What is Tax haven?
A Tax haven is a country or jurisdiction with low or no tax rates, it an attractive destination for individuals or companies to set up their businesses in order to minimize their tax liabilities.
Benefits of Tax havens for Companies
1. Lower tax rates::
Tax havens often have low or zero tax rates for companies incorporated over there, allowing them to reduce their tax liabilities and increase profits.
2. Reduced Tax Liability / Tax savings:
A Company can establish a subsidiary in tax havens and can reduce the overall tax burden by transferring profits in various ways to the subsidiary, where the lower taxes were levied and can decrease the profits of Indian entity where the higher taxes will be levied.
A Company can establish a subsidiary in tax havens and can reduce the overall tax burden by transferring profits in various ways to the subsidiary, where the lower taxes were levied and can decrease the profits of Indian entity where the higher taxes will be levied. .
A Company can make use of following strategies to exploit the benefits of tax havens by incorporating subsidiary in tax havens:
| Sl No | Strategy | Description | Effect on Profits & taxes | Reference Case Law |
|---|---|---|---|---|
| 1 | Transfer of Intellectual Property | Indian Company can transfer ownership of Intellectual property such as patents, Trademarks and it can further use such IP by paying Royalties or Licencing fee | Note:However Indian Company may be subjected to Capital Gains Tax in India on “initial transfer” of such Intellectual property |
CIT vs. EKL Appliances Ltd. (201) |
| 2 | Making Sale to Subsidiary | Indian Company can sell goods or services to the subsidiary at low price and can make sale at higher price in the global market | Since Indian Company is making sale at lower price, minimal profits will be accrued in India and maximum profits will be accrued in Tax havens. | Maruti Suzuki India Ltd. vs. CIT (2015) |
| 3 | Management and Service Fees | A subsidiary in tax haven may charge management, consulting or service fees to the Indian parent company | Cushman and Wakefield India Pvt Ltd. vs. DCIT (2014) | |
| 4 | Intra-Group Loans and Interest Payments | A subsidiary in tax haven could lend to the Indian holding entity and can receive the Interest Payments | Interest being paid by Indian company to tax haven subsidiary may reduce the taxable profit in India and the subsidiary needs to pay tax on the interest income as per the lower rates in tax havens | Aditya Birla Nuvo Ltd. vs. DCIT (2013) |
Note: However, In all the above cases, Indian Company needs to comply with "arms-length" pricing rules
3. Privacy and secrecy:
4. Asset Protection:
Tax havens can offer asset protection benefits to companies, held in offshore entities which can help companies to shield their assets from legal claims, creditors, and lawsuits.
Since, these jurisdictions have secrecy laws that make creditors or other parties difficult to access information about assets held in offshore.
5. Ease of doing business:
Tax havens may have more relaxed regulations, simpler business laws, and streamlined processes for setting up and operating companies, making it easier and cheaper to do business.
Tax Haven Countries
| Jurisdiction | Corporate Income Tax Rate | Additional Notes |
|---|---|---|
| Cayman Islands | 0% | No corporate income tax, no capital gains tax, no withholding tax, minimal reporting requirements |
| British Virgin Islands | 0% | No corporate income tax, minimal reporting requirements. |
| Bermuda | 0% | |
| Bahamas | 0% | |
| Singapore | 17% | Tax incentives available for certain sectors, effective rate can be lower. |
Disclaimer:
“The information contained herein is only for informational purpose and should not be considered for any particular instance or individual or entity. We have obtained information from publicly available sources, there can be no guarantee that such information is accurate as of the date it is received, or it will continue to be accurate in future. No one should act on such information without obtaining professional advice after thorough examination of particular situation.”
Prepared On:
17/10/23
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