The use of an offshore jurisdiction has been an accepted part of tax and estate planning and asset protection arrangements since World War One and remains so today. Before going into the particular detail, it is worth covering why go offshore in the first place?

The OECD Organization for Economic Cooperation and Development describes a tax haven as a jurisdiction, which actively makes itself available for the avoidance of taxes, which would otherwise be paid in a higher tax jurisdiction. The term "tax avoidance" should be noted, because there are ways of avoiding taxes without breaking the law, whereas the opposite term is tax evasion and this is generally classified as a crime.

In its broadest sense the term 'offshore' simply means a jurisdiction other than your own. The country next door can be offshore for you.

However, in a more practical context offshore usually means a country or territory, which offers specific benefits or incentives to foreigners (mostly tax concessions) but in many different forms also.

For example, it may be complete tax exemption for all international business operated by non-residents (Seychelles, Belize), local no-tax or low-tax liability on all investment income regardless of the residence of the investor (Bahamas, Cayman Islands); local tax exemption for non-residents of that jurisdiction (Gibraltar, Channel Islands); tax holidays for certain types of investment (Portugal, Netherlands Antilles, Iceland); favourable tax treatment through treaties and agreements with the investor's home country (Cyprus, Barbados, Netherlands, USA).

And in addition, some foreign countries may afford better legal protection from creditors and other potential litigants who might attempt to seize an individual's wealth. Asset protection is the second most important aspect why offshore jurisdictions are so popular. It may even have nothing to do with tax, although usually both are intertwined. It's just safer to be offshore. Except in the event of proven criminal activity most offshore governments uphold strict confidentiality laws for banks, corporate registries and trust companies.

These laws protect offshore investors from third parties, including both private and governmental authorities.

In the case of incorporating a company offshore there are few specific questions that one needs to ask.
 
Like, will the prospective customers be concerned that their new supplier or service provider is registered in a particular offshore territory or won't they care?'

Or has there been any restrictions imposed by the prospective market countries of the said company against transfers of funds to the particular offshore jurisdiction in question? How will the partners, suppliers, customers or investors react when asked to transact their business with an offshore company? Will it pose any problem for them? Plus, many high-tax countries have extensive blacklist regulations in their tax system, imposing tax surcharges or financial penalties on business carried out with known tax havens. Would that influence the business?

The way it works goes something like this. Offshore jurisdictions qualify into treaty jurisdictions and non-treaty jurisdictions. The first ones have an extensive network of double-tax avoidance treaties with other countries, inclusive with many high-tax countries. A double-tax avoidance treaty may be essential for the reduction of withholding taxes on the payment of dividends and royalties from contracting states. Treaty jurisdictions also usually portray a non-offshore image - usually offering reduced levels of tax instead of a complete exemption. This obviously may provide a better "image" of the jurisdiction. Cyprus is a typical treaty jurisdiction.

Non-treaty jurisdictions are "classic" in the offshore sense -they would usually have complete absence of corporate taxes on the profits of the company and only a fixed annual license fee. Seychelles is a non-treaty jurisdiction, although it has concluded a few.

It is for an individual or a company to decide whether the circumstances of its business or personal requirements require the tactic of "offshore stepping stones" through treaty jurisdictions, or the clear-cut approach through a classical offshore tax haven.

In personal circumstances asset protection; estate planning to simply opening an offshore bank account the questions and therefore choices are simpler. Asking yourself, first of all, why do you need to consider an offshore option?

In terms of asset protection an offshore jurisdiction is often used when wealthy individuals who live in politically unstable countries utilise offshore companies to hold family wealth to avoid potential  expropriation restrictions in the country in which they live. These structures work best when the wealth is foreign-earned, or has been expatriated over a significant period of time (aggregating annual exchange control allowances).

Offshore solutions are also used for the avoidance of forced heirship provisions. Many countries from France to Saudi Arabia continue to employ forced heirship provisions in their succession law, limiting the testator's freedom to distribute assets upon death. By placing assets into an offshore company, and then having probate for the shares in the offshore entity determined by the laws of the offshore jurisdiction, the testator can sometimes avoid such strictures. And for derivatives trading - when wealthy individuals often form offshore vehicles to engage in risking investments, such as derivatives trading, which are extremely difficult to engage in directly due to cumbersome financial markets regulation.

In all these cases does the country you are looking at specialise in all of these products and what about repatriating funds back home? The choice of jursdiction may impact depending on the relationship with the country in which one chooses to be based.

If you can find positive answers to any of these issues whether it's for your company or own personal assets then the biggest part of choosing the right offshore jurisdiction is already done. All other considerations can be broken down as follows:

That being said, for quite many offshore jurisdictions the relevant pieces of legislation are practically carbon copies of each other. For instance, quite a number of jurisdictions have taken the IBC Act of the British Virgin Islands and adapted it to their circumstances without much of a change. Fairly often the legislation of relatively new offshore centres, such as, for example, Seychelles or Saint Lucia, tend to be very well thought out and put together, having taken care of all the shortfalls and errors of the earlier laws in other, more mature offshore tax havens. If the total number of IBC's registered in a given country is in five figures or more (One can usually tell by the current registration numbers), it means that the system is working fairly well.

According to Michael Chaytor, head of retail, Bank of Scotland International, "The UK offshore centres have excellent reputations for transparency, regulation and innovation. I personally have been with Bank of Scotland International, outside the UK for nine years and have heard much about the 'offshore problems' but seen no real evidence to validate it when set in the context of other main jurisdictions including the UK. Our regulatory environment in Jersey and Isle of Man is at least equal to if not more stringent than the UK.  We certainly apply rigid take on rules and treat 'dodgy' customers in the same way the UK would."

Fiona Passey, director of offshore banking, Derbyshire Offshore, says, "Having assets in a globally accessible, well regulated jurisdiction brings peace of mind for our clients."

Apart from that, an offshore company is an offshore company generally they are all the same. Virtually all entities that are known as "offshore companies" in the narrow tax benefit sense will have the same distinct feature. Such company is essentially relieved of any substantial tax obligation and all the reporting that usually comes with it, insofar as it stays out and away from the country where it has been registered. All the rest is details.

What are the registration fees and flat rate taxes? What is the incorporation fee and what are the continuing domiciliary and management fees? What are the audit and other statutory compliance requirements? More importantly, though by taking into account all the other aspects described above is the cost reasonable for the quality of product you are getting?

Chaytor explains, "The decision as to whether to go offshore for a UK resident, for example, is likely to be driven by tax planning or perhaps particular product selection. 

Remember that the power of the internet search is not restricted to the UK shores so if a client is looking for a particular investment, offshore versions will appear. In today's global market place it's perhaps less about avoiding tax and more about choice and accessibility. For example, the capital guaranteed savings product range, with growth linked to the FTSE for example, is common in the UK. We have a different version of the same product which is popular with customers seeking an income, as half the investment is linked to a fixed rate for one year, currently 10 per cent. UK resident customers may choose this from a product and not a tax perspective.

When going offshore, banking and savings needs are often well down the 'To Do' list and it is only when met with the financial considerations that they begin to realise the changes that are needed.

The decision to go offshore is more about the expat cycle combined with the need for specific products to satisfy individual needs that an offshore environment can offer."

Which one to choose? It's hard one isn't it? Just make sure the one you are considering meets all your needs. In the short term all offshore jurisdictions are here to stay. However, looking towards the future how these countries face challenges, such as outside pressures from international organisations and heightened scrutiny from the international banking community, will determine which offshore jurisdictions are here for the long term.

© UAE MONEYworks 2006

 

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