Tax Havens: Asian, African, and Pacific Islands
Certain nations in Asia, Africa, and the Pacific boast various features that can be useful for a wide range of international finance tactics and strategies.8 min read
Certain nations in Asia, Africa, and the Pacific boast various features that can be useful for a wide range of international finance tactics and strategies, both on a personal and business level. These tax havens offer benefits related to the following:
- Tax reduction
- Asset protection
This article will examine a few of the most popular tax havens in Asia, Africa, and the Pacific Islands — namely, the Cook Islands, Hong Kong, Mauritius, Nauru, Vanuatu, and Western Samoa.
The Cook Islands
Located in the South Pacific and discovered by Captain Cook, the British naval explorer, the Cook Islands permit the incorporation of companies under the International Companies Act of 1981 with a minimum capital of $1,000,000 and no fees based on the capital. There is a one-time $1,000 and annual $500 fee payable to the government. There are no other taxes.
Bearer shares are permitted, and one corporate director can run the company from any location. There must be at least one joint resident secretary and a registered local office, but no agent is required. The use of the words "bank," "trust," and "insurance" are limited to licensed companies. There are no exchange controls or double tax treaties.
Hong Kong has become the world's eighth-largest trading economy calculated in terms of total value of trade undertaken. Hong Kong is the seventh-biggest importer of goods and the ninth-biggest exporter. This is an astonishing achievement for a territory with a population of only 6 million. After World War II, many of the Shanghai traders set up shop in Hong Kong. The British administration, consistent with British imperial tradition, allowed their businessmen maximum freedom. This combination has resulted in a standard of living for Hong Kong residents that is now higher than Germany or France. Clearly, freedom pays extraordinary benefits when combined with hard-working and smart businessmen.
The takeover of Hong Kong by mainland China has generated much speculation about communist intentions. However, the Chinese are businessmen first, and socialism has been redefined to mean whatever works. The reality of what has, in fact, happened on the ground supports the view that Hong Kong is actually taking over China.
Hong Kong Bank Accounts
As well as being a major trading center, Hong Kong is also one of the world's major financial centers and the expertise of the banks reflects this. The Hong Kong banking system is among the most efficient in the world, and Hong Kong banks are particularly well-prepared to process letters of credit and import/export documentation. They are also good places to open accounts through which stocks and shares can be traded on the world's major stock exchanges.
Hong Kong as an Off-Shore Administrative Base
The concept of residence has no applicability to Hong Kong tax law. Only income with a Hong Kong source is subject to Hong Kong taxes. For this reason, Hong Kong is a suitable base from which to administer an offshore company without tax consequence — provided that company does not do business with other Hong Kong residents. This is one of the reasons why the use of offshore companies by Hong Kong residents has proliferated to such a great extent. Offshore companies can conveniently have Hong Kong-based directors, a Hong Kong bank account, and a Hong Kong office address without being brought into the Hong Kong tax net.
Most other countries of the world operate a residency-based tax system. In these systems, care needs to be taken to ensure that the offshore company doesn't establish a permanent place of business within those countries and is not managed and controlled from those countries. For example, an offshore company that had UK-based directors or that established a place of business within the UK would become liable for UK taxes on its worldwide income.
A Hong Kong company does not have to state its registered office address or place of incorporation on its letterhead. This would give the non-Hong Kong offshore company the added respectability of a Hong Kong persona combined with the added flexibility and ease of administration that are important for an offshore company.
There is a capital duty of 0.6 percent and an annual fee of HK$75. There are no double tax treaties and no restrictions on dealings in currencies. Bearer shares are not permitted and registration takes three weeks, but shelf corporations are readily available. An annual audit is required.
Mauritius, an independent member of the British Commonwealth, is a mountainous island in the Indian Ocean east of Madagascar. It is often seen as the "Gateway to India." At present, there are two main fiscally advantageous company types in Mauritius:
- Ordinary Offshore Companies. These companies can avail themselves of the Mauritian double taxation treaty network.
- International Companies. These companies are directly analogous to West Indian "Tax-Free" IBC Companies and do not enjoy tax treaty benefits offered to ordinary offshore companies.
To enjoy the substantial benefits afforded by the Mauritian/Indian Double Taxation Treaty, which interestingly was signed in 1983 and hence before much of the Mauritian tax planning legislation, it is necessary to prove that the recipient is resident. Under Article 4 of the treaty, a company — including an Ordinary Offshore Company — will be deemed resident if both of the following are true:
- The undertaking is liable to indigenous tax.
- There is genuine proof of local management and control.
Ordinary Offshore Companies in Mauritius
Ordinary Offshore Companies are governed by the General Companies Act of 1984, as amended by the Mauritius Offshore Business Activities Act of 1992.
