Taxes What Is a Tax Haven? Tax Havens Explained in Less Than 4 Minutes By Logan Allec Logan Allec Facebook Twitter Website Logan Allec is a licensed Certified Public Accountant (CPA) and a personal finance expert. He has more than a decade of experience consulting and writing about taxes, tax planning, credit cards, budgeting, and more. Logan also has a master's in taxation from the University of Southern California (USC). learn about our editorial policies Updated on April 27, 2022 Reviewed by Eric Estevez Reviewed by Eric Estevez Eric is a duly licensed Independent Insurance Broker licensed in Life, Health, Property, and Casualty insurance. He has worked more than 13 years in both public and private accounting jobs and more than four years licensed as an insurance producer. His background in tax accounting has served as a solid base supporting his current book of business. learn about our financial review board In This Article View All In This Article Definition and Example of a Tax Haven How Tax Havens Work Criticism of Tax Havens Photo: Owner: Andersen Ross Photography Inc. / Getty Images Definition A tax haven is a country that imposes low or no tax rates on foreign taxpayers. Tax havens also often limit the information about these taxpayers that they are willing to share with other countries. A tax haven is a country that imposes low or no tax rates on foreign taxpayers. Tax havens also often limit the information about these taxpayers that they are willing to share with other countries. Learn more about tax havens and why some taxpayers choose to do business in them. Key Takeaways A tax haven is a country with low or no taxes, often with a high level of financial secrecy to protect foreign taxpayers.Tax havens cost governments hundreds of billions of dollars of lost tax revenue every year.To combat tax evasion through tax havens, taxpayers with income or assets overseas must disclose foreign activities to the IRS.The Tax Cuts and Jobs Act, which took effect in 2018, requires U.S. corporations with foreign subsidiaries to pay a one-time transition tax as though they had repatriated profits from foreign subsidiaries to the parent corporation. Definition and Example of a Tax Haven A tax haven is a country that charges foreign taxpayers low or no taxes. These countries also do not openly share financial information about taxpayers’ activities with the taxpayers’ home countries. Taxpayers, corporations, and mutual funds may choose to work through tax havens—often through subsidiaries—or hold their bank accounts there. This allows these individuals and groups to avoid paying taxes in their home country. For example, the Cayman Islands imposes no income tax on individuals or corporations. It is considered one of the most financially secretive nations in the world. As a result, the Cayman Islands is a popular tax haven used by many U.S.-based corporations. The profits these corporations report that they earn through their Cayman Islands subsidiaries are equal to 20 times the Cayman Islands’ own gross domestic product. How Tax Havens Work In general, income earned by a U.S.-based corporation’s foreign subsidiaries is not subject to federal income tax. It is only taxed once the income is repatriated to the United States via a dividend to the parent corporation. This means that corporations based in the United States can form subsidiaries in tax havens. As the profits earned in these subsidiaries remain in the tax haven, the corporations can avoid paying U.S. income taxes on them. Note There are both legal and illegal ways to use tax havens to avoid or defer paying income tax. Avoiding taxes by keeping subsidiaries’ profits overseas is legal. But some taxpayers may attempt to hide assets and even income overseas. This is more likely to happen in tax havens that don’t often share information with foreign taxpayers’ home countries. This type of fraud could be as simple as putting undisclosed cash in a bank account in a tax haven. Or it could be as complex as setting up a web of domestic trusts formed in the United States and foreign trusts formed in a tax haven to hide your business income. Criticism of Tax Havens Tax havens cost governments around the world over $483 billion in lost tax revenue every year, according to one estimate. Taxpayers’ use of them poses a significant problem to the countries that need that revenue, including the United States. To combat taxpayers evading taxes by operating in tax havens, the Internal Revenue Service (IRS) has imposed certain disclosure requirements on taxpayers with assets or income abroad. Examples of these disclosures include: Report of Foreign Bank and Financial Accounts (FBAR) using FinCEN Form 114 Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts Form 8938, Statement of Specified Foreign Financial Assets The Tax Cuts and Jobs Act, passed in 2017, took tax haven enforcement a step further by imposing a one-time transition tax on unrepatriated earnings of foreign subsidiaries. This law required United States corporations with profits in overseas subsidiaries to pay a one-time 15.5% tax on profits held in cash and a one-time 8% tax on profits held in liquid assets. Corporations were given the option to pay the tax all at once or in parts over eight years. Combating tax evasion through the use of tax havens is not only an issue in the United States. In fact, in 2009 the Organization for Economic Cooperation and Development (OECD) founded the Global Forum on Transparency and Exchange of Information for Tax Purposes. The forum’s goal is to increase cross-border transparency and end cross-border tax evasion. Much of this work involves tax havens. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. PwC. "Cayman Islands Overview." Tax Justice Network. "Financial Secrecy Index 2020: Narrative Report on the Cayman Islands," Page 1. United States Senate Committee on the Budget. "Legalized Tax Fraud: How Top U.S. Corporations Continue to Profit Through Offshore Tax Havens," Pages 3-4. IRS. "Tax Cuts and Jobs Act: A Comparison for Large Businesses and International Taxpayers." IRS. "Abusive Trust Tax Evasion Schemes—Facts (Section IV)." IRS. "What Are Some of the Most Common Abusive Tax Schemes?" Tax Justice Network. "The State of Tax Justice, November 2021," Page 8. Internal Revenue Service. "Tax Cuts and Jobs Act: A Comparison for Large Businesses and International Taxpayers." Organization for Economic Co-Operation and Development. "Global Forum on Transparency and Exchange of Information for Tax Purposes."