The 'who's who' of European tax havens

Will Germany, UK and Netherlands end up in the OECD "black list" of terrible "tax havens"?

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Forget about the Bahamas, Panama, Cayman Islands, or Fiji. If you want to avoid paying taxes and have no problem with dicey business practices, Europe has a lot to offer.

Europe is far from innocent in the international offshore tax evasion industry, as the Tax Justice Network (TJN) recently demonstrated. Many European countries, with their stable infrastructure and professional personnel, provide fertile ground for businesses or individuals to evade taxes.

Andorra

There are more than a few gaps that need to be filled in Europe, according to Markus Meinzer of the TJN. He helped paint a picture of who's who among European tax havens.

The independent mini-state of Andorra in the Pyrenees, which is not a part of the European Union, offers a secretive place for those in neighboring countries to stash their money. Particularly attractive is the personal service offered by banking advisers there. It's also easy for Spaniards and French to simply drive there to deposit cash. Afterwards, one can always tank up and buy cigarettes there - tax-free, of course.

Austria

As a country sharing borders with Germany, Hungary, Slovakia, Slovenia, Italy, the Czech Republic and Switzerland, Austria draws foreign capital by promising secrecy to account holders. It caters especially to Europe's German-speaking population, Meinzer said. But he also said that he knows of Argentines who, for example, combine investing in Austrian bonds with the advantages of bank secrecy. Due precisely to the lack of financial transparency and its geographic location, Austria has also attracted wealth from Arab world dictators for decades.

Channel Islands

The British Channel Islands Jersey, Guernsey and Sark are home to hundreds of financial institutions and insurance companies drawn to their simple and low taxes. While Jersey probably "hides the most dirty business," according to Meinzer, Guernsey is the most innovative.

With its so-called self-protected companies, an apparent single company is organized into cells with protective legal walls between them. And on Sark, according to British newspaper The Guardian, there are 24 companies registered for each of the approximately 600 inhabitants.

Cyprus

Cyprus is the perfect example of what can go wrong with depending on such dubious business models. It was particularly oriented toward former Soviet countries, and acted as a hub for them. Transactions over letterbox companies brought money into Cyprus, then back to countries like Russia - thus avoiding Russian tax authorities. But since the Cyprus bailout , in part by the EU, the Mediterranean island will have to come up with a new business model.

England

England, with London, represents one of the largest hubs for tax evasion and capital flight. Meinzer described London as "the mother of all tax havens" since the zone, which does not answer to the crown, has developed a network that continues to bring money back to the capital of the former empire. Money flows from there to British Channel Islands, such as Guernsey, Jersey or to the Isle of Man, then overseas to British territories in the Caribbean, such as the Cayman or Virgin Islands - or in Europe, to Gibraltar. London, is the seat of many dubious "letterbox companies," which only exist on the Internet.

Germany

Frankfurt is a great place for foreign investors to earn tax-free interest

Germany protects the data of foreign investors, who also don't have to pay taxes on interest.

Only Germans, or foreigners resident in Germany, have to actually shell out a flat rate withholding tax on interest income, Meinzer said.

Information on such yields also rarely flows out of Germany, he added: "Foreign investors with German accounts are protected with a certain degree of anonymity."

That's why Germany ranks ninth in the world for financial secrecy, according to TJN.

Gibraltar

At the southern tip of the Iberian Peninsula, Gibraltar has specialized in allowing such letterbox companies, called "trusts." The structure of such trusts means there is no real owner of the company. They are often used to add a layer of secrecy to letterbox companies, Meinzer said, which is particularly good for money laundering.

Meinzer cited insider information in calling it "the dirty end of the spectrum" for bringing money back into financial markets. The presence of many gambling casinos there also comes into play.

Ireland

It's called the "double Irish" in the financial world: A company founds two subsidiaries in Ireland with its business tax rate of 12.5 percent. Then, one claims to be based in a different tax haven. (Comparable taxes in the United States, for example, are around 35 percent.)

This is completely legal in Ireland, and therefore an optimal location for companies such as Google, Apple or Amazon.While the one company does business in Europe, it pays the other patent fees. Profits vanish, as costs and income equal out on the balance sheet.

Although other countries like the Netherlands offer similar models, Meinzer said the difference is that people do actually work in Ireland, which at least creates some jobs and a bit of growth in the country.

