Although the primary use of a tax haven is a place to base
entities, such as a corporation or trust, to serve as an
interface between yourself and the bureaucratic world, there may
come a time when you will find that having personal residence in
a tax haven country confers additional benefits. This is
particularly the case if you have built up accumulated earnings
in a business or in a tax-deferred annuity, and now need to
receive those earnings in a residential tax haven in order to
maximize the benefit.
Campione: Little Known Tax-free Backdoor to Switzerland
Campione, on the shores of Lake Lugano, is distinguished by
its very uniqueness. It is a little piece of Italian soil,
completely surrounded by Switzerland. There are no border
controls so there is complete freedom to pass in and out of
Campione. It is located in the Swiss Canton of Ticino, about 16
miles from the Italian border, and 5 miles from Lugano by road.
It has about 2000 inhabitants.
Campione belongs economically to Switzerland, and uses Swiss
banks and governmental facilities such as post office, telephone,
telegraph, and traffic laws. Cars registered in Campione bear
Swiss license plates.
Unlike Switzerland, there is no problem for foreigners in
obtaining residence rights in Campione, so the enclave is
enjoying a sudden popularity with people looking for a way to
obtain Swiss residence. Having a house or apartment in Campione
is all that is necessary to obtain a residence permit in
Campione, although the local authorities do require that
registered residents spend at least some time in Campione.
The lack of border controls gives Campione residents totally
unrestricted access to all of Switzerland and Liechtenstein, so
it can be a most valuable European executive base.
Besides its residence attraction, the enclave is also
gaining in popularity because it has a unique tax haven status.
Although part of Italy and subject to Italian law, there are
special tax requirements for Campione. There is no personal
income tax and no municipal tax as all of Campione's income is
raised from the operation of a municipal casino. Campione
residents are not subject to Switzerland's many double taxation
agreements with such countries as Canada, the U.S. and most of
western Europe.
Companies formed in Campione have many advantages over Swiss
companies, as they are able to use Swiss banking facilities, have
a mailing address that appears Swiss, but not be subject to
Switzerland's relatively high income and withholding taxes.
Company law is the same as in Italy, and a corporation can be
formed with a minimum capitalization of about $1000. Company
formation takes longer than in Switzerland, but unlike
Switzerland, a Campione company can be entirely owned and
directed by foreigners. The formation work is usually handled by
Italian lawyers in Milan, and the fees are modest, since this is
not a special or complex matter. The personal and company tax
exemptions do not apply if the resident is doing business with
Italy, but business with Italy can readily be done through a
Swiss or Liechtenstein corporation as an intermediary.
Foreigners may buy real estate in Campione without
restrictions, unlike Switzerland, so acquisition of a site in
Campione for a European regional headquarters is readily carried
out with minimal red tape. Demand for real estate in Campione
has pushed prices well above the level or surrounding Ticino. As
a part of Italy, the European Union regulations apply to
businesses, and this includes such things as the right to
establish a business and residence by any citizen of another EU
country.
The official language is of course Italian, and the enclave
is in the Italian speaking portion of Switzerland. Many
international schools are located in Switzerland, so school
arrangements for children of transferred executives can be easily
made.
The recent referendum in which Swiss voters rejected an
affiliation with the European Union means that Campione will
continue to have its special value for sometime to come. Without
the free access to Switzerland that EU affiliation would have
provided, the backdoor route via Campione will continue.
There are many recreation facilities in the immediate area,
including golf, ski resorts, and water sports. Milan, and all of
its cultural attractions, is only an hour away.
Campione's unique status has its origins in the Thirteenth
Century when the village and its territory were presented by the
Lord of Campione to the Church of St. Ambrosius of Milan. This
feudal property survived European upheavals and remained secure
to the end of the 18th Century, and then joined the new Cisalpine
Republic. Afterwards Campione fell into Austria's hands for a
short period and was finally incorporated into the new Kingdom of
Italy.
