A:

The Cayman Islands are one of the most well-known tax havens in the world. Unlike most countries, the Caymans don't have a corporate tax, making it an ideal place for multinational corporations to base subsidiary entities to shield some or all of their incomes from taxation.

What Is a Tax Haven?

A tax haven is any location that has very lenient or even non-existent tax laws. There are numerous tax havens around the globe, including Switzerland, the British Virgin Islands, Bermuda and Dominica. The specific tax laws in each location vary. While some simply tax income at lower rates, sometimes as low as 2%, others have virtually no taxes. The British Virgin Islands, for example, has no corporate tax, estate tax, inheritance tax, gift tax or sales tax, and it has an effective income tax rate of zero.

How Do Tax Havens Work?

Tax havens provide offshore banking services to foreign individuals and businesses that allow them to avoid paying income taxes in their countries of residence. For example, a large corporation might establish an offshore subsidiary in the Cayman Islands and direct all sales through the subsidiary rather than through the parent company based in the United States.

In this case, the shell corporation earns the company's profits and is subject to the tax laws of the Cayman Islands rather than the United States. Instead of being subject to the U.S. corporate tax rate, which stood at 38.9% in 2017, the company's profits are subject to whatever corporate or income taxes apply in the Caymans.

Tax Laws in the Cayman Islands

The Caymans have become a popular tax haven among the American elite and large multinational corporations because there is no corporate or income tax on money earned outside of its territory. This includes interest or dividends earned on investments, making the Caymans especially popular among hedge fund managers.

Instead of taxes, offshore corporations pay an annual licensing fee directly to the government. This fee is based on the amount of authorized share capital the company has.

Like all tax havens, privacy laws are paramount. The Caymans make it easy for individuals and business owners to shield their assets and identities from prying eyes.

RELATED FAQS
  1. Why is Andorra considered a tax haven?

    Find out why Andorra is considered a tax haven and how developments have lessened its appeal due to increased taxation and ... Read Answer >>
  2. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
  3. What are the differences between regressive, proportional, and progressive taxes?

    Learn the three basic types of tax systems--regressive, proportional, and progressive--used in the U.S., and how they affect ... Read Answer >>
Related Articles
  1. Taxes

    3 Ways Tax Haven Governments Make Money

    If the governments of tax haven countries impose little, or no, income taxes, how exactly do these nations generate revenue?
  2. Taxes

    All You Need to Know About Tax Havens

    These tax-free zones might sound appealing, but the consequences often aren't.
  3. Insights

    The Profits of Paradise: The Top 4 Economies of the Caribbean

    A look at some of the most dynamic economies in the Caribbean region.
  4. Insights

    5 Countries That Own the Most U.S. Debt

    China gets a lot of attention for being the top foreign holder of U.S. debt, but some other top holders may surprise you.
  5. Managing Wealth

    How To Buy Your Own Private Island

    We look at some people who own private islands, and give you tips for making a massive purchase like this.
  6. Taxes

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
  7. Taxes

    The Impact Of U.S. Corporate Taxation On Investment Decisions And CFC Transfer Pricing

    To avoid taxation, businesses do careful tax planning, taking into consideration more than one country's taxation system.
  8. Investing

    Trump, Le Pen, Tech & the Future of Alternative Investments

    Here’s what’s top of mind for investors and managers at the 2017 CAIS.
  9. Insights

    How Fortune 500 Companies Avoid Paying Income Tax

    President Donald Trump is not alone in not paying taxes.
  10. Financial Advisor

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
RELATED TERMS
  1. KYD

    The currency abbreviation or currency symbol for the Cayman Islands ...
  2. Tax Haven

    A tax haven is a country that offers foreigners little or no ...
  3. Effective Tax Rate

    The effective tax rate is the average rate at which an individual ...
  4. Taxes

    An involuntary fee levied on corporations or individuals that ...
  5. Form 8689: Allocation Of Individual Income Tax To The U.S. Virgin Islands

    A tax form distributed by the Internal Revenue Service (IRS) ...
  6. Corporate Tax

    A corporate tax is a levy placed on the profit of a firm, with ...
Hot Definitions
  1. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  2. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  3. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  4. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  5. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
Trading Center