Offshore Income Tax

tax definedIt is comforting to know that the possibility to save on taxes by depositing funds offshore where tax free privileges are available. Offshore income tax is not normally by tax havens where offshore tax exempt corporations are registered. However, people and corporations that are engaged in incorporating offshore entities and setting up offshore bank accounts are often tortured with the offshore income tax that they are required to pay to their countries of residence.

First and foremost, the safest way to avoid this situation is to be informed about what is expected from you as a recipient of offshore income, which makes you liable to offshore income tax. Tax treaties are often established between countries so that an understanding is reached in determining how offshore income taxes are to be applied. By knowing this, it will be easier to arrange your finances and taxes much easier especially if you qualify for offshore income tax exemptions or credit. In the event that you are unable to figure out a legal and safe way of avoiding offshore income tax in an offshore jurisdiction with which your country has a tax exchange information agreement (TEIA) or a tax treaty, then your best option is to find an offshore tax haven with a fully developed, well established and respected offshore sector.

There, the possibility of using offshore tax free structures that are effective mechanisms for avoiding offshore income tax exists much more and with less headache. Due to the strategies that are constantly being devised by countries such as the United States and United Kingdom where tax on offshore income is imposed, the importance of incorporating an offshore tax free structure in an offshore tax haven with unwavering confidentiality laws can never be over emphasized.

Furthermore, most of us tend to think that for saving on offshore income tax, popular is better. However, while quite a few offshore jurisdictions are renowned for the level of development that has been achieved in the offshore financial service sector and economic and social growth, tax collectors eyes become increasingly glued on offshore activity as they design ways to pass laws that seek to repeal the offshore income tax savings of offshore entities. Hence, a well regulated stable low profile offshore tax haven often better serves our interests in effectively minimizing tax on offshore income by providing structures that have been tested over time, proven to be legally sound and progressively amending its offshore legislative framework so as to enhance its offshore tax free services and mechanisms.

If we were to take the number of taxes on offshore income that are imposed by the US, in addition to income generated from offshore trade, it is a fact that US taxes are overwhelming. Offshore income taxes are set to include pensions, annuities, social security and other payments received by a foreign government. In order to avoid these offshore income taxes or to minimize tax expenditure, a tax treaty between the foreign country and the U.S which provide special exemption and or credit clauses must exist. If not, double taxation may become a serious problem, except if one of the two countries fully agrees to relinquish its right to tax that income.

Offshore income tax is a form of international taxation in that tax on offshore income is levied on any revenue that is received or earned from abroad. So, offshore income tax is applicable to interests accrued on offshore tax free bank accounts, money and assets kept in offshore trusts and funds, dividends, salaries and wages earned from overseas jobs, tips and even remittances received from family and friends abroad. In many countries including the United States, the list of income on which offshore income tax is imposed also extends to foreign pensions and annuity distributions which may be obtained from a foreign insurance company, trust set up by a foreign employer, foreign government or organisation or an offshore trust or entity charged with the responsibility of paying annuities. Offshore income tax is generally applied in the gross distribution less the investment amount that is stated in the contract. The same applies for foreign social security pensions where most offshore income tax treaties have specific policies for social security payments. And unless otherwise stated under an offshore income tax treaty, foreign social security pensions are normally taxed in the form of foreign pensions or foreign annuities and are not eligible for exemption from taxes in the way that a U.S social security might be.

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