When Bob Emmett considered locating his real estate development company on St. John, in the U.S. Virgin Islands, he thought about lifestyle perks such as balmy weather and island living. But the far more significant incentive for Emmett lay in the U.S. territory’s impressive tax benefits, which would shield 90 percent of his income from the IRS.

For Emmett, a former corporate lawyer turned entrepreneur, basing his luxury private residence club on St. John aligned perfectly with his plan to build a new resort on the island. He also headquartered his real estate company, Folio Collection, on St. John to oversee the sales and rental operations for two additional properties worldwide. Choosing St. John and employing a staff of 150 provides the island with the kind of economic benefit that is supported by the federal government through tax incentives.

Yet not all businesses located in the territory have such honorable intentions. Emmett has seen people attempt to establish nothing more than business addresses on St. John to avoid paying U.S. income taxes.  There was a dentist from Iowa who rented an office, but didn’t have a practice there—and was then discovered by the IRS, Emmett recalls. “It’s highly scrutinized,” he says. “They’ve really looked into how some people stretched the original intention.”

For wealthy individuals and business owners, the hunt for legal tax shelters and tax havens may seem hopeless.  The IRS taxes U.S. citizens on worldwide income, making it illegal to hide assets in offshore businesses in an attempt to avoid paying income or estate tax. Giving up citizenship and choosing another, more tax-friendly jurisdiction may provide some financial advantage, but such a choice is highly personal and often becomes emotionally impossible, even for the most hard-bitten foes of American tax policy. Still, for those willing to comparison-shop for tax jurisdictions, many countries provide enough incentive to reconsider the benefits of U.S. citizenship, or at least to find some creative—and legal—alternatives to paying American taxes.

“There are a lot of very large players living under a favorable tax status,” says Seth Entin, a Miami-based international tax attorney and partner with Greenberg Traurig. Entin says hedge fund managers are increasingly drawn offshore to places like the Bahamas, which levies neither corporate nor personal income taxes.

Breaking Up Is Hard to Do

The most attractive tax havens include Bermuda, the Bahamas, the Cayman Islands and Monaco. In Switzerland, foreign nationals negotiate their tax bills based on their yearly expenses rather than on income. The British government also provides a significant incentive by taxing foreign nationals solely on income earned in the United Kingdom, effectively shielding all investment performance and business profits earned on accounts and companies based elsewhere.

Yet in an age of global economies and shrinking distances, the desire to expatriate is often more complex than a simple wish to avoid paying taxes. For Jim Rogers, who cofounded the Quantum Fund with George Soros, moving his family to Singapore was not a difficult choice. Last December, Rogers sold his townhouse in New York for $16 million and relocated to Singapore. He has not given up U.S. citizenship, though he wants to live in Singapore for the rest of his life.

Rogers, whose most recent book is A Bull in China, sees an unparalleled investment opportunity in East Asia and wants to latch onto that booming economy and expanding cultural influence. He believes the greatest investment opportunity is in China, where he sees a population that ranks “among the best capitalists in the world.” He also says that if he were younger and choosing a place to live, he would probably select a country like China, where frontierlike expansion offers opportunity. He settled on Singapore, however, because he sought an Asian country with an efficient government, low pollution and exceptional services in education, air travel and healthcare.

“I have not given up my citizenship,” he says. “But everybody thinks of it, no question.”

Thinking of it can be an agonizing process for many. One of Entin’s U.S. clients has been considering a move to Switzerland for the past 12 years. On paper, the decision makes sense, Entin says, because escaping liabilities for income and estate taxes would save millions, but his client does not want to give up U.S. citizenship.

Nowhere to Hide

The IRS, of course, is aware that some Americans would gladly trade their citizenship for lower taxes. Consequently, it is now virtually impossible to legally escape the agency’s long reach and keep the advantages of full citizenship. The 2004 American Jobs Creation Act included a provision that limits the number of days former U.S. citizens can spend in the country to 30 days per year. If they exceed that time, their income and estates will be subject to taxation by the IRS. Lawmakers also recently revived a push to create an exit tax for citizens when they leave the United States. “Congress and the Treasury are even more hostile toward what they view as tax-motivated expatriation,” notes M. Read Moore, an international tax attorney with McDermott Will & Emery in Chicago.