It is one of the world's most unique, and least-known, tax
havens, and a most attractive base for companies looking for a
regional headquarters in Europe. It is also one of the most
expensive tax havens for real estate, because there is so little
of it. Apartments will range from $2500 to $3500 per square
yard, and you usually pay the broker a 3% buying commission on
top of that (the seller also pays 3%).
Getting started in Campione is much more difficult than in
other tax havens, because the enclave is not promoting itself,
and there is no central office of information to which one can
turn for instant literature. You are not unwelcome, but nobody
is going to go out of their way to let you in on this secret
haven. So there are no promoters or agents that you can write to
in advance to send you packets of nice brochures.
The only effective way to establish in Campione is to make a
personal visit and spend time talking to people.
Ceuta and Melilla: Reduced Tax Rates for Residents
Two very small enclaves on the coast of Morocco are
practically unknown, but may be very appealing for some purposes.
The cities are Spanish, and although Spanish taxes do apply, they
apply at only half the rate imposed in Spain, so they aren't pure
tax havens. Both cities are completely duty-free ports as well,
making them particularly useful land bases for keeping a yacht on
the Mediterranean and not spending enough months in the house to
be deemed resident by the Spanish tax authorities. There is also
no VAT.
On the other hand, there can be an advantage to becoming a
legal resident of one of the enclaves, since the cost of
maintaining an apartment is low, and it provides a visible tax
residence to satisfy the authorities in jurisdictions with higher
taxes. Since the enclave is your declared legal residence, and
you are voluntarily paying Spanish taxes (admittedly at a 50%
discount) nobody is monitoring where you spend your time. As a
Spanish resident, you certainly are entitled to use your town
house in Madrid for business visits (perhaps five days a week),
or spend time in your vacation villa in the Canary Islands. The
enclave address on your tax return and your residence card is
what gets you the tax break, not your physical presence.
Citizens of EU countries can establish residence
automatically, because of the treaty rights to live and work
anywhere in the EU. All Spanish double taxation treaties apply
to the enclaves, since they are legally part of Spain. Thus, to
your home country authorities, you are not residing in a tax
haven. (They are unlikely to even know that you are getting a
discount on your Spanish taxes.)
Between the years 1497 and 1848, Spain acquired two enclave
cities and three garrison enclaves on the coast of North Africa.
The combined area of these Spanish enclaves is 14 square miles.
According to the Spaniards, this area, with over 100,000 Spanish
citizens, represents a legal part of metropolitan Spain.
Ceuta and Melilla have about 80,000 people each. In
addition to the large civilian populace in both Ceuta and
Melilla, there are large garrisons of soldiers.
Both cities are situated between 35 and 36 degrees north
latitude. This places them roughly on the same latitude as Cape
Hatteras, Memphis, Albuquerque, and San Luis Obispo in the United
States; and Malta, Crete, Cyprus, Tehran, Kabul, Pusan and Tokyo
in Europe and Asia. Both of the enclaves are located on the
Mediterranean side of the Strait of Gibraltar.
The city of Ceuta is directly across the Strait of
Gibraltar, twelve nautical miles south of the Rock. Mount Hacho,
a 636 foot high mountain on the eastern extreme end of the cape,
one mile east of the center of Ceuta, and Gibraltar (elevation
1398 feet), constitute the "Pillars of Hercules"
of antiquity.
The city of Melilla lies 155 nautical miles east of Ceuta,
on a large cape which juts 15 miles out from the coast.
An overnight ferry goes between Ceuta and Melilla weekly,
with the eastern run being Monday/Tuesday, and the western return
Thursday/Friday.
Land connection is by Morocco's route P-39 -- a distance of
about 190 miles. Much of it is winding mountain road, so a trip
by car takes about nine hours.
Melilla has a 3,000 foot runway. Normal service for Melilla
airport is approximately five flights daily to Malaga. Ceuta has
a military heliport. Tangier has a 9,000 foot runway and
connecting flights to Casablanca, Madrid, Malaga, and Paris.
