Miért éri meg a jövőben is offshore céget működtetni?

Why will it still be worth operating offshore companies in the future?

Anyone who has read the lines, and more significantly between the lines, of the last 3 Newsletters will already have realised what I would like to summarise in this article: “offshore” is definitely not dead, and certain structures formed earlier should by no means be thrown away, or rather there is no point or benefit in establishing new ones. However, there are situations where it is worth making a fresh start, and heading into the new year with a clean slate.

Although the business world is being frightened by the threat of 2017 and the automatic exchange of information, the effect this has will not be as great as the OECD is expecting.

In the past, it was those who operated in some way through offshore structures who were the winners. In the future, too, those businessmen who are able to arrange their affairs with greater financial freedom will be the successful ones.

The aim of this article is to show the trends, both past and future, of the benefits offered by offshore structures; to offer some suggestions as to how it is possible to think about the use of offshore solutions in the climate of information exchange, without attracting the attention of the taxman.

Conclusion: even if it is a little more expensive, it will be worth it. Whatever we do, we should not look for “DIY” solutions to the question, but instead should seek the advice of serious professionals.

Who were the winners in the past?

If we consider the last 30-40 years, then the most successful businessmen and enterprises in the business world, irrespective of size and almost without exception, achieved their success when they maintained some kind of offshore structure as a type of satellite system in parallel with their own businesses. It is irrelevant whether this consisted of a single enterprise or several companies, or even various different vehicles. What is clear even to the naked eye is that just about everybody had some kind of offshore support behind them. Offshore was not the invention of the “small players”, but mainly by the multinationals, who even today are still very fond of such solutions. It is enough to consider the amount in excess of 100 billion dollars parked in Bermuda by Apple, or the case of Starbucks, or how about the offshore solutions employed by Google. There is no way that these can be called miniature enterprises. If Apple were to repatriate the 145 billion dollars held in Bermuda, then the amount would be subject to 35% federal tax in the USA. That’s almost 50 billion dollars, which, for example, is 25% of the annual GDP of Hungary. What do the multinationals have in common? Their approach. For multinationals, every dollar spent is a “cost”. Not in the sense of accounting, but from the point of view of the philosophy of financing. If something has been spent, then that has been lost forever, and is a loss for the company. In this way, for a multinational tax is considered in just the same way as, say, wages or raw materials. The multinational doesn’t differentiate when it comes to where the money goes; if we spend it, it’s gone and that’s that. You may wonder why I am spending so much time on this question. The answer is that this is the essence of it all, the approach which is present in the philosophy of all major enterprises, and which the managers carry with them like a virus when they switch between multinational companies, or even if they escape the shackles of the multinational world and set up their own companies. Very often they take the same approach with their own companies as they did with the multinationals.

Some time after the second World War, two significant processes began in parallel. These could both be witnessed primarily in the USA, but it has also been typical of the entire “white civilisation” for the last 50 years: we could call this period the era of the feel good state and the consumer society. One of the characteristics of the consumer society is a growth in income compared to earlier periods, which in turn also attracts taxation. The state was left with no option but to turn the taxation screw, as the tasks they had undertaken required financing. The easiest source of finance, given the lack of any significant state assets, was taxation. At the private individual level, it is relatively difficult for the average person to wriggle out of the clutches of the taxman. It was different, however, in the case of companies. As the increase in taxation also affected them, they began looking for solutions to the question of how to avoid the high levels of taxation for their cross-border business activities. Thus demand for advantageous tax opportunities began to grow. And, as is the general rule in regard to the market mechanism, demand generates supply, at least where the market is not hijacked by artificial tools or regulations.

And that is exactly what happened during the 60s, 70s and 80s: the supply side also started to grow. This was when the offshore company appeared initially as an elite product, then became a mass product in the second half of the 90s. The supply was provided by those independent countries and British Independent Territories who through their own constitutions and legislators developed their own tax laws. They did just that, providing such beneficial possibilities to foreigners as could not fail to attract the interest of those eager for tax-free or low-tax structures. On numerous occasions these small countries stole each other’s ideas, and sometimes even entire laws. The International Business Companies Act passed in the British Virgin Islands in 1984 appeared almost word for word in the legislation passed in Belize in 1990. The Seychelles, too, then merely changed the name of the country and the dates in their version. The geographical location of these jurisdictions is very interesting. The Cayman Islands and Bermuda typically served the demands of US enterprises, while the Channel Islands (particularly Jersey and Guernsey) or the Isle of Man provided tax relief to British businesses and their European neighbours. The law of supply and demand, the first law of the market economy, worked perfectly here too, with one or more offshore centres working closely with all of the major stock exchanges (New York, London, Tokyo, Frankfurt). The small Caribbean islands occasionally fought amongst themselves over clients considering company formation. As one of my favourite university students said of the process in his dissertation: it was just like when a poor girl sells her virtue for money. You know, maybe there was something in what he said…

