Tax Sparing

A tax sparing clause between a capital importing country and a capital exporting country allows residents of the capital exporting country a credit against domestic tax for profits or gains derived in the developing country in respect of which all or specified taxes are subject to exemption or reduction in the latter country.

Such tax treaties are not normally concluded between tax havens and high tax jurisdictions and certain tax treaties specifically exclude entities that benefit from specially favoured tax treatment. For example, Luxembourg holding companies are excluded from the provisions of tax treaties concluded with Luxembourg. However, certain colonies (or former colonies) of the UK and the Netherlands benefit from extensions of treaties concluded respectively by the UK and the Netherlands. The existence of such treaty links may be of considerable value with regard to tax haven operations taking place in jurisdictions such as the British Virgin Islands and the Netherlands Antilles.