Tax havens have been known to greatly reduce and eliminate taxes that would have otherwise been due by domestic tax authorities if not for their placement in offshore accounts. Studies suggest that U.S. taxpayers hold around $4 trillion in overseas accounts, about half of that in countries normally considered tax havens.
This article analyzes the top 10 tax havens in Europe. The continent is home to many tax havens that offer advantageous environments for capital gains taxes, income taxes, and corporate taxes. These regions have attracted large companies along with wealthy private investors who seek refuge from taxation policies in their home countries.
Key Takeaways
- Europe is home to many tax havens that provide favorable environments for taxation on capital gains, income, and corporations.
- England, Germany, and Ireland are among the top tax havens on the continent.
- Switzerland's financial secrecy has made it one of the world's top places to store cash.
- Foreign companies can get favorable treatment as Danish holding companies while Luxembourg doesn't charge capital gains taxes on certain stocks.
- Trillions of dollars of private wealth are diverted into offshore tax havens around the world.
1. England
England is considered the epicenter of the world's tax haven systems. Foundations and trusts are typical tax haven vehicles foreigners use to offer a protective tax-free or tax-reduced wrapper around assets. The country is particularly popular with foreign billionaires who benefit from a lack of income or capital gains taxes on investments held outside of the country.
London is Europe's tax haven capital for non-British individuals. The city's well-established banking systems are trusted and used by foreigners from nearly every country in the world. Small and large companies benefited from a relatively low 19% corporate tax up to 2022. That rate increases to 25% in 2023.
British territories are also popular tax havens, including the British Virgin Islands and the Cayman Islands. Neither overseas territory charges corporate taxes or capital gains taxes. Individuals aren't taxed in the British Virgin Islands unless they are employed in the territory while the Cayman Islands don't charge any individual income taxes. Neither territory has a withholding tax.
2. Germany
Foreign investors are freed from the burden of taxes on interest in Germany. The country retains the privacy of account holders. For non-resident corporations, foreign income is exempt from taxation whether it is in the form of dividends from foreign subsidiaries or income earned in foreign branches.
Corporations benefit from Germany's tax environment as only 5% of dividends and capital gains have taxes levied against them. These classes of income are considered nondeductible operating expenditures according to German accounting standards.
3. Ireland
People who claim to live in Ireland but are not residents and hold a residence elsewhere are able to use its attractive tax environment. Ireland has a long history of offering low corporate tax rates to encourage foreign companies to relocate business on paper rather than physically.
Ireland is host to a business tax rate of 12.5%, and artists enjoy a tax-free income. The country has been host to quite a few shadow corporations attempting to take advantage of the low-tax environment.
Dublin is home to the International Financial Services Centre, a financial center that has served as a deregulated haven for both individuals and businesses. The IFSC has attracted the presence of 20 of the world's top 25 financial services companies, as well as 17 of the top 20 global banking institutions.
4. Jersey
Jersey receives funds from England as a mainstay in England's tax haven system. The crown dependency of Jersey operates under different financial transparency laws than most banking systems. It is notorious for banking secrecy procedures, as well as general secrecy in matters of government and justice.
The government charges no corporate taxes to companies foreign and domestic companies that are permanently established on the island. Financial companies are charged a flat 10% corporate tax rate while large corporate retailers and utility companies pay 20%. Jersey does not tax dividends or capital gains.
5. The Netherlands
Business taxes in the Netherlands are very low, as are taxes on interest and dividends. The Netherlands attracted $84 billion in foreign direct investment in 2019, making it the largest recipient of FDI in Europe.
With 24,000 multinationals operating in the country in 2020, the Netherlands has become a popular destination for international capital. The Netherlands has boomed in corporate headquarters and subsidiaries for its treatment of multinational taxes.
Tax exemptions, which are called participation exemptions, remove the tax burdens from dividends and capital gains that are accrued outside of the country. Royalties and interest payments are also free from tax burdens, though the Netherlands began withholding tax for entities established in low-tax jurisdictions beginning in 2021.
