Tax optimisation is an important issue for many entrepreneurs. It helps to reduce tax liabilities in order to increase profits. In Poland, taxes are often high and unfavourable for business. This is why some entrepreneurs are interested in tax havens. They are looking for territories or countries with more favourable financial policies. Is it worth setting up a company in a tax haven? Find answers in the article below.
Table of Contents
- What are tax havens?
- Criteria for granting tax haven status
- What are the consequences of conducting business activities in tax havens?
- List of countries classified as tax havens
- Tax havens in Europe
- Tax havens in the world
- Tax havens vs. countries attractive from a tax perspective
- Tax havens – withholding tax
- Tax havens – summary
What are tax havens?
Tax havens are countries or territories that offer attractive tax conditions for companies and entrepreneurs. These involve:
- Low or zero tax rates,
- Tax exemptions,
- Lack or limited tax transparency,
- Non-transparent tax regulations,
- Lack of information flow between the tax haven and OECD member countries,
- Independence of the national economy from the adopted taxation system,
- The possibility of taxing income without actual business activity.
Tax haven countries attract capital from diverse sources. It may come from business activities, dividends, interest or capital gains. They’re used to transfer funds and avoid or minimize tax obligations in the home country.
Criteria for granting tax haven status
The Minister of Public Finance provides a list of countries applying harmful tax competition. It is defined in the specific regulation. The procedure results from Art. 23 section 2 of the PIT Act. The minister takes into account the following factors:
- the agreements made in this regard by the OECD,
- the legal basis for tax information exchange between Poland and the specified jurisdiction.
- the timeliness of fulfilling the obligation to exchange tax information,
- the reliability, completeness, and clarity of the tax information provided,
- the actual characteristics of the tax system of the given country or territory that may lead to harmful tax competition.
What are the consequences of conducting business activities in tax havens?
Conducting business activities in a tax haven imposes the obligation to pay income tax on the income of foreign controlled entities. In practice:
- natural persons,
- companies that are subject to unlimited tax liability in Poland and at the same time hold shares in foreign companies that are considered tax havens
must pay income tax on the income obtained by these companies.
The tax rate is 19% of the tax base. These entities cannot benefit from the abolition tax relief which allows for deductions from income tax according to statutory rules. Abolition relief is not applicable when the source of income is in:
- and territories recognized as tax havens.
Exclusion of the relief may burden individuals doing business in tax havens. This means that individuals conducting business in tax havens must be ready to pay income tax. Its rate is 19% on the entire income obtained by foreign companies in which they hold shares. An alternative solution may be conducting business in countries with low tax rates. A good example is a company in Estonia or a company in Switzerland.
List of countries classified as tax havens
There is a list of countries reluctant to cooperate on tax matters, known as the list of tax havens. The Council of the European Union prepares it starting from 2017. The aim is to promote and strengthen mechanisms for a transparent and fair tax system. The EU Council aims to fight unfair tax policies in this way. Since 2020, the list of tax havens has been updated twice a year. The next review is scheduled for February 2024. On 17 October 2023, the Council adopted the EU list of jurisdictions reluctant to cooperate on tax matters. It includes 16 countries:
- Antigua and Barbuda
- American Samoa
- Trinidad and Tobago
- Turks and Caicos Islands
- Virgin Islands of the United States
Tax havens in Europe
Tax havens in Europe include:
Tax havens in the world
Official lists of the most popular tax havens indicate which countries support the policy of lowering tax obligations. The indexes are subject to systematic updates. Various global organizations, such as Oxfam, maintain their own listings. According to Oxfam data, tax havens worldwide include:
- British Virgin Islands
- Cayman Islands
- Hong Kong
- United Arab Emirates
- United Kingdom
- Isle of Man
- Turks and Caicos Islands
- Czech Republic
- Costa Rica
- South Africa
- San Marino
Tax havens vs. countries attractive from a tax perspective
Tax havens and tax-friendly countries offer favourable tax conditions for entrepreneurs. However, there are significant differences between them. Tax-friendly countries offer:
- competitive tax rates,
- stable and transparent tax laws.
These countries are attractive to entrepreneurs who want to reduce the costs of doing business but also do not want to risk breaking the law. The decision to establish a company abroad may be influenced by geographical location. For example, a company in Cyprus or a company in Dubai can bring many profits. However, it is important to prepare a well-thought-out business strategy. Setting up a company in the USA may also be a tax-friendly solution. The State of Delaware is not recognised by Polish legislation as using harmful tax jurisdiction.
Tax havens – withholding tax
Transactions conducted with countries listed in the tax haven registry and with companies domiciled therein are considered controlled transactions. The Tax Office has the right to verify their financial relationships. It will examine whether the conducted transactions comply with market norms.
Transactions from tax haven entities are treated like transactions between related parties. However, the regulations concerning tax havens are more rigorous.
It should be noted that since 1 July 2020, every cross-border payment (regardless of its value) subject to deduction as tax-deductible expenses constitutes a tax scheme if the recipient of the payment is a related party having:
- or management
in the territory indicated in the EU list of tax havens. What is important, the premise for the existence of a tax scheme in such a case is neither the occurrence of a tax advantage, nor even action aimed at achieving it. The value of the transaction is also irrelevant (a scheme can even involve a transaction with a value of e.g., 1 PLN).
Tax havens – summary
Tax havens can offer significant benefits. However, it’s important to remember that they also come with certain risks. Therefore, the decision to establish a company in a tax haven should be made carefully. It requires an analysis of all crucial factors.