The perfect offshore
corporate and trust structuring strategy, should one exist, would
constitute the 'holy grail' of commerce and wealth management.
It
would free its employer from the chains of taxation (both
domestically and internationally), render assets immune from adverse
adjudication and cloak finances with an impenetrable veil of privacy
insurmountable by even the most determined and capable of inquirers.
Firms
of expensive lawyers and accountants earn fortunes each year from
companies and individuals with deep pockets looking for strategies to
maximise and preserve their wealth. As a consequence, to this end,
individuals and companies (particularly those with international
interests) are deploying increasingly sophisticated arrangements of
offshore agreements, trusts, corporations, foundations, powers of
attorney, bank accounts and other mechanisms.
This
series of articles will consider some of the common components of
offshore corporate and private wealth management strategies typically
employed by high net worth individuals and corporations around the
world.
The
term 'offshore' generally refers to any territory outside of one's
home jurisdiction. In the context of finance management however, the
term refers to a jurisdiction which offers attractive financial and
legal incentives to non-residents who assume a legal presence or hold
assets there.
These
incentives tend to include tax concessions or exemptions together
with banking facilities and confidentiality rules which purport to
enable non-residents to maximize the value of, protect and conceal
their wealth. Examples of the tax concessions available offshore
include the complete exemptions for all international business of
non-residents offered by Belize, St Lucia and the Seychelles. Other
examples include the exemptions from income and capital gains
taxation for companies incorporated in the British Virgin Islands and
the tax concessions on investment income available in the Bahamas and
the Cayman Islands. There are currently in excess of fifty
jurisdictions offering such incentives to offshore businesses.
An
individual or company wishing to establish a presence in an offshore
jurisdiction in order to take advantage of the incentives available
there usually does so by way of an International Business Company
('IBC') incorporated under the laws of the offshore jurisdiction.
In
the more popular offshore jurisdictions, an IBC may be incorporated
quickly and relatively cheaply. Where privacy is of particular
concern to the beneficial owner, the IBC is often incorporated with
nominee corporate directors and shareholders thereby obscuring the
beneficial owner's interest in the company. Other mechanisms are
available to further enhance the privacy afforded by the offshore
arrangements if so required.
It
is a common misconception that simply contracting through an offshore
IBC circumvents the tax liability that would otherwise have arisen.
The tax rules of most 'normal' and 'higher' tax jurisdictions include
anti-tax-avoidance provisions carefully crafted to prevent the use of
offshore entities in the avoidance of taxation of domestically
sourced income.
However,
notwithstanding such domestic legislation, a properly executed
offshore strategy may, in appropriate circumstances, reduce, defer or
completely eliminate liabilities that would otherwise arise. Some of
the more common uses of IBCs are outlined below. The legality and
effectiveness of such arrangements will depend on a range of very
important factors including the laws of the home and offshore
jurisdictions as well as those of the jurisdiction in which the
business is conducted. The existence and terms of any applicable
double-taxation treaties are also critically important, particularly
as it relates to the operation of withholding taxes and other
anti-avoidance mechanisms.
IBCs
are frequently included in a trading corporate group as a
distribution, import/export, procurement or sales intermediary. For
example, where goods are being sourced from a producer in one country
for sale to a consumer in another, an offshore IBC may be used to
purchase the goods from the manufacturer for shipment directly to the
end consumer. Similarly, IBCs are often used by importers for
procurement of goods sourced abroad, and by producers for foreign
distribution. The ultimate objective of these arrangements is to
accumulate the trading profits in the tax-free offshore jurisdiction.
IBCs are also used by professional consultants, athletes and
entertainers as service companies through which fee income is
accumulated offshore. Contracting through an IBC also reduces the
individual service provider's personal exposure to liability for
breach of contract.
Many
private investment funds are administered through offshore investment
companies. Although the fund's investments would in many cases be
subject to withholding tax or capital gains tax at source, there are
a number of investment instruments where no such taxation applies.
IBCs
are also used to hold and exploit intellectual property rights. Such
offshore IP holding strategies have become less prevalent as a result
of the withholding taxes applied on royalty payments at source by
most of the higher tax jurisdictions. Depending on the territories
involved, a double taxation avoidance treaty may operate to reduce
the withholding taxes.
One
area in which there appears to be very good scope for offshore
structuring is the provision of international electronic services.
This is because transnational e-commerce challenges the concept of
legal jurisdiction which is traditionally based on clearly defined
geographical boundaries - boundaries which are not so easily
delineated in 'cyberspace.' IBCs are increasingly being used to hold
domain names and operate service providing websites from their tax
friendly offshore territories.
Perhaps
the most popular use of an IBC is to hold shares of subsidiaries and
real estate based in other jurisdictions with less friendly tax
regimes. However, the utility of IBCs in this regard has declined as
a result of the various withholding taxes and rules applicable to
'immovable property' imposed by many of the higher tax jurisdictions.
Despite these rules, IBCs are still frequently used to acquire and
hold property with a view to simplifying the subsequent disposal
process. The transfer of shares or real estate held by an IBC may be
accomplished by transferring ownership of the IBC itself
circumventing domestic red tape. Depending on the jurisdictions
involved, this may also save on some legal fees, transfer taxes and
duties levied by the state. Where an individual owns a number of
assets in different countries, by consolidating ownership through an
IBC, estate transfer upon death may become less complicated,
expensive and time consuming.
The above examples have
been simplified and are provided for illustrative purposes only.
Offshore trust and corporate structuring is highly risky and
extremely complex. A misconceived or improperly executed strategy may
result in severe criminal and/or civil liability. Most jurisdictions
have entered into numerous Tax Information Exchange Treaties, which
have significantly limited the tax planning capabilities of IBCs.
Individuals or companies seeking to explore offshore options should
ensure that they are properly advised by suitably qualified and
experienced legal and accounting professionals.
.JPG "Lord Ellor & Co.")
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