Today, these tax haven jurisdictions, with a slightly modified ideology, are known as International Financial Centres. Which is quite appropriate, given that over the last 40 years or so, the more serious jurisdictions have developed significant, well established infrastructures, with banks, investment funds, management consultants, insurance companies, lawyers, accountants, etc. to serve international clients.

Those who wanted success used “performance enhancers”. They purchased, or set up offshore structures and temporarily sent money there, safe from taxation. If this was done for long enough, they could become quite successful, as significant amounts could be accumulated, and, where necessary, re-invested into circulation. Sooner or later, those who didn’t do this lagged behind those who did and became uncompetitive. The businessman who saved on taxes and re-invested these funds in his business was able to beat the prices offered by his competitors, or maybe finance campaigns which enabled him to gain further advantage. This is exactly why I refer to offshore as “doping”. The majority of experts say that in competitive sport today everybody takes performance enhancing drugs, just there are those who manage to get away with it. There might just be something in this as well…

Nobody is able to say exactly how much money has been parked in the bank accounts of the International Financial Centres. A few years ago, an organisation known as the Tax Justice Network published a report in which they claimed that more than 20 000 billion dollars had been secreted away to these centres, attracted to the small countries with low tax rates from the large, developed nations via harmful tax competition. Who knows whether or not this figure is accurate? What is important is that an amount definitely exists, and it is certainly not small. And this is the heart of the problem. The battle for this money has begun.

The battle for the redistribution of the world’s wealth

This title may appear a little drastic, but believe me it is not. The end of the 19th century witnessed the close of the era of free-market capitalism, and the beginning of a new period, which the followers of Marx named the Imperialist era. It was at this time that the large empires were established, with all the major powers staking their claims around the world. When everything had been divided up they had no choice but to start occupying, or stealing each other’s territories. This is when Lenin says that the “new thieves” appear alongside the old “thieves”. This is exactly what is happening in the world offshore market: the world offshore system has been too successful over the last 50 years, and the huge sums which have accumulated have just become too tempting for some who want to get their hands on the money. Here too, the new thieves appear alongside the old thieves.

Around 15 years ago a process began which radically shook up the world’s financial system. The OECD began producing recommendations for the world banking system, and one of the core elements was to achieve the complete transparency of business and financial structures worldwide. Their goals were the recognition and identification of the beneficiaries behind companies and financial transactions, and the tracking and monitoring of the processes. In parallel with this, they also redefined the term money laundering (even though there is no agreement worldwide on a definition), and basically declared war on solutions which enabled income and capital to escape high rates of tax by enlisting the help of countries with low rates of tax. September 11th 2001 gave the process huge momentum. The attacks on the New York towers provided the OECD with an ideal excuse, and from that point on money laundering did not stand alone as the target of the very public fight, but was joined by “prevention of the financing of terrorism”. If you read the anti-money laundering laws of just about any country, they start with something like this: “the Parliament of …., in the interest of the prevention of money laundering and the financing of terrorism, passes the following law…”

Over the last decade and a half we have been witnesses to how the OECD recommendations have “killed” the world banking system. So-called compliance departments started appearing in the banks, and as some kind of all-powerful governors they dictate, to this day, who and under what conditions the banks open accounts for, and what constitutes a suspicious transaction. They copy and adopt the OECD recommendations, without giving a moment’s thought to the damaging effects which will be imposed on the business sector. All this while the banks’ managers stand by and watch with unblinking eyes as these ridiculous rules whittle away the banks’ profits.

If somebody tries, in today’s globalised world, to open a bank account in a country other than their own, then they very often find themselves facing a very difficult task. It is currently more difficult to set up a company in a country with an advantageous tax climate than it is in England, the USA or Germany. While for the formation of a company in the Seychelles we are forced to ask clients for numerous documents, in the USA or Germany the lawyer or notary making the arrangements will, at most, ask for the individual’s personal identification documents, if at all. If, heaven forbid, we then want to open a bank account for this company from the Seychelles, then 999 banks out of 1000 will reject the application on the basis of the high level of risk.

