What are tax havens, and how do they work?

We explore what you should know about tax havens, including what they are, how they work, and if you can legally retire in one.  

Summary 

• A tax haven is a country or territory that offers foreign businesses and individuals no or low tax liability to attract external investment.

• Well-known tax havens include Bermuda, the Cayman Islands, and Switzerland.

• Tax havens benefit their users but are a legal grey area with which many disagree.

• Whether you want to ensure you’re paying the right amount of tax or plan for retirement, a financial adviser can help you meet your goals.  

What is a tax haven? 

A tax haven is a country or territory that offers foreign businesses and individuals no or low tax liability to attract external investment. 

They usually impose special tax rules to encourage wealthy businesses or people to deposit money in a bank in that country.  

Many common factors help identify tax havens, according to the Organisation for Economic Cooperation and Development (OECD) including: 

• No, or low tax on relevant income

• A lack of effective exchange of information

• A lack of transparency

• There is no requirement for substantial activities, so profits can be made from certain mobile activities without corresponding economic activity

According to the Tax Justice Network, tax havens are also sometimes known as “secrecy jurisdictions” as they often specialise in helping individuals hide their wealth and financial affairs from the rule of law.  

What are the problems with tax havens? 

Many believe tax havens create financial injustices, with some of the main issues including: 

• Loss of tax revenue: If an individual or company does not pay tax in their home country, the government loses out on tax revenue, which can impact funding for vital services and infrastructure. 

• More inequality: Tax havens are usually used by the wealthy, who have the resources to use tax loopholes that others do not. According to the Tax Justice Network, tax havens “fuel inequality, foster corruption and undermine democracy.” 

• Instability: According to the International Monetary Fund (IMF), as a tax haven’s primary purpose is tax avoidance, this activity results in little investment in tangible assets, making the tax haven business highly volatile. 

More pressure has been placed on tax havens to curb their activity and reduce incentives they offer over the last few years, including from the US and European Union (EU), as well as advocacy groups.

Following the publication of the Panama Papers – a collection of documents disclosing how the superrich used tax havens to conceal their wealth, escape public scrutiny, and avoid paying taxes – this pressure intensified.  

Who benefits from tax havens? 

While many disagree with the use of tax havens, they are beneficial to those who use them. 

Those who benefit include:

• Wealthy individuals: Those who use tax havens can enjoy a lower or no tax liability.

• Corporations: Companies that use tax havens also enjoy lower tax rates. For example, Apple uses Ireland as a tax haven, saving them up to $65 billion in taxes, according to the Corporate Finance Institute (CFI). 

What countries are tax havens? 

Tax havens can be found everywhere, with well-known tax havens including: 

The British Virgin Islands 

The Caribbean is home to some of the most popular tax havens in the world, including the British Virgin Islands (BVI). 

The BVI has 36,000 residents but is home to over 400,000 companies and holds approximately $1.5 trillion in assets, according to the World Population Review (WPR).

Offshore BVI businesses are exempt from corporate income tax, capital gains tax, or VAT. 

BVI international companies also pay no income tax or capital gains. As the territory has no tax treaties with other nations, the financial privacy of bank account holders is protected.

Cayman Islands 

Alongside no corporate tax, the Cayman Islands does not impose direct taxes on residents, including property, income, and payroll taxes, making it popular with both individuals and businesses alike.

Fortune 500 companies, including Pepsi, Marriott, and Wells Fargo having subsidiaries in the Cayman Islands, according to WPR.  

Bermuda  

Bermuda in the North Atlantic is a well-known tax haven for companies worldwide. 

According to PWC, it does not impose taxes on profits, income, dividends, or capital gains, has no limits on profit accumulation, and does not require dividend distribution. 

Under the new Bermuda Corporate Income Tax Act 2023 (CITA 2023), a 15% corporate income tax will apply to businesses that are part of multinational enterprise groups with annual revenue of at least €750 million. This will take effect in 2025. 

Switzerland 

Switzerland has low taxation for both foreign businesses and individuals.  

According to the Swiss Federal Department of Finance, foreign nationals living in Switzerland but are not employed there can pay a low, lump-sum option on the money they bank inside the country, and the government considers their taxes paid. 

The Swiss government also offers significant tax breaks to companies that hold 10% shares of other corporations. 

It’s worth stressing that while the wealthy can take advantage of the country’s low tax rates, its financial privacy laws have been weakened due to pressures from both the US and EU.  

Luxembourg 

Luxembourg is the richest country in the world in 2024, with a gross domestic product (GDP) of over $143,000 per capita, according to Global Finance.

It is also one of the most well-known tax havens in the world, with its favourable low tax rates and impenetrable tax secrecy, making it home to many US Fortune 500 companies and individuals looking to reduce their tax liability.  

Can you legally retire to a tax haven? 

As they are predominantly countries and territories with their own laws, tax havens are legal, meaning you can move to a tax haven if you wish. 

However, the specific actions and laws of both the tax haven and the UK will determine the legality of how you use them.  

It’s worth noting that while you can move to a tax haven, you will still have to pay UK tax if you’re classed as a UK resident – for example, if you visit the UK for more than 183 days in a tax year.

This could lead to double taxation and become more expensive than if you didn’t move.  

Get financial advice 

It's wise to seek expert advice to make informed decisions tailored to your unique circumstances and goals.

A financial adviser can help you develop a strategy to reach your financial goals.