Is It Illegal to Use Offshore Tax Havens?

Offshore tax havens and offshore countries in general are sometimes referred to as the ‘greatest evil’ for the world economy. Supposedly, they are used by criminals who hide money there, evade taxes, and undermine the ‘normal’ economic processes. 

The truth is, however, that offshore jurisdictions offer legal opportunities to private individuals as well as corporations to lessen their tax burdens. The claim that it is illegal to use offshore tax havens is incorrect. 

Besides, the word ‘offshore’ has changed its meaning in recent years. Today, an ‘offshore company’ is any company registered in a foreign jurisdiction that offers several advantages that are not to be found in the company UBO’s home country. The advantages include a lesser tax burden, better protection of personal information, simpler reporting requirements, and so on.  

Offshore Tax Havens

What is an offshore tax haven?

An offshore tax haven is a country or territory that offers tax incentives to foreign entrepreneurs establishing business companies and opening bank accounts there. The incentives may include the following ones:

  • Low or zero tax rates;
  • Simple company incorporation;
  • Strict legislation protecting financial privacy.

Such a jurisdiction is naturally attractive for people who seek to optimize their finances, protect their assets, and reduce their tax burdens. The most popular offshore jurisdictions include Switzerland, Nevis, the Cayman Islands, and Bermuda.

We must note, however, that some onshore countries that generally charge high taxes sometimes offer special tax incentives to foreign entrepreneurs. You can find some ‘offshore properties’ in countries such as Canada, the USA, and Great Britain, for example. If you use the available opportunities in a wise way, you can seriously economize on taxes by establishing a foreign company in one of these jurisdictions and enjoy a high level of confidentiality protection there. 

Is it legal to use offshore tax havens?

Notwithstanding all the disputes about offshore jurisdictions, only the moral side of using offshore tax havens might be questioned. As far as their legality is concerned, there can be no doubts about it. Offshore jurisdictions are independent countries or self-governed territories that live in accordance with their own legislation. Every country or independent territory is free to pass the laws that it finds suitable. The matter is that offshore countries often lack natural resources and thus they are in need of foreign direct investments. This is a matter of survival for them. Consequently, they pass laws that attract business people from richer states who form companies there. The favorable corporate legislation that they find in offshore countries allows them to optimize their business operations. The offshore countries’ administrations, in their turn, gain some additional funding from foreign entrepreneurs that allows them to finance various social projects. The sector of offshore services in an important sector of economy for a considerable number of national states and self-governed territories.  

At the same time, it is important to understand the difference between tax planning and tax evasion. Tax evasion is illegal in all cases while tax planning is perfectly legal even though the phrase has recently acquired some negative connotations. Both private individuals and international corporations have lawful instruments that they can use to save on taxes. Some of them manage to save millions if not billions of dollars a year by employing legal tax planning mechanisms.

On the other hand, evading taxes by concealing incomes, by supplying false information, or by participating in fraudulent schemes is going to have negative consequences whatever country you look at – offshore or onshore. You will face fines and even imprisonment wherever you are found guilty of tax evasion.

To reduce tax evasion opportunities, the international community has introduced tough information exchange requirements. Both onshore and offshore countries exchange the financial information of local banks’ clients within the FATCA framework (for the US citizenship) or within the CRS framework (for citizens of almost all other countries). This is why the bank administration will always want to know who the ultimate beneficial owner of the company is, whatever jurisdiction the company is registered in. They will share the information with the tax authorities of the company UBO’s fiscal authorities.


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Is it ethical to use offshore tax havens?

Some critics claim that offshore jurisdictions cater to tax evaders thus increasing the tax burden on the people who do not have access to offshore services and undermining the overall tax base of other national states. You may hear that it is unethical to use offshore tax havens because if you do, you supposedly shirk your social responsibility and do not contribute to the social welfare of your fellow citizens.

Moreover, the high level of financial secrecy that can be found in some offshore jurisdictions raises concerns about money laundering and corruption. If a bank account, for example, is anonymous, it is difficult for the law enforcement agencies to solve financial crimes and monitor the flows of illegal money.

Over the recent years, the global community has been putting a lot of effort into combating tax evasion. In particular, a de-offshorization campaign is in full swing. International organizations such as the OECD and G20 are promoting increased fiscal transparency and introducing tougher measures to combat money laundering.  

The CRS initiative as well the BEPS initiative are aimed at eliminating the loopholes, improving financial transparency, and preventing aggressive tax planning strategies. The efforts are intended for striking a balance between fair taxation, economic competitiveness, and the preservation of the global financial system.

The United States of America are at the frontline in this fight. The IRS demands that all foreign countries should share the information about the bank account holders who are American citizens. Ironically, however, the U.S.A. doesn’t share its residents’ banking information with anybody else. With the view of this fact, the country can be referred to as the largest tax haven in the world. 

Small offshore countries cannot afford to be 100% secret, on the other hand. They have to cooperate with international institutions and introduce new regulations that increase the transparency of their residents’ banking information. Countries that have been traditionally thought of as ‘offshore zones’ are actually more transparent today than some onshore states, such as the U.S.A., for example.

The fight against offshores is mainly aimed at redirecting money flows as the big and powerful states want to exercise even more control over what’s going on in the world. But small offshore countries manage to resist the international pressure to a certain degree. They still offer some efficient instruments that can let you reduce your tax burden. Besides, an offshore-registered company or an offshore bank account can protect you privacy – not from the fiscal authorities of your home country but from fraudsters, ex-spouses, journalists, and so on. In addition, your assets in an offshore jurisdiction will be well protected from stealth, raids, and illegal seizure.

The BEPS, CRS, and other initiatives have actually made starting an offshore company a more secure enterprise than it was before. Because offshore-registered companies are transparent now, they are, therefore, absolutely legal.  

We will gladly assist you in registering a business company in an offshore jurisdiction. You are welcome to request a free consultation on registering an offshore company of the type that will suit your interests in the best way. Please do not hesitate to write to or contact us in any other way and apply for a consultation.

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