What are offshore jurisdictions? The word “offshore” refers to a country away from the country you live in. The term “jurisdictions” is a legal word meaning the right to interpret and apply the law which usually refers to judicial courts. In the offshore industry, the phrase offshore jurisdictions refer to countries which have favorable laws for forming an offshore company, offshore foundations, offshore trusts with these offshore legal entities owning offshore bank accounts.
In the simplest sense, offshore jurisdictions are states, territories or countries that provide competitive legal and financial structures for the use of foreign individuals and companies outside of their primary jurisdiction. In other words, going offshore is taking your business and your money elsewhere other than your own country for beneficial purposes. Having stated that, almost the whole world has to be evaluated as an offshore environment, even though offshore countries, also called “tax havens” or “fiscal paradises“, are usually referred to as low-tax or zero-tax jurisdictions.
The practice is clearly a byproduct of globalization. In fact, the term “offshore” has its origins in the international shipping industry. During the middle part of the 20th century, registering ships and shipping assets in a country other than where the owners of the shipping company originally resided became a common practice. It was soon realized that using offshore services was more expedient and, as it turned out, less costly. Utilizing such offshore services as legal and financial structures at offshore jurisdictions eventually grew beyond the shipping industry. Its bottom line benefits overflowed to other industries and even to personal finance.
To a limited extent, public finance also uses offshore services available at offshore centers. There are cases where government aid or loan, from a major country to an underdeveloped nation that has unsuitable legal and corporate structures in place, has to go through a neutral offshore jurisdiction in order to materialize.
The Upside For Offshore Jurisdictions
In the context of a global economy, competition in all areas of finance has become so critical that financial turmoil in a tiny island nation can send adverse ripples all across the globe, affecting all markets. Even now, we walk a financial tightrope spanning oceans and entire continents. Getting to a spot where you can gain some respite is a valuable commodity in itself.
In these times of economic difficulties, any means of getting ahead, any financial advantage that can be acquired, any way of ensuring some level of financial security is certainly going to be in demand. That is why offshore financial centers have become so in vogue these days.
More than that, the role of offshore jurisdictions in personal and corporate finance has come under fire. The criticisms come particularly from other high-tax, highly regulated financial jurisdictions that are directly threatened by the competition posed by often smaller offshore centers – a sort of David versus Goliath of the financial battlegrounds, if you will.
Tax havens by themselves are not necessarily a bad thing. Many people migrate within their own country to avail themselves of lowered taxes or incentives in other localities or states. Tax mitigation is generally an accepted practice.
However recently, offshore jurisdictions are experiencing an inquisition from the likes of the 30-member nation OECD (Organization for Economic Co-operative Development) and the FATF (Financial Action Task Force). Both have come out with their own blacklists of offshore jurisdictions labeled as “uncooperative tax havens”.
What has caused the aforementioned groups is the propensity of some offshore jurisdictions to be uncooperative insofar as disclosing tax related information regarding foreigners who are making use of their country’s offshore services. Such characterization of offshore jurisdictions lends itself to the wrongful impression that these countries are coddling gamblers, criminals, tax exiles and even terrorists.
It is a delicate situation that puts all sides on the defensive. At one end, the larger countries want an exchange of information relevant to concerns over tax evasion, money laundering and similar financial crimes. On the other end, clients of offshore jurisdictions demand their privacy and offshore centers are more than willing to protect their clients’ anonymity.
Benefits of Offshore Jurisdictions
The current predicament begs the question – what’s in it for offshore jurisdictions in the first place? Why do they foster an environment that challenges the status quo of larger economies?
In some instances, it is actually not by design. Some governments cannot simply prescribe a tax rate beyond the capacity of its people. In other cases, the society’s level of productivity is such that revenue by taxation matters little to the local economy.
In contrast, other offshore jurisdictions purposely maintain such financial structures with the clear intention of attracting foreign capital. By participating in the offshore industry, these jurisdictions are able to raise national revenue fast and push the development of the economy with minimal expenditures.
Either way, the benefits for offshore jurisdictions is that by fostering offshore company formation activities in their country they are able to raise government funds. Although the rate of taxation is minimal, the sheer volume of demand, with assets poured into the global offshore industry now estimated at $5 trillion to $7 trillion, raises more than enough revenue to keep their respective economies running.
Other benefits for offshore jurisdictions include knowledge and technology transfers and increasing employment opportunities for the offshore jurisdiction’s constituents.
Offshore Jurisdiction Opportunities
Offshore jurisdictions usually have anonymous ownership of legal entities laws which affords privacy to foreigners. Their laws regarding trusts, corporations, and private foundations allow true ownership to remain hidden through several means like hiring “nominee” officers and board of directors who are nothing more than straw men who follow the true owner’s wishes. A few offshore jurisdictions allow stock certificates to not have a person’s name but only the word “bearer” which means the holder of the stock certificate is the shareholder. Loosing the bearer shares results in lack of proof of the offshore corporation’s ownership.
Offshore jurisdictions also have some form of bank secrecy laws which protects their offshore bank accounts from being scrutinized by outsiders and even their own governments. Most tax havens make exceptions to their bank secrecy laws for exposure of terrorist funds, illegal money laundering, and certain crimes. Otherwise, these offshore jurisdictions make it a crime for a bank employee to expose a customer’s account information to an unauthorized third party.
Offshore jurisdictions are also known as “tax havens” because they have laws which provide little or no income tax on the earned interest from their offshore bank accounts and their profits from the sale of their services or products. Some offshore jurisdictions have an income tax for income generated within their borders but not for income earned outside the country. These offshore jurisdictions are known as “territorial taxation” countries because they only have an income tax for profits made inside their territories.
An offshore jurisdiction is often used by individuals for the following purposes:
- Holding assets;
- Investment funds;
- Captive insurance;
- Offshore Banking;
- Yachts and aircrafts registration;
- International financial activities;
- Protection of personal wealth and real estate; and
- Holding investment and trading companies.
An offshore jurisdiction may be the right choice both for a business activity and for a more cost-effective personal life organization. Forming an offshore company and/or redomiciling a company to an offshore country, as well as changing one’s place of residency to a low-tax jurisdiction introduce effective solutions to a more cost-effective business and lifestyle.
Selecting an Offshore Jurisdiction
Panama: Offshore Jurisdiction
Different countries offer different opportunities. There are no two absolutely the same offshore centers, as all of them are free to work out and implement their own internal regulations. We find many similarities in providing confidentiality, asset protection and tax optimization, but it is important to evaluate every jurisdiction laws in details in order to take a full advantage of offered opportunities and to use them in the most appropriate way to personal goals and objectives.
The ideal offshore jurisdiction is one offering different easy to achieve anonymous ownership of different legal entities like offshore corporations, offshore trusts, and offshore foundations. In addition, the best offshore jurisdictions offers strict bank secrecy laws so the legal entity can enjoy full privacy in its banking activities. The ability to avoid paying any income or corporate taxes on earned or passive income is also desirable when choosing the right offshore jurisdiction.
Cost is another consideration when choosing an offshore jurisdiction. Some tax haven countries are more expensive to set up an offshore entity.
It can be difficult researching all of the offshore jurisdictions to find the right fit. Therefore, it is best to find an experienced, reliable, competent international law firm to help you choose the best offshore jurisdiction amongst the many offshore jurisdictions.