If we use our common sense, then clearly something here is not right. Let’s go back to where we started: OECD transparency. Is it possible? Has the business world ever been transparent? No, never. If a person other than the true beneficial owner appears or appeared behind a company, then company registers around the world will already show a distorted picture. Has this happened, does this happen, will this happen? Naturally. This is not an offshore characteristic, but a business solution which has been applied for many years and for many reasons: for competition reasons, individuals in high ranking positions in the state, and conflicts of interest. This is never going to change, a fact which the bureaucrats at the OECD are only too aware of.

Financing of terrorism. Are there fewer terrorists in the world today, or rather has the financing of these bodies really been cut off? The OECD, with their recommendations, are fighting tooth and nail against cash solutions, really trying to suppress them. The attacks on the London Underground in 2005 were organised for about 5 000 pounds. Just about every terrorist cell around could raise this amount from its followers in less than a day; you don’t need banks for that. In the case of the so-called “Islamic State”, for example, it is income from the oilfields which finances them. And if this is the case, then any bank has to work with them, if they don’t want to miss out on the millions and millions of dollars of oil money.

We immediately have to stop here, as we have reached an extremely significant point: the dollar. What is the US dollar currently? The only truly global currency, which is accepted everywhere and can be exchanged for local or foreign currency. According to the published figures, almost 900 billion US dollars of paper money were printed in 2012. Close on 75% of this was circulated outside the USA. The US dollar is a currency which is accepted as legal tender in the USA irrespective of the date of issue. If a banknote is 100 years old, it’s 100 years old and that’s that. What follows from all this? The US currency offers the best opportunity for the arrangement of so-called “black transactions”. If this is the case, then why don’t they deal with this question, or why doesn’t the OECD recommend that the USA stop printing dollars for the rest of the world?

Or how about if the US was to realise the Israeli plan to completely remove cash from the economy? If they wanted to, they could do it. In the country where even the ice cream seller on the street corner accepts card payments, they could bypass cash without too much trouble. But they don’t. Moreover, they tend to get into some rather interesting scandals, such as the Wachovia Corporation money laundering case a few years ago (Wachovia Corporation is a large bank in the USA). In less than a year, over 370 billion dollars went through the bank from the USA to Mexican money changers. This was, without exception, drug money, and the amount constituted 25% of the Mexican national income that year. Didn’t this get noticed by any supervisory body in the USA? Good question. Retrospectively Wachovia paid a fine of something less than 200 million dollars and the matter was taken care of, and everything continued as before. Drug money still finds its way into the system. The global turnover from the drug industry is estimated at some 500 billion dollars per year. 60% of this can be linked to the USA. These days, not even the American dream can get by without drugs, and the financing of this on such a scale is impossible without the banks. Has the OECD, or any other influential body for that matter, ever passed judgement on the USA because of this? And even if they did, were there any consequences? A friend of mine, who used to be a policeman, spent some time on training courses in the USA a while ago. His American colleagues, took him all round Texas, showing the routes used by the drug runners, before finally taking him to a drug warehouse where the seized drugs were stored. Our man, a very thorough police officer, asked how all the illegal drugs were destroyed. There followed a deathly silence, with nobody able to answer the question. A doubt crept into his mind: do they destroy the drugs at all?

Of course, in all this there is one very important element: the ban. If drugs were legally available from the local chemist, then it is highly unlikely that the cartels would be able to make such huge fortunes year after year. Today this is exactly what is happening in the world offshore market. By forcing their recommendations on the world, the OECD are restricting, banning and killing off opportunities. The OECD confront anyone who doesn’t accept their recommendations. Except the USA. The USA, thank you very much, which is exempt from just about everything which the OECD dictates to the rest of the world. In the USA it is still possible today to form a company without being asked for even a faxed copy of the client’s identification documents (passport, ID card etc.) by the formation agent. In offshore jurisdictions, by contrast, each person involved in the formation of a company is required to present 20 different papers. Offshore jurisdictions are subject to record keeping obligations, and the latest idea is the introduction of a register of beneficial owners. In the USA, on the other hand, if an annual return is required at all, it consists merely of a few details.