Ceuta is about nine square miles, Melilla is four square
miles. By comparison, Gibraltar is only 2.4 square miles.
Ceuta and Melilla are characterized by a mild Mediterranean
subtropical climate with summer drought and winter rain.
The population in each enclave is about 80% Spanish and 20%
Moroccan. This Moroccan percentage can be a bit misleading
however, as it refers to actual population. There are between
eight and ten thousand Moroccans from the surrounding countryside
who cross the borders daily, either to work or to shop. There
are also several hundred shop owners from India in the enclaves,
although that is still less than 1% of the population, but Indian
commercial influence in the duty-free shopping industry is
considered to be significant.
In practice there is little concern by the Spanish border
authorities to inspect anything carried into Ceuta, either by car
or on one's person. On the other hand, Moroccan customs police
frequently strip search young European backpackers as they leave
Morocco for Ceuta, on the assumption that they may be carrying
drugs. The arrest rate on the Moroccan side has been fairly
high.
Ceuta has a civil government, and the city is administered
as a municipality of the Cadiz Province, and Melilla is
administered by Malaga Province. But the cities also have a
somewhat special status, in that they each have one Deputy and
two Senators in the Spanish Parliament. For practical purposes,
the city administration is the government, and there are no
functions for the provincial government to carry out.
Ceuta has an excellent natural harbor, and is nearly as busy
as Bilbao, the second busiest port in mainland Spain. This isn't
some quiet backwater, but a booming freeport that can be a very
useful and inconspicuous base. The Melilla port is also modern,
but is considerably smaller than Ceuta.
Upon entering the port, Ceuta appears to have many more
tall, new buildings than Melilla. This gives Ceuta a more modern
look. There is much more useable pier space in Ceuta than in
Melilla because much of Melilla's inner harbor is taken up by its
beautiful recreational beach.
Ceuta's location at the busy strait contributes greatly to
its traffic, whereas Melilla gets little traffic that is not
directly destined for the port itself. For a yachtsman, this
gives some edge to Ceuta for an ability to disappear in the
crowd. Melilla is known for its excellent seafood, and has a
small fishing fleet.
The port facility at Ceuta has many sport and recreation
boats. There are rows and rows of pleasure craft, compared to a
fairly small nautical club at Melilla which includes mostly small
sailboats.
Ceuta is only a one-hour ferry ride from Algeciras, Spain.
Since it is a shorter journey than the Algeciras-Tangier
connection, it rivals Tangier as an easy entry to Morocco from
Spain. The ferries carry both passengers and automobiles, and
there are at least eight round trips daily -- up to fifteen in
tourist season. Ceuta newspapers cover happenings across the
Strait in the towns around Algeciras bay, and there is close
contact with the area for entertainment and visiting.
Since the mid-1960s, Ceuta has been a designated duty-free
port of entry for Spain. There are about 500 small appliance
stores in Ceuta, selling radios, stereos, cameras, small
appliances and watches. All this commerce makes the city's
economy quite strong. Other industries are fishing, tourism, and
smuggling.
Melilla is much less accessible than Ceuta. Daily round
trip ferry service connects Melilla with Malaga, eight hours
away, although as mentioned previously, there are five flights
daily that connect Melilla with Malaga.
A resident of the enclaves can buy a car duty-free, but must
drive it in the enclave for one year before he can take it back
to mainland Spain duty-free. In this way, one can buy a
Mercedes, for example, at a price that is below even the price of
the car in Germany.
Monaco: Traditional Haven of the Wealthy
There are many places where you could live and be free of
income taxes, inheritance and estate taxes and real estate taxes.
But most are isolated, too cold, too hot, or too distant. Monaco
is the only tax haven located a short drive from several truly
major cities, and at the same time in a resort area well known
for its glitter and the non-stop action of major gambling
casinos. It boasts fine beaches, golf and tennis clubs.
Contrary to popular belief, it is possible to live in a
hotel, eat regularly, and have a pleasant month in Monaco on a
budget of US$30 a day. But as a practical matter, a liveable
apartment with a sea-view will cost about US$1000 a month --
considerably less than half the price of similar accommodation in
New York or London. And the weather is far better!