Political pressure is mounting in other jurisdictions, too, to curb overly favorable tax breaks for expatriates and foreign nationals. Until recently, numerous foreign nationals sought residency in the UK, where so-called non-domiciliaries, or those people not intending to make a permanent home there, were taxed only on income earned in the country or  brought into it.  The British government is debating limiting that exemption this year.

Another challenge that tax-haven shoppers must face is that tax advantages might be the only thing a nation has to offer. Political and economic stability are also critical parts of the equation; just as in moving to any location, individuals must assess qualitative factors such as the cultural and educational environment.

PricewaterhouseCoopers and the World Bank recently published a joint survey of the most attractive jurisdictions in which to locate a business. Based on most-favorable corporate-tax laws, Gaza and the West Bank ranked along with Zambia at the top of the list. “You’re not going to have people rushing to give up their current residency to move there,” says Bill Barbeosch, the chief fiduciary officer with GenSpring Family Offices, based in New York.

For noncitizens, the United States may also offer substantial tax incentives. Santiago Ulloa, the president of Miami’s GenSpring International, is helping one of his clients restructure trusts created in Delaware. His client’s grandfather established family trusts to shield income from their home country in Latin America. However, the granddaughter now resides in a Western European country that levies a wealth tax of 1 to 2 percent, which Ulloa estimates could cost her several million dollars. By restructuring the trusts and relying on substantial Delaware trust protections, Ulloa believes that he can help the family avoid such tax expense. “Otherwise, the distribution of the trust might be subject to an inheritance tax; it gets very expensive,” Ulloa says. 

Elizabeth Harris is a staff writer for Worth.

10 GLOBAL TAX HAVENS

Even for the most tax-conscious individuals, moving overseas often becomes more a question of lifestyle than tax savings. Political stability, the social and cultural climate, and the national economy are critical factors to consider when thinking of expatriation.

The following nations attract the majority of global investors and companies wishing to shelter assets.

The Bahamas  Long considered among the premier destinations for expatriates seeking a true tax haven, the Bahamas boasts zero income taxes, and no capital gains,  inheritance or gift taxes. The only cost is an affordable one: a 1 percent property tax levied on nonpermanent residents.

Bermuda  Hedge funds are discovering the appeal of registering in Bermuda, where more than 14,000 international companies (many U.S.-owned) are drawn to the island’s zero-corporate-tax structure. Residents also pay no personal income tax. However, permanent residency can be tough to get: The government requires non-Bermudans to buy homes worth more than $1 million and levies a 22 percent property tax.

The Cayman Islands The Cayman Islands’ thriving financial-services sector reflects its status as one of the more popular tax-exempt destinations. The Caribbean nation levies no taxes. However, there is indirect taxation through an import duty of 20 percent on any goods brought into the country.

Dubai  Dubai is emerging as an attractive tax haven thanks to its zero-taxation policies—no capital gains and no income taxes. Political and legal tensions may offset the benefits.

Gibraltar  Gibraltar modified its tax structure six years ago by eliminating corporate taxes, but began charging a new tax on company personnel and property of up to 15 percent of annual profits. Personal income taxes are also restricted on the first $90,000 of income on a sliding scale that peaks at $56,000. Full-time residency requires two letters of recommendation.

Hong Kong  Hong Kong’s blend of East and West makes it a preferred destination for offshore companies and trusts. Taxation is limited to 15.5 to 17.5 percent  on income earned in Hong Kong, with no tax on income earned overseas. Residence visas are available to those investing the equivalent of $833,000 in the local economy who also pass a background check.

Liechtenstein  Roughly the size of Washington, D.C., and bordered by Switzerland and Austria, Liechtenstein benefits from privacy and wealth laws that date to 1926. Foreign nationals will pay no taxes on most income earned here.

Monaco  Non-French residents pay no personal income tax, as well as no gift or estate taxes for immediate family members. Corporate taxes are limited to companies that derive 25 percent or more of their income from outside Monaco. (The country does not allow holding companies.) A high value-added tax comparable to the European Union’s can be as much as 30 percent on luxury goods.

Panama  Panamanian residents benefit from zero taxation on income earned outside of Panama. Private-foundations laws, similar to trusts, are modeled on Liechtenstein’s. Despite political instability and corruption, Panama attracts an increasing number of expatriates.

Switzerland  With its 26 substantially autonomous cantons, or states, this country remains the gold standard when it comes to attractive taxation and banking laws. Individuals negotiate their tax rates based on their living expenses in Switzerland. Many regard this limited tax as a cost of doing business in Europe.