The OECD is forcing the automatic exchange of information on the world’s banking system. The USA, however, is not a part of this, because they, thank you very much, set up their own FATCA regulation earlier, and exchange information through this. It’s true that they are focusing primarily on their own taxpayers, making sure they’re not hiding anything from the American taxman. Foreigners are not so interesting, especially if they have to report on any funds they are holding in the USA. So, the USA is elegantly removing itself from the international information exchange process, happy to receive information, but less so when it comes to giving. Moreover, they are not always able to give. Despite the international tax agreements, in certain cases they can not satisfy the requirements as their system is not capable of doing so. The State of Nevada, for example, does not have an information exchange agreement with the Internal Revenue Service (IRS), the American federal tax authority. If a foreign tax authority asks about these companies, all they can do is show their bare hands. Nevada slips through the information supplying net. If we think we can maybe see some possible link between the Casino business and Nevada, then it’s obviously not by chance. But isn’t it all the same if the slot machines are directly linked to the local tax authority, when nobody outside the state receives the information. So maybe the machines aren’t even linked to the tax authority after all. Not there either…

For decades we were advised by the professional press to avoid the United States for the formation of companies wherever possible. The tax laws are complicated, the tax authority strict, and breaking the laws can even lead to imprisonment. Only American residents and entities with Employer Identification Numbers (EIN), can have American bank accounts. All this managed to put off the majority of clients interested in setting up companies and bank accounts in the USA. Prior to the introduction of the FBAR regulations in 2011, however, the number of LLCs and LTDs registered in the USA reached the hundreds of thousands, although these typically opened bank accounts outside the USA. Starting from 2011, however, these foreign bank accounts became subject to a voluntary report which had to be filed each year with the IRS. Now, though, the situation is visibly changing.

At the beginning of October I attended a prestigious tax conference in Monaco. The subject of one of the presentations was the following: the establishment of tax-free Trusts in the United States. The English common law Trust dates back some 800 years, and in the past, as in the present, remains one of the most significant and sophisticated instruments in the field of asset protection. There are a number of versions of this throughout the common law world, from Australia to the Channel Islands via New Zealand. The format is also extensively used in the USA, though the placing of the emphasis on the tax-free aspect is very new. So, just what is this all about? Everything that is tax-free has been banned for everyone, and then, when numerous small tax havens are visibly losing the fight for life, the USA leaves the door slightly open and lets anyone passing that way take a peep inside. And if the door is left slightly open, then what more does it take to open it completely for guests? That’s just one tiny step. If, in time, the US legislation changes, and those foreigners who wish to have bank accounts in the USA no longer require an EIN, then capital will be free to flow into bank accounts in America. All this requires is the insertion of the word “not” in the right place in the regulations: “individuals with American company bank accounts are NOT required to obtain an EIN”. Even the most remote island nations in the Pacific Ocean have an American Embassy, or at least a Consulate. Certifying the signatures for the opening of an American bank account would not be a problem for them, in fact, they would welcome the extra revenue from certification fees. In this way, it is not even necessary to travel to the States to open the account, as everything can be done remotely.

And what if none of this happens?

Naturally, anyone has the right to claim that this is just a well constructed conspiracy theory, which has nothing to do with reality. If, dear reader, you feel this way, good for you. I won’t begin to back up America’s attempts to be “the world’s policeman” with examples from history, even though there have been numerous cases since the end of the second World War. But instead, let’s all forget about what went before, as if it had never been written. There is no manipulation in the system, everything happens irrespective of outside interests in the spirit of justice, with the world’s financial system being returned to its normal path and people being forced away from low taxation and towards higher rates.

I wonder if this is really possible. I have serious doubts. The game rules of the economy have remained unchanged for thousands of years, and whether the market is manipulated or in free competition, market mechanisms will prevail and competition always guides participants towards the most efficient solutions. Those who wish to be the winners in the future will look for the tools, methods and possibilities which will allow them to be more successful than their competitors. The law on profit is not going to change in the future either; it may, at most, be distorted by the entrance of monopolies, but even here, the effect will only rarely be complete.

Over the last 25 years I have met many successful businessmen, and have noticed these 5 typical characteristics. The majority of them combined a mixture of all 5. Naturally this is very subjective, but is certainly worth thinking about.

