Why Are the Cayman Islands Considered a Tax Haven?

The Cayman Islands are considered a tax haven because the Caymans do not impose 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. The Cayman Islands do not impose taxes on residents. They have no income tax, no property taxes, no capital gains taxes, no payroll taxes, and no withholding tax.

Understanding a Tax Haven

A tax haven is any location with lenient or 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 has no corporate tax, estate tax, inheritance tax, gift tax, or sales tax and an effective income tax rate of zero.

Without tax income, the Caymans earn revenue via fees related to tourism and work permits, financial transactions, and import duties. Duty taxes are levied on most goods imported to the Caymans at a rate of 22%. Some items, such as baby formula, are exempt from duty taxes, while other goods such as automobiles are taxed at a higher rate based on the value of the vehicle. For expensive cars, the duty tax rate can be as high as 42%.

How Do Tax Havens Work?

Tax havens provide offshore banking services to foreign individuals and businesses to avoid paying income taxes in their countries of residence. 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 of 21% in 2023, 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 with zero corporate or income tax on money earned outside its territory. This includes interest or dividends earned on investments, making the Caymans especially popular among hedge fund managers.

Offshore corporations pay an annual licensing fee directly to the government based on the company's amount of authorized share capital. Like all tax havens, privacy laws are paramount. The Caymans make it easy for individuals and business owners to shield their assets and identities.

The Bottom Line

A tax haven is any location with very lenient or non-existent tax laws. The Cayman Islands do not levy a corporate tax and act as a haven for multinational corporations to shield some or all of their incomes from taxation. Additionally, the Cayman Islands do not impose taxes on citizens or non-citizens.