Isle of Man

Taxes are kind of an afterthought on this island between England, Scotland and Ireland. Inheritances and capital gains aren't taxed at all, while the highest level of taxation lies at 20 percent. Corporate tax is nonexistent. It's especially loved as a hidey-hole for British millionaires.

Luxemburg

Luxembourg is the second-largest financial hub in Europe, after London. Innumerable investors and around 150 different banks enjoy a lenient tax framework in Europe's stocks and bonds center. Luxembourg's status as an EU member makes it particularly attractive for European companies and the international market, Meinzer explained. "If I want to get around German laws, for example, I could go through Luxembourg," Meinzer said, adding that 40 German banks do business there.

With its low tax rates, Malta, like Cyprus, has long drawn foreign capital. Although corporate taxes are around 35 percent, companies can get most of that refunded.

It's a favorite among German companies, which earn a higher profit if based on Malta. Meinzer said that while it's clearly a tax paradise for companies, it's not clear if that's also the case for individuals.

Monaco

The Principality of Monaco continues to be home to the rich and famous, being surrounded by France. Millionaires happily set themselves up there due to the fact that they pay no income or inheritance taxes. The city-state also does not prosecute financial crimes committed abroad. Businesses, however, must pay taxes there - at rates of around 33 percent. France, though it doesn't play an active role, lends a protective hand, Meinzer said.

Netherlands

What Luxembourg is for private investors, the Netherlands is for large corporations. Business taxes are incredibly low, with many tax advantages for interest and licensing income.

With the "Dutch sandwich," a parent company has a subsidiary in the Netherlands, which it uses as a cheap tax base to develop its European business.

Switzerland

Although there are supposedly no more completely anonymous bank accounts in Switzerland (and neighboring Liechtenstein), it continues to draw large sums of money due to its strict banking secrecy. Considering the volume of money in Switzerland, it made first place on the TJN's Financial Secrecy Index.

Full text in http://www.dw.de/

Germany Becomes Tax Haven for Firms and Wealthy 1/2

Germany Becomes Tax Haven for Firms and Wealthy

09/02/2009

By Beat Balzli and Michaela Schiessl

German Finance Minister Peer Steinbrück has been railing against tax havens such as Switzerland and Luxembourg with harsh rhetoric. But he has paid too little attention to completely legal loopholes -- such as having subsidiaries on Malta -- that allow German corporations and the ultra-rich to minimize their tax burdens.

The Swiss are essentially a placid people. But for the past few months, two words have been sufficient to transport them into a state of agitation: Peer Steinbrück.

They have referred to the German finance minister as "Peitschen Peer" ("Whip Peer"), ever since he threatened to call in the cavalry unless Switzerland, traditionally a tax haven, cooperated with other countries. Even Luxembourg Prime Minister Jean-Claude Juncker, whose country Steinbrück also included in his verbal attack, feels deeply offended.

Only one person is pleased with these reactions: Steinbrück himself.

"It wasn't only friends that I made during the fight against tax havens," he says. However, he adds, it was important to "sail against the wind and stay on course in this effort." But now Steinbrück lacks more than popularity. Now he also needs money. Last week, Germany's Federal Statistical Office reported a national deficit of €17.3 billion ($24.8 billion) for the first half of 2009.

Completely Legal

But the minister's rage against tax havens risks obscuring a much bigger problem: A completely legal tax avoidance industry is flourishing right at home in Germany. It is an industry that thrives on the mistakes made by ministries and the parliament in drawing up tax legislation. And hardly any other industry is as successful, irrespective of the current economic situation, or operates as efficiently.

While ordinary German workers are at the mercy of the tax authorities, millionaires and corporations use aggressive tax models to make themselves appear to be artificially poor -- and it's completely legal. In fact, seminars on "International Tax Structuring" are even tax-deductible in Germany as professional training.

What the national treasury loses in the process is far from insignificant. The German Institute for Economic Research (DIW) has calculated that there is a gap of €100 billion between the demonstrated profits of corporations and partnerships and the profits they have reported for purposes of taxation. "This points to tax breaks and structuring options with which companies can lower their taxable profits or shift them abroad," writes the DIW.