  1. Freedom, or the desire for freedom. A businessman with creative intentions can not be squeezed into a restrictive framework. In order for creativity to be allowed to develop, the individual requires a certain amount of freedom, both in the physical and financial senses.
  2. Ability to take risk, while also striving for security. This may seem contradictory, but that is not at all the case. There is risk involved in start up companies, especially in the early stages. It is impossible to move on from the starting point without taking some risk. At the same time, once the enterprise has reached a certain level, then the desire to place assets securely and to diversify the portfolio appears straightaway.
  3. Striving for efficiency. The majority of these people don’t just want to do something businesswise, they want to do it well: better, more organised, more cost-effective etc.
  4. Discretion. If there is something worth talking about, then it is not necessary for everyone to know about it. The taxman doesn’t necessarily represent the greatest danger to a successful business or businessman, but rather competitors, or even friends, business partners or family members. While the taxman writes letters, a well placed „acquaintance” can immediately start acting for us, or even against us.
  5. Tax optimisation. Planning and regulating the payment of taxes, managing the process, rather than being dependent on it. A successful businessman never merely goes with the flow, but always tries to get the most out of every current. They want to regulate how much tax they pay and where and when they pay it.

Over the last 30-40 years, what we generally describe as “offshore solutions” have contributed significantly to the realisation of the above. The phrase includes company formation, the opening and managing of bank accounts and the possibility for the discrete operation of a business. I wonder if this is really going to change in the coming period just because the automatic exchange of information is apparently going to start in 2017. I really don’t think so. The characteristics listed above will continue to appear in the philosophy of successful businessmen, as without these they can not be successful. If I wanted to illustrate the resulting change, it would be like taking either one or both of the axes of a graph, and pushing one away from and the other closer to the existing curve on the graph. The shape of the graph wouldn’t change, just the distance from the axes would be altered. Those who recognise this, remaining well orientated, will continue to be successful in the future, while those who don’t will lag behind or drop put completely.

In the past the offshore world was the area, in both the physical and virtual senses, which provided opportunities for the realisation of the above. They are currently trying to remove this from the system through administrative regulation. Can this, I wonder, succeed, bearing in mind the economy’s general conformity to the laws? I doubt it. At most, everything will return, just with a different hat on, while the core elements bear remarkable similarities to the previous ones. The OFFSHORE 2.0 era is starting/has started.

Held prisoner by the banks

In parallel with the real processes taking place in the business world, or rather partly out of synch with them, there are also financial processes. The carrying out of these financial processes is all but impossible without the involvement of the banks. The banks are playing more and more important roles these days, be it in the life of a private individual, a family, company or group of companies. From time to time they are literally masters of life and death, with the entire financing of a situation, transaction or event depending entirely on them. Our bargaining power with the banks, unless we are talking about a very, very big company, is very weak: generally the banks dictate.

We witness this, and very often struggle with this, in regard to each foreign company structure. I have written about the peculiarities of this situation on many occasions in earlier editions of the LAVECO Newsletter. About how the banks ignore all reasonable business logic when creating the regulations concerning which clients to accept, and in regard to the evaluation of the risk involved with client transactions.

I have also referred numerous times to the all-powerfulness of the compliance departments. Just the other day, a banker I have known for 20 years came to see me. He has worked for various banks, experiencing both small and large financial institutions, but basically always working with international clients. So the field is not unknown to him. Not long ago, after an absence of 7 years, they enticed him back to a bank where he had earlier spent many happy years. He thought he would just carry on where he had left off. On his first day, however, the management called him in for a chat. It was made clear and in no uncertain terms that everything had changed over those 7 years, that compliance now dictated the terms and that he should bear that in mind and not try to arrange his affairs according to his past experience, as that could land him in serious trouble.

I have also had the chance to chat to a number of lawyers working in the compliance field, naturally about matters related to my profession. To summarise, I can state that it is not the most talented lawyers who occupy the positions of compliance officer around the world. The majority of these people have absolutely no business experience whatsoever, and as such they tend to approach the cases placed before them with the mentality of a Russian bureaucrat. That’s the way it is, like it or leave it, we can expect this for the foreseeable future. At the same time, the banks will be an important factor, indeed, a key factor, in future business processes. The banks decide who they will and who they won’t open and operate accounts for, and which transactions they are willing to accept.

Future trends

So, who do the banks like? It’s a difficult question, so let’s look at the easier approach. Who don’t the banks like or want, and will turn away, either immediately, or after a little umming and ahhing?

