22 February 2021

Tax Avoidance vs Tax Evasion

Tax evasion is the illegal act of misreporting income to lower tax liability and is punishable by law with hefty fines and in some countries, prison. On the other hand, tax avoidance is a method of tax planning that utilizes the tax code of a country to reduce tax obligation through the strategic use of tax loopholes and tax shields.

While there are many ways to evade taxes, some of the most common methods include:

  • Under-reporting your income
  • Excluding income sources including sources from abroad
  • Claiming personal expenses as business expenses
  • Hiding or transferring assets
  • Paying employees “under the table”

As you can see by the above examples, these acts are considered illegal and there is intent to defraud the tax authority. Tax avoidance does not involve acts of fraud, but instead uses different legal measures to reduce the amount of taxable income.

Restructuring a company to an offshore entity is a great legal step to take advantage of tax planning and avoidance. Offshore jurisdictions in Latin America and the Caribbean offer low to zero taxes on income or capital gains. Some of the best tax havens are found on a beautiful, sunny island.

It is important to note that business tax and personal tax are two very different matters and will thus be taxed differently. Although the business can incur little to no taxes through their offshore entity, it is important to create a tax planning strategy for personal income as well. Read more about establishing tax residency in a low-tax jurisdiction here.

Though offshore corporations have received a fair share of negative connotations throughout the years, they are a great legal tool to open a corporation in an offshore jurisdiction while continuing the operations in the home country. Companies can then significantly benefit from moving their taxable income from a high tax country to a low tax country. This is not only for the bigger companies out there, small business owners can also benefit from restructuring their company offshore.

There are many offshore jurisdictions that offer great incentives and it can be overwhelming choosing the right jurisdiction for specific business activities or operations. Remember, it is always advisable to contact a tax expert in both your preferred offshore jurisdiction and your home country to ensure you are optimizing your tax planning while adhering to the tax code and regulations.

Written by Magdalena Wczesna

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