fourty years ago, there were
only a handful of offshore, (tax havens) and to many, their use was surrounded in 'mystique'. Also, there were only a few
professionals specializing in offshore practice and tax havens, and those that did, typically made use of
only one or two jurisdictions.
Over the last years, startling advances in technology and the telecommunications
revolution, have made it easier to access offshore facilities - so much so, that today's
offshore industry has developed in to a major global business, spanning all quarters of
the world, involving, in one way or another, approximately half of the world's financial
transactions by value.
Consequently, International Financial Services Centers are no longer surrounded by the
'mystique' of fourty years ago. They are used globally, twenty-four hours a day, each and
every day, as an integral and important part of the world's financial system.
Possibly more to the point is a little bit of history about limited
companies generally, on which all off shore companies are based.
The concept of limited liability companies can be traced back to the early part of the
19th century and the insatiable demand for cash which the industrial revolution and its
thousands of manufacturing and trading organizations spawned. Whilst many of these early
businesses were government backed, the demand for funding was so great that entrepreneurs
started looking to the public for investment money.
Many of these early enterprises were highly successful of course, leaving only happy
investors, but many others failed, either through misjudgments, bad luck, incompetence or
downright fraud. Sometimes, when these businesses failed, the investors were not only left
nursing the loss of their original investment, but frequently faced demands for all the
company's losses. Not unreasonably, faced with such mounting losses and ensuing
bankruptcies, demands were made for legislation to protect stockholders and other
THE FUTURE OF THE TAX HAVENS AND OFFSHORE INDUSTRY
In the 21st Century, there will be major changes in world geo-politics. The
current world population is increasing by 90 million a year - 15 million of whom are born
Presently, thirty per cent of the world's working population is unemployed. Additionally,
the world's population is increasingly expecting higher standards of living and improved
These radically changing patterns in expectations, population and wealth will continue to
create political and economic instabilities. Governments in both the developed and the
developing world will have no option but to continue to levy high taxes to meet these
expectations and the associated costs of providing new and improved infrastructure.
Thus, one does not need a 'crystal ball' to clearly see that the offshore industry will
continue with its rapid development and growth.
The following political and economic trends will influence the development of the offshore
industry, not only in Europe but world-wide:
The spectacular growth in South East Asia.
The after-effects of the collapse of the Soviet Union.
The emergence of South America, India and China as economic power houses.
Volatility in currency markets.
For example, consider South East Asia. Today, approximately 6
million people in the ASEAN countries enjoy the equivalent of Australian,
or US middle class
living standards. It is estimated that this number will have grown to
120 million by the
Therefore, it is not surprising that South East Asia will become the world's paramount
market, not only for consumer goods but also for financial services.
The users of International Financial Services Centers are becoming increasingly demanding.
They expect high quality service at a reasonable cost, and access to sophisticated
investment services - as well as confidentiality.
Tomorrow's offshore users will be looking for centers that can compete with today's
onshore financial centers in the following areas:
The Limited Liability Company.
From this early legislation the concept of the limited liability company grew. These
companies had two important features, firstly the director's and stockholder's liabilities
became limited to the amount of the share capitalization of the company, and secondly the
companies were viewed as a separate legal entity, distinct from its owners.
Thus the legislation ensured that should a limited company fail, for whatever reason, the
directors and stockholders of the company were limited in their financial liability to the
failed company and its investors and creditors to the amount of the share capital they
owned. In practice the directors and stockholders of a failed limited company simply lost
their original investment.
Over the years, the legal framework of limited liability companies has changed to keep
pace with more modern business practice, however the basic concept still remains to this
day. Ensuing legislation now gives more protection to investors and the general public,
especially from companies run with intent to defraud, and tries, with some success, to
ensure that those convicted or suspected of fraudulent dealings are barred from holding
It is the separate legal identity aspect that makes the limited company an ideal tax
Offshore Limited Companies
Because tax rates have always varied, not only from individual to business but from
country to country, there has always been an incentive to live or work in or from a lower
tax area. As the wealth of both companies and individuals has increased over the years,
this incentive has become the foundation for a business in its own right.
The principle motivations behind the demand for offshore services from both individuals
and corporations are:
With global instability, currency fluctuations and political
uncertainties set to continue, our clients' needs will be not only to minimize
global tax exposure, but also to protect and preserve their assets and investments in safe havens.