To begin with, every stranger is treated as suspicious. In this globalised world, where information and money can travel thousands of kilometres in a fraction of a second, a foreign individual or company is seen as suspicious, risky and dangerous. At least, that is, according to the evaluation systems employed by a significant number of banks. And this will only get worse; in the internet age we are becoming more and more distant from each other, or more exactly, the banks from us.

The “unwanted” are the companies which fewer and fewer banks are willing to work with. In general, it is the low tax jurisdictions, where, to this day, the companies registry still does not keep records of company directors or owners, and there is no requirement to prepare audited annual financial statements. This category includes the world’s most significant offshore jurisdictions, including the British Virgin Islands (BVI), Belize, Panama, Seychelles etc. Their fate in the future is still not clear, but today it would appear that a slow, but certain death awaits these jurisdictions. Especially if all they really do is “manufacture paper” there, and it is not even possible to open accounts with local banks with these documents. Such a banking infrastructure is missing, for example, in the BVI, but even in Panama, where it exists, the requirements for the opening of new accounts are so strict that nobody wants to go there anyway. The situation is no better in Belize, while in the Seychelles the local branch of Barclays showed the door to all existing offshore clients on October 31st, 2015, and has no intention of accepting new ones.

Also “unwanted” are certain company activities. In addition to discriminating against offshore companies, the banks also consider many activities as risky, or “sensitive”. Even if they do not reject the account application of a certain company, it is 99% certain that they will not accept, for example, companies involved in financial type activities, or which deal in similar areas. This includes activities such as collecting deposits and the like. FOREX transactions are unacceptable in cases where the company would be handling its clients’ money. They are wary of recruitment agencies, and activities involving large numbers of clients. Enterprises dealing in electronic equipment, and in particular mobile telephones, can expect incredibly tough checks. Furthermore, just about everything to do with internet sales or services is highly suspicious. Yes, in the internet era, when everybody is on the net, the banks do not accept foreign companies which carry out their transactions via the internet.

There are undoubtedly numerous fraudulent enterprises hiding behind the internet, that is an undeniable fact. Logically, therefore, the banks would ban a significant number of these companies from the system, not wishing to maintain a business relationship with them. A company operating adult sites, dating sites, internet pharmacies or sites selling electronic equipment is likely to find itself in an extremely difficult position when it tries to open a bank account for a foreign company in just about any bank in the world. It is at this point that the penny drops for many people: we really are seeing the end of an era, and what was possible with the banks 5 or 10 years ago, is out of the question today, as many doors have closed while no new ones have opened. Just like the banker returning after 7 years, clients also have to face up to the changing requirements.

In the last edition of the LAVECO Newsletter I described the very extreme example of a Maltese bank with 4 conditions for the opening of accounts:

  1. the company must be registered in Malta
  2. the company must have a real office in Malta (substance)
  3. the company’s beneficial owners must be resident in Malta
  4. the company must carry out its business activities in Malta

This is all very well, though it is certainly not “global banking”, but rather a typical “local banking” approach. This bank will be incapable of serving international clients, or maybe doesn’t even want to, which is why it sets its clients such strict conditions.

The future can quite clearly be seen from the above, and especially from the first 2 points: the bank and the company must be in the same country, which must also be the place of management of the company. If they really want to adhere to this principle, then the number of players on the world stage is going to drop dramatically. The small jurisdictions without the necessary infrastructure will be incapable of meeting the requirements. If you recall what I wrote a couple of paragraphs earlier: “Our bank doesn’t want you, because you are registered as a company in a low-tax jurisdiction.” What we are seeing now is: “We can’t accept your low-tax company, even in the country in which you were registered, as we do not have the necessary banking infrastructure.” The noose is clearly tightening.

We could look at each of the world’s most important company formation locations from this point of view; I’m sure it would make interesting reading. At this point, however, the question is not “who doesn’t?”, but rather “who does?”, who will stay afloat and be capable of providing clients with acceptable solutions? Note that I didn’t say “ideal” solutions, as those no longer exist. The goal is the provision of acceptable solutions which actually work.

While the list which follows is not exhaustive, I would like to mention a few countries which will be able to satisfy even the strictest expectations from the points of view of taxation, transparency and banking and additional infrastructure.

