The Bahamas is known the world over as a popular destination not just for sun-seeking beach lovers, but also for investors. The Bahamian government has taken a number of steps to make the country attractive to foreign investors, and its low tax rates and high incentives for investors are at the top of the list.
But is The Bahamas a tax haven? And if so, what does that mean for you if you invest in Bahamian funds, real estate or other opportunities?
In this post, I’ll examine what constitutes a tax haven, if The Bahamas qualifies as one, and what the ramifications are for potential (or current) investors.
What Is a Tax Haven?
Tax havens are countries that allow foreign corporations or individuals the opportunity to make or store money with limited tax liability and a stable economic and political climate. Countries designated as tax havens are generally reluctant to share financial information with foreign governments and do not require those benefitting from their tax policies to maintain residency in their country.
In short, a tax haven is a country that allows foreign investors to shelter their money from tax obligations they might otherwise face in their home country.
Why Do Tax Havens Exist?
Is there a benefit to the residents or governments of tax haven countries?
In short, yes, there is. Tax havens are often small countries that have relatively little industry. By attracting wealth from foreign investors, those countries bring in revenue. Even with relatively low tax rates, financial activities and job creation spurred by investments often play a significant role in the economies of tax havens.
In fact, economist Gabriel Zucman estimated in 2017 that eight percent of the world’s wealth — or about $7.6 trillion — is held in offshore tax havens.
Are Tax Havens Legal?
This is a harder question to answer. Technically, you are not breaking the law by investing your money in another country. And if that country offers you lower tax rates and doesn’t share your information with authorities in your home country, there’s no law to stop it.
That said, international pressure from organizations like the OECD and the G20 on tax havens is increasing. Many governments are setting up Tax Information Exchange Agreements and Mutual Legal Assistance Treaties with authorities in would-be tax havens to curb tax avoidance.
Tax Law in The Bahamas
Taxation in The Bahamas is minimal — a factor that plays a significant role in attracting foreign investors. The Bahamas does not levy taxes on:
- Personal income
- Rental income
- Capital gains
- Capital transfers
- Estate inheritance
Most non-resident businesses are also exempted from government licensing fees and stamp duties as well.
The Bahamas isn’t entirely tax-free, however. Landowners must pay property tax annually, there are mandatory national insurance contributions expected of anyone working, and the government implemented a value-added (sales) tax in 2015. There are also duties and taxes associated with the purchase of real estate.
Investing in The Bahamas
The Security Commission of The Bahamas oversees all four types of investment funds in The Bahamas outlined in the Investment Funds Act of 2003:
- Professional funds
- “SMART” funds
- Standard funds
- Recognized foreign funds
The Bahamian stock market is much smaller — and slower moving — than more established exchanges, so be prepared to exercise some patience when investing in the country.
Despite its moves to appease foreign authorities, the government in The Bahamas does still offer numerous incentives to foreign individuals or companies investing in real estate:
- Access to government-owned land
- Border tax concessions on building materials, equipment and supplies
- Property tax exemptions
- Unrestricted repatriation of profits
The Bahamas’ national debt has increased dramatically — from 13% in 1990 to 57% in 2017. Although officials in the country currently seem complacent to address this issue with increased value-added tax rates, it would not be unreasonable to expect the Bahamas’ zero percent tax rate to end in the near future.
Some neighborhoods in the capital city of Nassau have also been identified as incentive zones with reduced VAT and duty rates, which could indicate plans to use tax revenue for social initiatives.
So, Is The Bahamas a Tax Haven?
When you compare the description of tax havens I gave in the first section and the outline of tax obligations in The Bahamas just above this section, it’s pretty clear that The Bahamas is a tax haven.
Legislation passed by the Bahamian government in the 1990s that allowed offshore and international business corporations to incorporate solidified the country’s reputation as a tax haven. The Bahama facilitates the following offshore activities without requiring any accounting records:
- Registration of companies
- Registration of ships
- Trust management
The Bahamas’ strict banking secrecy laws mean offshore account holders enjoy zero tax liability, and their personal information can only be disclosed by order of the country’s Supreme Court.
Bahamas’ Tax Haven Designation
The Tax Justice Network recently included The Bahamas on its Corporate Tax Haven Index, grouping it with nine other countries that “have done the most to proliferate corporate tax avoidance and break down the global corporate tax system.”
The European Union, however, has removed The Bahamas from its list of countries blacklisted for being tax havens. EU officials cite the recent passage of several pieces of Bahamian legislation for the move:
- The Multinational Entities Financial Reporting Act (provides reporting of profit or losses by entities incorporated or resident within The Bahamas that are a part of a multinational entities group)
- The Commercial Entities Act (requires entities incorporated, registered or continued under Bahamian law to demonstrate ‘economic substance’ in the country)
- The Removal of Preferential Exemptions Act (eliminates preferential tax regimes unavailable to domestic taxpayers)
- The Beneficial Ownership Act (requires registered agents to identify and verify beneficial owners and maintain a database for the government)
Based on the Bahamian government’s apparent shift towards cooperation with global authorities, the Bahamas’ tax haven status may soon be in jeopardy.
Benefits of The Bahamas as a Tax Haven
While the future of The Bahamas as a tax haven is beginning to look uncertain, the odds of a dramatic shift in the country’s tax policy remain relatively low. For those looking to leverage the power of The Bahamas’ current tax haven status, the country does offer a range of benefits:
- Wealth: The Bahamas is the third-wealthiest country in the Americas
- Economy: The country boasts a stable economy, based 60% on tourism and 36% on offshore banking
- Exchange rate: The Bahamian dollar has been at par with the US dollar for over ten years
- Time zone: The Bahamas observes Eastern Standard (or Daylight) Time, making it easily accessible to East Coast financial hubs
- Stability: The government is a parliamentary democracy, and has been for far longer than the country has been independent
The Final Word
So, really… is The Bahamas a tax haven? The country’s official status may depend on who you ask, but for the time being, it’s fair to say that the country’s almost non-existent tax rates and favorable treatment of foreign investors mean that it is.
Should you plan to take advantage of The Bahamas as a tax haven, it would still be wise to confirm that local laws and policies have not changed. If you still have questions about The Bahamas that I haven’t answered, drop me a line. I’m happy to discuss your specific questions to ensure you have all the information you need.