Thus, risk management has become as important a motivation for using International
Financial Services Centers as international tax planning.
The political and economic catalysts that influenced the growth of the offshore industry
in the eighties and nineties will continue to influence growth in the next decades.
These catalysts are:
Political and economic instability.
Market globalization and deregulation.
The internationalization of business.
The lifting of trade barriers.
A trend towards steady global economic growth.
A global relaxation of foreign exchange controls.
In addition to political and economic catalysts there are also
global tax related catalysts that continue to influence the growth of the offshore
High tax regimes.
More effective tax recovery.
The opportunities of utilizing double taxation treaties.
In 1997 some 70,000 or so offshore companies were incorporated in the various
The most popular jurisdiction Delaware and the BVI whose
registrar has incorporated approximately 300,000 IBC companies in the last ten years. Some
40,000 IBC's were incorporated there last year.
It is estimated that 15,000 companies a year are incorporated in Hong Kong for offshore purposes and another 50,000
or so in the other offshore jurisdictions.
This means that the total number of companies formed for offshore purposes exceeds 140,000
Statistics indicate that in 2000 a minimum of half a million
offshore companies were incorporated world-wide.
An increasing number of countries, often but not exclusively 'third world', have seized
upon this to offer companies based in high tax areas, a 'tax haven' if they move their
legal identity to their own low tax shores. Not only does this save the organization tax,
it ensures that the 'haven' country gets both a revenue from registration fees (to its
government) and employment and income for its citizens by way of formation agents and
their own businesses. There are now some 40/50 different offshore jurisdictions worldwide,
each offering slightly different companies but all sharing a common aim - to attract
international business by way of offering a low or zero tax base from which to trade.
The Client Profile
The users of offshore facilities fall primarily into the two categories of individual and
Individual users include:
High net worth individuals.
Expatriates and emigrants.
Owners of businesses.
High net worth individuals are generally those clients with
disposable assets in excess of two million dollars.
Expatriates are, in the main, individuals who are living away from their home countries,
either on overseas contracts of employment or as retirees, whereas emigrants are
individuals who have permanently moved from one country to another in pursuit of a better
quality of life and/or business interests.
The category of 'owners of businesses' relates predominantly to proprietary businesses
where the shares are held by family members.
Corporate users include:
Whilst the profiles of individual users are diverse, they would include, amongst others:
Individuals enjoying inherited wealth.
Entrepreneurs and industrialists.
Businessmen and senior executives.
Entertainers and authors.
Sportsmen and other personalities.
Inventors, engineers and designers.
Owners of intellectual property rights.
Medical practitioners and other professionals.
Traditionally, such users originated from Europe, North and South
America and certain African and Australasian countries. Over the last decade, however,
clients falling into this category have increasingly come from the Eastern European
countries, the CIS, the Indian sub-continent and the booming economies which make up South
East Asia and the Pacific Rim.
- Individual users utilize offshore facilities for the following reasons:
Estate and investment planning.
Confidentiality and privacy.
Most modern corporations, be they medium sized companies pursuing international expansion,
multinational companies, conglomerates, shipping companies or financial institutions, are
market driven and many have been able to establish and maintain their competitive edge by
efficiently structuring aspects of their operations through offshore centers.
Holding companies, foreign direct investment companies, mixing vehicles, royalty companies
and treasury management companies are but a few examples of the types of companies that
have been established by corporate users in offshore centers.
Treasury management operations would typically include cash management, capital raising
exercises, the provision of finance to subsidiaries and risk management. Corporate
treasurers often apportion their cash resources between their subsidiaries. This process,
known as 'netting', is regularly undertaken from an offshore center.
Many corporate users have favored establishing a physical presence in offshore
which, in addition to treasury management, are utilized for:
Marketing, trading and administration centers.
Re-export, trans-shipment and pre-positioning.
Manufacturing and assembly plants.
Transportation and distribution.
Free ports, export processing and special economic
zones have continued to attract corporate users. Mauritius,
which has in excess of 700 companies operating in its Export Processing Zone,
the Isle of Man and Madeira have all been successful in attracting
multinational and large companies to establish physical presences.
The individual and corporate users of offshore services are, diverse, matched only by the
wide range of benefits that offshore centers offer.