  • Hong Kong. One of the world’s biggest financial centres, Hong Kong continues to follow the English common law system, even now that it is part of China. According to the principle of territorial taxation, profit arising from Hong Kong sources is subject to tax at 16.5%, whereas profit earned outside Hong Kong is exempt from tax. Annual audited balance sheets, prepared according to International Financial Reporting Standards, must be filed with the local tax authority. Although the account opening procedure can be a little difficult, Hong Kong banks are prepared to open accounts for companies registered in Hong Kong which have actual business ties with Hong Kong, mainland China or the Asian region. Hong Kong has signed, and is signing, agreements for the avoidance of double taxation with more and more countries.
  • United Arab Emirates. In the country of free trade zones, exemption from tax is considered something of a cultural tradition in business life. It has been compulsory since September 2015 for all companies in the Emirates to prepare bookkeeping records, but the company is free to choose the format, and, in the absence of a local tax authority, it is the company which must store the records for 5 years. There are a couple of banks in the Emirates who are open to cooperation in the case of companies whose directors and/or owners are not resident in the Emirates. The UAE is continually signing new agreements for the avoidance of double taxation.
  • Cyprus. In international comparisons, the Cypriot infrastructure is of an exceptionally high standard, with solid foundations for the future based on the island’s 40-year history in the international financial world. Profits are taxed at the rate of 12.5%, annual audited balance sheets have to be filed with the tax authority, and numerous banks are open to cooperation. Cyprus is one of the last remaining places where it is currently still possible to open accounts for foreign companies, not just locally registered ones. Cyprus has signed more than 60 agreements for the avoidance of double taxation.
  • Liechtenstein. A mini-state within Europe with strong foundations and a complete financial infrastructure capable, like Cyprus, of providing services to foreigners. The rate of corporate tax is 12.5%, and again every company and foundation is required to prepare an audited annual report. Liechtenstein has entered agreements for the avoidance of double taxation with relatively few countries. The banking infrastructure in Liechtenstein is considered to be one of the most secure in the world. The aptitude of the bankers and the country’s financial culture are unparalleled in Europe, and indeed throughout the world.
  • Bulgaria. Although this small country does not currently appear on the list of international financial centres, its economic and tax policies over the last 10 years have made Bulgaria very competitive, competitive enough, in fact, to even compete with Cyprus. Corporate tax in Bulgaria is 10%, irrespective of the size of the profit. As a member of the EU, companies are required to file with the local tax authority annual audited reports in line with international standards. Bulgarian companies are able to take advantage not only of agreements for the avoidance of double taxation, but also the benefits of the EU directives. The Bulgarian banking system appears relatively stable, and the large international banks present in the country offer very good possibilities for local companies in the field of the opening and managing of bank accounts

I would have liked to mention Malta as 6th on the list, but Malta today has become a country where bank accounts can not even be opened for local companies. The attitude of the Maltese banks has changed drastically in the last year or two. It is practically impossible to work with them. Malta is starting to exclude itself from the market.

Of course, the list and categorisation above are extremely subjective. I would also be happy to talk about the banks in the small Caribbean countries. However, these days their contribution to the international market is relatively small, and they are rather difficult to work with, responding quite slowly to clients’ requests.

It is also difficult to mention companies registered in the USA. Following 2011, banks around the world systematically closed the foreign accounts of American entities, considering them too much of a risk. However, such a company without an American bank account is worth precious little, and at most can be used for holding purposes, though even here in certain cases it is necessary to report to the IRS in keeping with the FBAR regulations.

The systems in the countries listed above meet the relatively strict expectations in regard to transparency. A typical characteristic of these jurisdictions is that the details of the company directors, and in some cases shareholders, are available on public records. Annual reports, in one form or another, are also obligatory in each of the countries listed, and this also serves to reinforce transparency.

Automatic exchange of information, the secret which everybody wants to know

I don’t want to bore everyone with a detailed description of my own personal opinion. I still believe that this whole concept was doomed to failure from the start: either everyone signs up worldwide, or the large countries are going to fight over the spoils, and who wins and loses what.

Let’s assume that I am wrong, and the exchange of information begins in 2017. Even in the best scenario this will only be partly true. There is an entire group of countries which will only join in 2018. The process can be followed on the OECD website, where they constantly update the list of participating countries and agreements which have been signed.

