Best Tax Jurisdiction: Midshore v. Offshore Jurisdictions

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Nobody enjoys paying taxes. The desire to reduce tax bills leads many to search the internet trying to discover “the best tax jurisdiction.”

But there is no such thing.

The best tax jurisdiction for one person might be lousy jurisdiction for another.

Ultimately, the only thing that matters is the best tax jurisdiction for you.

Here are some general points and concepts to keep in mind with respect to your tax planning.

Paper v. Reality

Most of the articles on various jurisdictions make tax planning sound simple – just pick a jurisdiction with a low tax rate, minimal reporting requirements, and low start up fees and you’re all set!

The Seychelles, Belize, and Mauritius and similar “offshore” jurisdictions look like no-brainer options. On paper, they look just like Bermuda and the Bahamas!

In reality, they’re virtually useless.

Getting a bank account in an offshore jurisdiction is incredibly difficult, if not impossible. The offshore jurisdictions attract a lot of criminals. As a result, international transactions are heavily scrutinized. Many businesses and financial institutions refuse to do business with entities from certain jurisdictions.

To make matters worse, many of the offshore jurisdictions do not have tax treaties with major countries. Without tax treaties it is very difficult to capitalize on a jurisdiction’s low tax rates.

New Rules Are Killing So-Called Tax Havens

Around the world, countries are passing “economic substance” rules to capture more tax revenue.

Essentially, a company must have significant economic ties to a jurisdiction in order to benefit from its tax system. The “economic substance” taking place in the jurisdiction must be commensurate of the revenue being booked there. Sometimes, satisfying these requirements can be achieved by simply holding board meetings there. However, some businesses will be required to have an office staffed by many employees there including executives. 

But the so-called tax havens like the Cayman Islands, Bermuda, Bahamas, and BVI often do not have the infrastructure to support the economic activity required under the new rules.

As a result, people are looking to form entities in jurisdictions with real economies and many existing companies will likely need to relocate to such jurisdictions.

Midshore Jurisdictions

Midshore jurisdictions often offer the same low or no-tax rates and minimal reporting requirements as the offshore jurisdictions.

Importantly, they have the infrastructure to fulfill the needs of a thriving enterprise.

Midshore jurisdictions like Hong Kong, Singapore, and the United Arab Emirates (UAE) have actual economies and infrastructures that support industrious labor pools whereas offshore jurisdictions are typically dependent on tourism. Satisfying economic substance rules in midshore jurisdictions is relatively easy. 

Furthermore, they have robust banking systems that can handle anyone’s needs–from commercial to private banking.

Also, traveling to and from these jurisdictions (which may be required to satisfy economic substance rules) is much more convenient compared to the island jurisdictions.

Why The UAE Stands Alone

The UAE has separated itself from the other midshore jurisdictions.

First, the UAE has tax treaties with all major countries, unlike most of its competitors. Again, tax treaties enhance the ability to maximize the benefits of a jurisdiction.

Second, the UAE is affordable.

Many people that can genuinely benefit from forming an entity cannot afford other midshore jurisdictions. But they’re surprised to learn how inexpensive it is to form and operate an entity in the UAE.

Need Help?

You can purchase your UAE entity today.

Or, if you’d like some guidance through the entity formation process, our entity specialists are ready to find the best tax jurisdiction for you.

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