6. Switzerland
Once a home for many anonymous banks that are no longer able to operate anonymously, Switzerland still serves as a popular tax haven, as the country adheres to secrecy in banking practices.
The efforts of U.S. tax evasion investigators have not bumped Switzerland from the list of popular European tax havens. Russia has also identified Switzerland as an offshore jurisdiction that refuses to share banking information on account holders.
The Financial Secrecy Index ranked Switzerland as the second tax haven in the world based on its banking secrecy procedures and the amount of its offshore business. Switzerland's enforcement of tax laws has been conspicuously absent. The country has a long history of hiding funds as it was the go-to hiding place for the upper class during the French Revolution.
In 2018, Switzerland agreed to provide information about bank accounts with members of the European Union (EU) and nine other countries, including Australia, Canada, Guernsey, Iceland, Isle of Man, Japan, Jersey, Norway, and South Korea.
7. Sweden
Sweden disposed of a number of taxes including inheritance taxes and gift taxes. In 2012, Sweden began offering an investment savings account, or ISK, which can hold securities and funds with special tax rules.
Rather than being taxed on actual income, gains, and losses, it imposes a standard revenue tax on estimated earnings. This means you pay taxes even if your account drops in value. However, you can also withdraw funds at any time tax-free.
Though Sweden has not traditionally been viewed as a tax haven in Europe, changes to its tax codes and the introduction of new investment vehicles have modified the country's image as a potential tax haven for foreign investors.
8. Denmark
Tax havens in Denmark are able to operate due to low transparency in information exchanges between tax authorities and banks. The real owner of a corporation or a foundation can be difficult to distinguish in Denmark, as is the case with limited partnerships.
As of 1999, Danish federal law was established to allow foreign entities to use the country as a jurisdiction for holding companies. Foreigners are allowed to hold 100% of shares in a Danish holding company and aren't subject to corporate taxes in this case.
Other benefits of these companies include:
- Lack of restrictions for business activities
- Ease of registration
- Low requirement for minimum capital
9. Austria
Account holders in Austria are granted privacy in exchange for their funds, and Austrian bank accounts are popular with Germans. Austria's bond market is popular with foreign investors. Stringent banking secrecy earned the country a ranking of 44 on the Financial Secrecy Index.
10. Luxembourg
German banks notoriously take advantage of Luxembourg's tax environment as the dividends of many companies are not taxed. Long-term capital gains on stocks are tax-exempt if a majority share is 10% or more is not held. By placing segments of business entities in Luxembourg, foreign corporations have been able to cut huge tax bills from their expenses.
Luxembourg has become so notable for its tax laws that much of the country's attractiveness for outside businesses are owed exclusively to these features, and Luxembourg's economy is partially built around the business gained from its tax structure.
The country may be put at risk financially if it is no longer attractive to outside businesses for these reasons. European policymakers have demanded the country alter its tax structure to encourage corporate and consumer tax revenue.
What Is a Tax Haven?
Countries that offer corporations and individuals little to no tax liabilities are called tax havens. Many tax havens provide favorable tax benefits, including low or no tax rates for corporate and investment income. Some of these jurisdictions do not require residency and may promise not to share information with the home country. Although they are often associated with illegal activity, tax havens can be used as a legal way to minimize an individual or corporation's tax liability.
Why Do Taxpayers Put Their Money Into Offshore Tax Havens?
Individuals and corporations often use offshore tax havens to minimize their tax liabilities. These jurisdictions may promise low or no tax rates on corporate, personal, and investment income, while some even promise to shield information from being shared with the home country.
Is It Illegal to Use Tax Havens?
Contrary to what most people may believe, the use of tax havens isn't always illegal. For the most part, it is a very legal strategy that many wealthy people and corporations use to minimize their tax liability. But it can be illegal if money is purposely hidden from tax authorities in a taxpayer's home country.
The Bottom Line
The use of tax havens is generally a very legal strategy that individuals and corporations can use to minimize their tax liabilities. Some of the most popular tax havens are found in Europe. These areas may provide favorable corporate tax rates, little to no taxes on dividends and capital gains, and even secrecy.
