The most effective offshore tax plans derive from the ability to sever the nexus or connecting factor with a taxing country in favour of an offshore country or to rearrange the connecting factors in such a way that a lower overall tax burden is suffered. Liability to tax is dependent upon the existence of a connecting factor between a taxing jurisdiction on the one hand and a taxpayer or taxable event on the other.

In the case of an individual taxpayer, the principal connecting factors are residence, ordinary residence, domicile, and citizenship (nationality). In the case of a company, they are management and control, beneficial ownership, place of incorporation, and location of the registered office. In the case of a trust, they are the place of creation, the applicable law, the place of administration or trusteeship, and the residence, domicile, or citizenship of the beneficiaries or trustees.

Other important connecting factors may be the centre of economic interests, the presence of a permanent establishment, and effectively connected income.

The principal connecting factor with regard to a taxable event is the real or deemed source. For example, in the case of profits deriving from the sale of goods, the source might be the place of the execution of the contract, the place where a trader or manufacturer employs his capital or where activities are exercised, while in the case of a real property tax or a capital gains tax on the sale of real property, geographic source or situs would normally constitute the connecting factor.

Many parameters relating to the taxpayer, the source, or the nature of the taxable event may affect (a) the liability to tax, (b) the computation of the tax burden, and (c) whether the connecting factor has indeed been severed with the taxing country in favour of an offshore country.

The definitional content and criteria affecting the existence or otherwise of a connecting factor and its characterisation must be determined from within any given legal system or treaty.

It follows that the connecting factor is a key element in international and offshore tax planning and structuring.