In fact, German corporations structure their international subsidiaries in such a way that the most profitable ones are located in the countries with the lowest tax rates. Corporate tax paid by corporations makes up only 2.8 percent of the government's total tax revenues of €561 billion. Germany's army of wage-earners contributes the largest share.

"Germany is a tax haven for large companies," says Wiesbaden-based economist Lorenz Jarass. "People with normal incomes are being robbed."

Toothless Tiger

Steinbrück isn't so keen to discuss this injustice. He prefers to draw attention to his latest coups in the fight against tax havens: Belgium and Luxembourg have agreed to release information about potential tax evaders. And Swiss representatives will arrive in Berlin on Sept. 8 to negotiate a new double-taxation treaty that provides for increased mutual assistance between Swiss and German authorities.

This is undoubtedly progress. But another one of Steinbrück's prestigious projects has already failed: The interest-rate barrier that limits the tax deductibility of interest costs for businesses has been relaxed.

He was also forced to make concessions on the tax evasion law passed in July. Instead of leaving it solely up to the finance minister to determine which countries are to be ostracized as tax havens, the Foreign Ministry and Economics Ministry will also be involved in such decisions in the future. However if a country is classified as a tax haven, it will mean that investors and companies doing business there will be subject to stricter requirements regarding providing tax-related information.

Corporations have little to fear from such a toothless tiger. They maintain entire departments for the sole purpose of optimizing their tax situation. In their international web of subsidiaries, they manage to control the internal flows of money with the help of three adjusting mechanisms: interest payments, license fees and transfer prices.

It works in the following way: Swiss subsidiaries charge their German parent company high fees for the use of patents or charge prices higher than the cost price for product shipments. The resulting profits are earned in the tax havens.

However Dieter Ondracek, head of the German Tax Trade Union, claims some of these problems have already been fixed. "Many of these loopholes were plugged with the 2008 corporate tax reform," he says.

Financial Monopoly

Tax expert Hanno Berger, for one, finds that argument laughable. Berger, a stout man in his late fifties with a construction worker's handshake, spent 14 years auditing Frankfurt banks for the German tax authorities -- until he succumbed to the lure of private industry. Nowadays, he sits in his office on the 31st floor of the Skyper building in Frankfurt and designs tax savings models for the ultra-rich and large corporations.

Berger's trademark is zero taxes for multi-millionaires. He is considered the king of the industry. With the skyline of Frankfurt's financial center as a backdrop, he uses a flipchart to illustrate his most successful structures -- those with tax-free returns of up to 10 percent. For Berger, finding ways to beat the tax system is an "athletic and intellectual challenge." Is it his problem that Berlin enacts amateurish laws? It's no wonder that the Finance Ministry sees Berger as one of its greatest enemies.

Of course, Berger is also familiar with the latest mecca for Germans seeking to optimize their tax structure: Malta. In the global game of financial Monopoly, the small Mediterranean country has become one of German industry's preferred locations in the time since it joined the European Union in 2004.

Companies like Lufthansa, Puma, BASF, K+S and Fraport have their offices in the town of St. Julian's, near the "Stiletto Gentleman's Club" and the pubs where foreign language students drink themselves into oblivion. The offices of the BMW Malta Group are near the casino in the upscale Portomaso waterfront development.

"The number of companies in Malta is growing rapidly," says Andrew Manduca, a partner in the accounting firm Deloitte Malta. He avoids using the term tax haven. "Companies pay a 35 percent tax rate here, which is more than in Germany." Technically, this is correct, but in a second step, shareholders can apply for a refund of the bulk of those taxes. On balance, profit distribution in the form of dividends is taxed at only 5 percent. After taxation, the net dividends are returned to the coffers of the German parent companies -- 95 percent tax-exempt, thanks to the decisions of the former Social Democratic and Green Party coalition government under former Chancellor Gerhard Schröder.

No one seems to be troubled by the fact that this loophole deprives the German treasury of massive amounts of revenue. On the contrary.

Last summer, Germany's ambassador to Malta invited German banking executive Frank Krings -- now a member of the management board of the troubled mortgage lender Hypo Real Estate -- to his private residence for a meeting with representatives of subsidiaries of German companies. Krings apparently liked what he heard. The local media has reported that banking giant Deutsche Bank plans to expand its business in Malta this year.

Full text in http://www.spiegel.de/international/business/0,1518,646558,00.html