Offshore Tax Havens | 8 Other Tax Shelters You Must Know
Offshore tax havens: Double tax treaties, financing, the stock market, partnerships, and real estate
Offshore tax havens are also used as tax shelters. As a rule tax shelters must recover more than US$ 1 in tax for every US$ 1 spent, within 4 years
Generally, it is assumed that only offshore tax havens can be used to save on tax. However, there are several other methods.
Tax shelters are any method of reducing taxable income resulting in a reduction of the payments to tax collecting bodies, including state and central governments. The methodology can vary depending on local and international tax laws.” – Wikipedia
Offshore tax haven: Types of tax shelters
Some methods are quasi-legal:
1. Companies registered in offshore tax havens
By transferring funds to a company in another country, you may be able to claim the transfer as an expense, and so lowering the taxable income. International tax treaties often make the income not legally taxable. e.g. Double tax treaties between Mauritius and China and India let resident Mauritius companies invest in those countries with negligible taxes.
2. Financing arrangements
By paying unreasonably high-interest rates to a related party, one can severely reduce the income of an investment, or even create a loss, but create a massive capital gain when one withdraws the investment.
The tax benefit derives from the fact that capital gains are taxed at a lower rate than the normal investment income such as interest or dividend.
Other widely used tax shelters:
3. Stock market trading
Using certain stock trading strategies like spread betting and spread trading, all trading profits are tax-free under United Kingdom law.
4. Limited partnerships
Certain companies, such as mining or oil drilling often take several years before they can generate positive income, while many of them will go under. This normally deters common investors who demand quick, or at least safe, returns.
To encourage the investment, the US government allows the exploration costs of the company to be distributed to shareholders as tax deductions which are not to be confused with tax credits. Investors are rewarded by
- The near instant tax savings
- The potential massive gains if the company discovers gold or oil. In US terminology, these entities are given the generic title of “limited partnership” and function as tax shelters
5. Retirement plans
In order to reduce the burden of the government-funded pension systems, governments allow individuals to invest in their own pension and deduct some or all of its income for tax calculations. e.g. 401 [k] in the USA. These vary by country and very often are linked to governments trying to influence people behavior during the period the tax saving plan is introduced.
6. Owning your own business
The surest way to reduce your taxes is to convert personal expenditures into allowable deductions. Turn even a hobby into a business and you’ll cut your tax bill.
You can incorporate yourself, as a Type S or a limited partnership or a sole proprietorship, or even show that there was a profit motive that drove the expenditure. Most governments tax corporate income at lower rates than individual earnings. And your expenses are deductible even if you do not make a profit!
Even if you’re employed full time elsewhere, that doesn’t prevent you from having another activity on the side, subject to no objections from your current employer, of course. But the expenses you want to deduct must be reasonable since they will be scrutinized thoroughly by the tax man.
7. Real estate is a widely used tax shelter
Real estate provides leverage, an inflation hedge, cash flow and equity buildup. As your property appreciates in value, you are allowed a paper deduction for depreciation. If structured correctly, you buy the property with your down payment.
Hopefully, your rents cover your mortgage interest, taxes, and operating expenses.
8. Offshore tax haven holding company
Incorporation offshore as a holding company to own your local operating company is another well-used strategy. It is also used to save your investments. And even do business.
Dubai offshore companies with its zero capital gains, rent or income taxes is a good place to use for property investments!
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Disclaimer: Varal does not provide any tax shelters nor any consultancy on creating them. It’s business is to register companies. Ask your own tax consultant for tax advice