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.
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.