Monaco is in a slightly different league, offering banking
and investment services to a wealthier clientele of tax exiles;
the Monagasque financial center is less dependent on fiscal
nomads and expatriates than on the international untaxed ranks of
the supremely rich.
There is no shortage of heavyweight financial names
represented in Monaco.
Among the 40-plus banks are American Express, Chase,
Citibank, Credit Suisse, Grindlays and NatWest. They all rub
shoulders with each other in and around Monte-Carlo's boulevard
des Moulins. Mostly they offer discreet private banking services
for Gucci-heeled lotus eaters on the Cote d'Azur. The
principality is trying to balance its image as a playground for
the rich by promoting itself more strongly as a serious offshore
financial center.
While there is no personal income tax in Monaco (except for
French nationals in certain circumstances), on the face of it
corporations established in Monaco are taxed at a rate of 35 per
cent. However, the taxable base to which the 35 per cent rate
applies can often be significantly reduced through negotiation
with the tax authorities. There are no withholding taxes in
Monaco.
There are three other areas in which Monaco may have
something to offer as an "offshore" financial center:
The first is mutual funds. Legislation introduced in 1988
means that neither the Monegasque fund, nor its investors, are
subject to any tax in Monaco on income or gains.
There are no exchange control limits.
Secondly, Monaco is a popular center for internationally
operating companies to set up a co-ordination center or 'bureau
administratif.'
Finally, Monaco can be an ideal location for the locally
tax-free administration of personal or closely-held investment
trusts.
The United Kingdom and Ireland
While both of these would appear at first glance to be high
tax countries, both have a concept of "resident but not
domiciled" in their tax laws. This concept separates domicile --
ones permanent home -- from ones current residence. Domicile is
a vague concept, since it does not necessarily require having a
residence in one's domicile. Thus, a person born in Canada may
be considered domiciled in Canada, even though they are living in
London, and paying U.K. taxes as a resident.
That would not usually be a good position to be in, but in
the case of "resident but not domiciled," one is only taxed on
income actually brought into the United Kingdom (or into
Ireland). Income earned abroad can continue to accumulate in
offshore accounts and not be taxed. Some people reduce the tax
exposure even further by setting up two accounts with their
investment manager -- a capital account and an income account.
All income from both accounts is paid into the income account;
withdrawals of U.K. (or Irish) living expenses are made only from
the capital account, thus proving that one is living on capital
and not on income. Hence a zero tax.
This strategy won't work forever, since one would eventually
be deemed to have changed ones domicile, and it needs good hand-
holding from an experienced tax practitioner, but the technique
works well for many. Provided appropriate action is taken,
foreign nationals living in the U.K. can often retain their
foreign domiciles for many years. It's how those Arab oil
sheikhs can live so well in London without being taxed.
It should be noted that the Labor Party has threatened to
end this tax break, and tax the worldwide income of all U.K.
residents, so if they win an election one should be prepared for
a quick change of residence.
The first step is to bring capital rather than income into
the U.K. (or Ireland). The capital must be "clean" capital --
that is, it must not contain capital gains or income accruing
while a resident in the U.K. This is not difficult to arrange.
One simple way is to put cash into one offshore bank account (the
capital account) before becoming a U.K. resident, and open a
separate, initially empty, offshore account to which the interest
earned on the cash would be credited. You would then draw on the
capital account only.
So long as you are domiciled outside the U.K., only income
and gains brought into the U.K. are subject to tax, and as the
capital account contains neither, money paid from it to the U.K.
is tax free (and the account itself provides the documentation
and proof to support this position to the tax inspector).
To get even more sophisticated, if you exhaust the capital
account and have to draw on the income account you would become
liable to income tax on the income brought into the U.K. But
this tax can still be avoided if, before drawing on the income
account, it is restructured by closing it down and opening new
accounts. It requires timing and planning, but it can be used to
wash out the income tax liability and create a new "clean"
capital account, which can be drawn on free of tax.
