave Canada, move to the U.S., live there for part of the year and not actually be resident there. Therefore, foreign income would not be subject to tax there. Also, the U.S. basically does not tax RRSPs or RRIFs. Therefore, people retiring to the U.S. can get a major break on withdrawals.
Switzerland has always been a useful country for international tax planning. Recently though, because the Canada-Swiss Treaty has been re-negotiated, it has become even more interesting. The advantages are mainly in setting up businesses operating from Switzerland, where the corporate tax rate can be as low as 8%, with only 5% more tax on bringing the money back to Canada. One added benefit over other places; the Swiss international treaty network is fully available.
Ireland can also be a useful place to earn certain business profits, at an overall rate of 10%. However, there are limitations on the types of activities permitted to enjoy this low tax rate.
These countries have special incentives to attract international business. In addition to being tax treaty countries, they offer a very low corporate tax rate on offshore business profits and no withholding taxes. (Barbados 2-1/2%, Cyprus 4-1/4%.) The only disadvantage is that their tax treaties with Canada apply only in a very limited way.
New Zealand/ Singapore/ Netherlands/Barbados
For individuals, these countries can be useful for capital gains tax planning. In the right circumstances, capital gains are not taxed, which allows residents in these countries to realize such gains free of tax. Their international tax treaties with Canada can prevent Canadian capital gains tax.
This is a quick summary of some of the world's more useful jurisdictions for international tax planning. Most people will find the list to be very surprising, and this reinforces the point that international tax planning is not so much a matter of finding the lowest tax rate jurisdiction, but one of careful strategic planning and pinpoint precision.