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As already mentioned above, one of the most important purposes of the registration of offshore companies in tax havens is to reduce high tax burdens and to take advantage of direct or indirect tax benefits. At the same time, we should stress that completely tax-free and cost-free companies do not legally exist in any part of the world, in spite of the fact that in a number of countries offshore companies are often referred to as tax-free companies. Fundamentally, the following principles of taxation may be enforced in the locations of registration of offshore companies:

• In countries where the company may only derive revenues from abroad, these revenues will be completely free from the payment of any tax. In this case, the company is required to pay a fixed annual fee which is independent of the turnover and profit of the company. Such locations are the British Virgin Islands, the Bahamas, Belize, etc.
  
  
• The tax is not based upon the turnover but upon the company's registered capital . For instance, the Liechtenstein foundations are required to pay 0.1% of their issued capital (or at least 1,000 Swiss Franks) to the state annually.
  
  
• Tax exemption is granted only in respect of revenues derived from abroad . In such countries as, for example, Panama and Hong Kong, companies may pursue economic activities within the country, too, and the domestic revenues are taxed on the basis of a linear rate, while revenues derived from abroad are tax-free. In this case (Hong Kong), the company is required to indicate domestic revenues separately in its annual report.
  
  
• Taxation on the basis of a linear tax rate . One of the best-known locations is Cyprus where offshore companies pay a 10 % tax on their net profits. (In these locations, without exception, the keeping of books and preparation of annual reports is compulsory.)