The last step is to put the non-U.K. assets into a suitable
offshore trust. This insures that the U.K. inheritance tax on
the cash is avoided on death. For inheritance tax purposes,
foreign assets are only free of inheritance tax if their owner
has been resident in the UK. for tax purposes for less than 17 of
the last 20 tax years, so the trust must be established before
the 17-year period elapses. So long as the trust assets are kept
out of the U.K., no inheritance tax is payable.
If the trustees are resident and the trust is run outside
the U.K., it can be used to avoid capital gains tax in the long
term, and to defer income tax. (This works best if it is done
before becoming a resident of the U.K., but that isn't essential
for all purposes.)
The offshore trust strategy can work if it is created before
taking up residence in a great many countries, since it separates
legal and beneficial ownership of the assets.
The strategy also works in most (but not all) countries
which have inherited their tax laws from the U.K., so if you are
contemplating residence in an ex-British jurisdiction, it is
worth exploring this concept with a local tax advisor.
The concept has even been carried to Israel (which obtained
much of its commercial law from the U.K. during the years of the
British mandate over Palestine). New immigrants are granted
exemptions on foreign-source-income for up to 30 years, thus
putting a huge loophole in the normal perception of Israel as a
high-tax country.
Malta and Cyprus
Malta and Cyprus have both passed legislation giving special
tax benefits to foreign residents, in each case taxing only a
small percentage on the amount brought into the country for
living expenses. This results in a nominal tax payment, combined
with the ability to claim benefits under the network of double-
taxation agreements which each of these countries has.
The Americas: A Variety of Residential Havens
With the exceptions of Brazil, Venezuela and the Dominican
Republic, most Central and South American countries do not tax
foreign source income. Thus living in Mexico, Costa Rica,
Honduras, Panama, Guatemala, Argentina, Uruguay, Chile, and other
inexpensive but appealing countries is very practical for anyone
who is not earning a local income in the country.
Solving The Worldwide Taxation Problem For American Citizens
American readers of tax haven books are usually faced with
the frustrating fact that much of what is said does not apply to
them, because the U.S. taxes its citizens on a worldwide basis
regardless of where they reside. Much of this problem can be
solved with combinations of trusts and corporations, of the type
of tax planning that The Harris Organization does for its clients
(see the sections on forming trusts and corporations for more
details). But this still leaves the American taxpayer struggling
through the various hoops of the tax code to protect his wealth
from taxation.
Many publications talk about the value of offshore
techniques to defer taxes. Creation of an offshore business by
an American citizen will generally defer taxation until dividends
are paid, allowing untaxed profits to compound in the foreign
corporation. Purchase of an annuity allows deferral of the tax
until payments from the annuity begin to be made.
But this is as far as most publications take the subject,
and that is missing one of the great values of such investments.
Tax-deferral creates an option to become tax-free in the future,
a decision which may never be taken -- but the option on the
decision costs nothing. At any point in the future, if an
American citizen decides to renounce their U.S. citizenship, the
accumulated profits of the business or the annuity can be
withdrawn totally tax-free. (This option strategy only works
with a foreign annuity -- a U.S. annuity would be taxed heavily
on distribution to a non-resident alien.)
This "option strategy" also works for inheritance taxes.
With proper tax planning, one can create a large estate, and if
one renounces U.S. citizenship before death, that entire estate
can pass tax free to ones heirs. Thus a person is able to
maintain and use their U.S. citizenship for a lifetime, and then
take the option of renunciation of citizenship when it is no
longer relevant -- perhaps when living in an overseas retirement
haven. All of the residential tax havens just discussed become
very suitable for an American pursuing this strategy.
About the Author
Adam Starchild is the author of numerous books and articles on
offshore investing and living. Extensive sample chapters from his
works are available at The Offshore Entrepreneur.
Copyright © 1996; by Adam Starchild
The Libertarian Library has reprinted this article with the permission of the author.