Despite this, nobody is currently able to say anything for certain. If we speak to 10 bankers, then we get 12 different versions from them. In theory, everybody develops their system on the basis of the OECD handbook, though there are wide divergences in the interpretation of the regulations and recommendations. The OECD itself gives the banks a huge degree of freedom. One example of this is in the documents which can be accepted from the client for identification purposes. In the case of proof of address, which can be crucial from the point of view of future reports, it is left entirely up to the banks to decide what they consider acceptable. In the past, the client could take an electricity bill into the bank as proof of address, and this will remain the case in the future. The bank can, of course, refuse to accept the document, if they suspect that it is not genuine. This will undoubtedly be a crucial point, as residential address will determine which countries reports should be sent to, or whether, dependent on the terms of the agreements entered, it is necessary to report to the country in question.

It is still very early days in the process, so nobody can or even dares to issue hard and fast rules. Nor do we receive any written information from the banks. Anything we find out is always by word of mouth, and is always accompanied by the stock phrase that this may be amended or changed in the future and that the legal team are working on it.

What does seem to be relatively certain is the timing. The first reporting period will cover the 2016 calendar/financial year (the two can be read as one, as the report refers to the calendar year). For accounts closed in 2016, the details at the time of closing will appear in the report. Otherwise, the situation or details as at December 31st, 2016 will be reported. The first reports will be sent to the tax authorities in September or October, 2017.

Who are they going to be reporting on? According to the bank we have spoken to, if a beneficial owner (controlling person) holds 25% of the rights in a company, then a report will be filed. In the case of companies, if less than 25% is held, then no report will be prepared. In the case of personal accounts, it is more straightforward; as accounts are usually held by 1, but maximum 2 individuals, they can not escape the reports in this way.

In the case of Trusts, there is a reporting requirement in regard to the Settlor, Trustee and Beneficiary(ies). As the Trust itself is not a legal entity, the handbook issued by the OECD deals separately with the reporting requirements for Trusts. There is a requirement to report on the Settlor, but if we think about it, the Settlor can be an individual, but it can also be a company, such as an offshore company. The Trustee is of no particular interest here, as these are generally professional companies or individuals who are resident in some tax-free jurisdiction. The ones affected most by the reporting requirements are the Beneficiaries. Reports are only prepared on the Beneficiaries if they receive some form of distribution from the assets or income of the Trust. If there is no such distribution, then there is no report; even if the Beneficiary receives a certain amount in their personal account, provided that it comes as a loan.

With this bank, the treatment of the Discretionary Trust described above also applies to Discretionary Foundations, where it is the Foundation Curatorium, and not the Beneficiaries themselves, which decides who receives what from the Foundation’s assets. It was not by chance that I wrote about the Panamanian foundation in the last edition of the Newsletter. This is the most developed vehicle in the field of offshore asset protection, and will be used to great effect in the future too.

Not the final word by any means

I’ve been hearing it at the end of every year for the last 20 years: this will be your last year, the whole offshore industry is going to die off. The first such prophet of doom came into my office around Christmas 1995. Now, a month before Christmas 2015, I have just read that local entrepreneurs in Wales are in uproar and all want to go offshore. They are doing this in protest against the tax avoiding behaviour of large multinationals, such as Google, Amazon and Facebook. In the meantime, 20 years have gone by and people are still talking about offshore. Fortunately.

This goes to show that the world economy is alive and well and will not be closing its doors. Market forces are working, general laws thousands of years old are still valid, tax competition is, and will remain, one of the major factors of competition. Those who wish to remain successful will have no option but to take advantage of these possibilities, because if they don’t, one of their competitors certainly will.

As this analysis is designed at the same time to act as an advertisement for LAVECO Ltd., please allow me to plug the company a little. This time I don’t want to talk about our 8 offices around the world or the fact that we’ve been around for 24 years. Instead, I want to mention why clients come to us: because we give exactly what it says on our website. That’s the least we can do. More and more clients are coming to us who bought companies somewhere else, but then found out that they couldn’t help them open bank accounts, give advice or even order a certificate of good standing. Today, a client came to me who wanted to dissolve a company purchased elsewhere. I wonder what they could have done to this poor chap, if he had so little trust in the previous service provider that he even wanted us to arrange to have his company closed.

It looks more and more likely that in the OFFSHORE 2.0 era, the services of the “DIY” companies will no longer be sufficient. But then that’s what we are here for, so feel free to contact us in the future as well.

10 thoughts on “Why will it still be worth operating offshore companies in the future?

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