When most people think of a tax haven, they picture an island nation or a small country with few tax regulations. The United States may be one of the last countries that come to mind when discussing tax havens, but experts feel that it actually meets the qualifications of being one. Despite this, the EU does not include it on tax haven lists, possibly because of the fear of extreme backlash.
The Tax Haven Status Only Applies for Foreigners
It is important to note that the ways in which the United States qualifies as a tax haven only apply to foreigners. Citizens will not get the same benefits that are associated with tax havens.
Foreign Entities Without a Presence
The United States becomes a tax haven if you are a foreign individual or company that does not have a physical presence in the country. This includes residing in a different country, not having the income connected to the United States, and conducting all business activities outside the country.
Taxation in the United States only applies if you have a company or employee in the United States that works just for you. Furthermore, this person or company must contribute to the business significantly to be taxed. Otherwise, if a company operates in another country and pays taxes there, it does not have to worry about U.S. tax laws.
Services and Products Can Still Be Provided
Based on that above description, only those without involvement in the United States get to avoid taxes, which is the case everywhere. However, the tax laws in the U.S. still allow companies that meet the previous requirements to sell their products or services in the country.
One example would be managing properties for U.S. clients, but doing so from another country. Another would be opening an LLC so you can receive USD payments into an American bank, without other involvement. Companies can also take advantage of this tax loophole by using a third-party service provider, such as Amazon.
There Are Still Some Requirements
Although companies who take advantage of this tax haven loophole in the United States will not have to pay taxes in the country, they must still report financial information to the Internal Revenue Service via a specific form.
Foreign Trusts Allow U.S. Citizens to Take Advantage, as Well
One of the important aspects of the tax haven status of the United States comes from the specific language in the IRS code. Specifically, it includes clarification that foreign estates or foreign trusts are treated just like nonresident alien individuals who do not have a U.S. presence.
Thanks to this language, even U.S. citizens can take advantage of the country’s tax haven status, provided they take the appropriate steps. There is a simple definition of foreign trusts, and as long as the trust created by a company or high-net-worth individual meets those requirements, it can be formed by U.S. citizens or residents, created using U.S. laws, have beneficiaries in the U.S., have residents as trustees, and have assets within the United States.
There are specific legal complications for some of these situations, and depending on the situation, the trust may be subject to some taxes but not all of them. The trust may also be eligible for a lower tax rate. This workaround lets even U.S. citizens and residents take advantage of the U.S. tax haven rules.
But the U.S. Is Not on Tax Haven Lists
Given the fact that the U.S. can serve as a tax haven for both foreigners and United States citizens, it is unusual that it is not typically found on lists of tax havens. It is easy to find criticisms of these American policies, but most world powers likely recognize that there would be too much backlash if the United States were included given its high status in the world, both in terms of economy and power.
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