Mauritius has a significant number of local lawyers and accountants who can provide resident directors, maintain local bank accounts, record official "minutes," hold board meetings, and submit the annual audited accounts. In respect to the liability to local tax, there would, of course, be no benefits if fiscal liability was merely extrapolated from India to Mauritius. The full normal corporate tax rate for Mauritius is a very non-tax-haven-like 35 percent.
However, under S.59D of the Income Tax Act, the proscribed rate of tax for an Ordinary Offshore Company is 0 percent unless otherwise elected, up to a maximum rate of 35 percent. This provision exists for tax planning and anti-avoidance reasons. In other words, it is quite possible for a Mauritian Ordinary Offshore Company to have no indigenous tax consequences.
International Companies in Mauritius
Mauritius permits the incorporation on companies under the International Companies Act of 1994 and exempts them from all taxes except for a $100 annual fee. Bearer and no-par-value shares are permitted. No information need be given to the authorities prior to incorporation or prior to tax-exempt status being granted. There is no information open to the public about exempt companies, and there is no restriction on where meetings may be held. A registered office and a representative is required, and certain documents must be kept at the agent's office. Exempt companies cannot, however, take advantage of double taxation treaties, the most important of which is with India.
In light how Mauritius treats Ordinary Offshore Companies, the question becomes at what level will India impose withholding taxes on investments. Under the treaty, once a Mauritian company holds an investment stake of 10 percent or more in an Indian company — known as a participation exemption — India will only impose a withholding tax rate of 5 percent on dividend distributions. In addition, realized capital gains from the disposition of shares are fully exempted from Indian taxes.
Of course, it would be wrong to give the impression that Mauritius is the ubiquitous solution for investments in India. In other circumstances, as has been pointed out by Nicos Chrysanthou, LL.B. (Hons), LL.M., Cyprus may provide a more successful catalyst — especially where a Cypriot company wishes to grant a loan to an Indian subsidiary. The withholding tax on interest payments is merely 10 percent, as opposed to the 20-percent rate levied by Mauritius. Cyprus can also provide protection against the imposition of capital gains taxes.
As can be seen, Mauritius offers substantial advantages for investors who are active in India. Even tax-exempt international companies, which may not avail themselves of the double tax treaty, are private and inexpensive and may be appropriate in many situations.
Nauru, an independent republic in the Pacific Ocean about 2,500 miles southwest of Hawaii, offers the possibility of setting up a bank with no requirement for local directors or any local presence apart from a registered office and company secretary in Nauru. These services would normally be provided by a management organization.
Nauru will accept applications for unrestricted licenses or for in-house type banks, but in practice, the authorities are unwilling to grant unrestricted licenses to anybody other than an existing bank. When such licenses are granted, the authorities impose a requirement that the applicant set up an office and associated infrastructure in Nauru. The capital requirements for an in-house bank are low — US$100,000 — and the process requires around one to three months.
A Nauru in-house bank is prohibited from dealing with anybody other than associated companies and individuals. However, it would be possible for your client to set up a finance company that conducted a broader range of activities. For example, the finance company could take deposits from third parties and then deposit the money in the bank. Any literature that was drafted could make clear reference to the fact that the finance company was a wholly owned subsidiary of XYZ Bank LTD and contain further details about the bank. The costs for obtaining this type of license would be around US$20,000, and timeframe would be one to two months.
Vanuatu is one of the newest South Pacific island tax havens and a jurisdiction that has indicated it is willing to receive applications for both unrestricted and restricted bank licenses. The minimum criteria laid down is that each type of bank requires paid-in capital of US$150,000. However, in practice, it is unlikely that an unrestricted license could be obtained by offering this minimum required level of capitalization if the company is registered in another offshore jurisdiction rather than one of the better-regulated onshore jurisdictions. Costs for obtaining a restricted license would be around US$25,000. Government taxes for an offshore company are US$300 per year, and the rules are otherwise competitive.
Since Vanuatu is new and out of the way, it holds interest for persons who may wish to do a low-key banking business. The minimum funding requirements for a restricted license offer a definite attraction. Bearer and no-par-value shares are possible. There are no restrictions regarding meetings, directors, or officers and no reports or accounts that need to be filed.
Western Samoa is one of the better offshore jurisdictions currently offering restricted offshore banking licenses. Unrestricted licenses are not obtainable by anybody other than existing banks and require a minimum paid up capital of US$10,000,000. Most applicants will find this high figure unappealing. Restricted licenses require a minimum paid-up capital of US$250,000, but the operations of the bank must be run through a local trust company. This means that an element of third-party control and involvement in the affairs of the bank is required. Fortunately, such local expertise is readily available.
Costs for a restricted license would be US$22,500, and application time would be approximately one to three months.