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Offshore 2.0

Contributed by Laveco Ltd.
25 June, 2015

A new era is beginning in the world offshore market. Just like in the life of a software when a new version overwrites the previous one.

In the leading article of the last LAVECO Newsletter I wrote that hardly anything will change in the business world just because they wish to make everything more transparent, more clean, more taxed internationally in accordance with the dictate of the OECD. I still doubt whether human nature can be changed: we will continue to seek tools which help us find success or make our business more successful, just as we have done until now. In the past these tools were the offshore structures which were widely used throughout the world. Conservative estimates put the number of offshore companies in existence today at 4 000 000, and the amount of money handled and active in daily transactions at 10 trillion dollars.

This is what the new regulations are going to turn on its head from 2017. Let’s accept that transparency will be introduced, and we will be playing by the new rules within the next 2-5 years. But the system can not simply ignore the past. In reality, the new system will be built on the old one, using that as the starting point. It’s like the new version of a software, with certain old characteristics remaining, but with new elements built in. It simply can not be any different here. And just as we learn to use the new version of the software on our computer, so we will adapt to the new version in the world of company formation as well.

As is normal, many people are afraid of the new. To tell the truth, I am now completely fed up with all the moaning and crying which I hear so often within professional circles. We just complain continually, instead of looking to the future and seeking solutions. All over the world I see tears for the past but no progressive thinking. There seems to be some kind of incomprehensible romanticism surrounding the past, with the same question constantly repeated: „Why can’t everything be like it was 20 years ago?” This is static, stuck-in-the-mud thinking. Can a person who is 40 or 50 years old be the same as they were at the age of 20 or 30? Of course not. If we look at the changes taking place around us every day, it is almost impossible to find a system which will remain unchanged for 20 years. Take the mobile phones vibrating in our pockets. We are lucky if a device lasts for 2 years, as in that time it either becomes outdated, or the battery throws in the towel, or the software has to be updated. We get a new device, which in many ways is very similar to the old one, but we still have to learn how to handle it.

In the same way, we now have to learn how to handle this new situation. Whining and wailing gets us nowhere, and definitely can’t be turned into profit. I personally am also very wary of „experts” who constantly place the emphasis on the negative aspects, and frighten their own clients. Using this principle, the doctor might just as well sum up life for his patients with the sentence: „Look, life is a dangerous process, because in the end it always ends in death.” Yes, dear doctor, but somehow we have to get there first. :)

There are a few elements regarding the operation of the system in the past which are worth bearing in mind:

1. What was categorised in the public opinion as „offshore activity” is not, and was not earlier either, illegal. It is surrounded by far more sensationalist reporting than hard facts. In general, the press only touches on the subject if they suspect a scandal.

2. Money held in offshore structures can not automatically be identified as the proceeds of crime. I’m not saying that there aren’t those who abuse the system, but can we say that all the money held in „onshore” structures is „white?” Hardly! If we look at economic crime, then according to the statistics 90-95% of the cases involve „onshore” companies rather than offshore ones. Just consider the VAT fraud taking place all over Europe and which can only be achieved using companies appearing in the EU system and which have EU tax numbers. The total amount being lost to such fraud each year is some 100 billion euros.

3. Use of offshore structures is not going to be illegal in the future either. Much more refined, though at the same time more simple, structures will be established. Greater emphasis will be placed on pre-planning; whereas in the past the process for the establishment of such companies was quite simple, in the future it will take the cooperation of several specialists to come up with the right constructions to serve the needs of a group of companies or private individuals.

4. The taxation of the individuals behind the companies will require more attention as a result of transparency. Since the banks, in theory, will be reporting from 2017, it may occur that the situation arises where the beneficial owners behind a company become liable for taxation in regard to 2016. This is a moment of key importance, which should be discussed with personal tax consultants and accountants in 2015. No-one should wait until 2016, as it may then be too late to make changes in time, and the situation could turn awkward.

5. Transparency itself is not the main problem here, but the „traps” laid in national tax systems. The concept of the so-called Controlled Foreign Company now exists in the tax laws of numerous countries. If a person is the beneficial owner of such a company, then they should examine the tax implications on a yearly basis. The term is not new, but it has only recently come under the spotlight because, from 2017, this will be the factor which will allow the tax authorities to establish whether an individual has a tax liability, once they receive the information from the foreign banks.

6. It is necessary to review any existing foreign companies in 2015, in order to be able to minimise any possible tax liability in the future. The future must be created now, not later, when the damage has already been done. In 2017 it may be too late for a company network established 10 years ago to re-invent as a new structure.

7. Until now, just about everybody did their tax planning at one level, the corporate level. From 2016, twin level tax planning will be the norm. The place where the individual is resident for tax purposes will play a huge role. Everything would be simple, if we could just relocate to a country where there is no personal income tax. In that case, in a place like the United Arab Emirates, for example, where there is neither a tax authority nor personal income tax, what I have said so far would be meaningless. Very few people, however, will be able to just uproot with their families and resettle in Dubai.

8. There are two very important factors which must be borne in mind when establishing company structures:
Where the foreign company is tax-resident. From 2016, the banks will also have to examine this question very thoroughly. One of the focuses of the banks’ reports will be the place of management of companies, and if this is the same as the individual’s home or office, then the company will also be considered tax-resident in the same country.

Whether the company in which the individual is a beneficial owner is classified as a Controlled Foreign Company. It is worth selecting a country where it is possible to form non-Controlled Foreign Companies with favourable conditions, and to combine Controlled and non-Controlled Foreign Companies in the case of a given group of companies. Cyprus can be just such a jurisdiction within the EU.

9. Unfortunately, we live in a financial dictatorship, where the rules depend to a great extent on the banks. All that we can do is try to adapt to the conditions they force on us, as we basically have no chance of changing them. In my opinion, the banks will define the future of the whole process. It is quite clear from the current situation that the banks are in a position of strength where customers are concerned, and they take advantage of this on a daily basis.

10. It is exactly for this reason that, looking to the future, it is worth thinking about companies where the company itself, the bank account and the place of management are all in the same country. Why? Simply because the banks are almost certainly going to favour this type of set up. Jurisdictions where this is possible include, for example, Cyprus, Hong Kong and the United Arab Emirates. It is likely that in many cases where the bank account is not in the country where the company is registered, the banks will close the accounts, or will not open new ones, as they do not consider it justified to have the bank account in a “foreign” country. Don’t try and find the logic in this, because in a globalised world there isn’t any, but the banks dictate and that’s final.

The opinions listed in these 10 points are purely subjective, and I wouldn’t call them professional expertise. There is a lot of truth in this, or rather the truth is closely linked to these statements. Judging by the current situation, it is worth carefully considering the future and putting in place solutions which, though they may not last for the next 20 years, will serve our business purposes for the foreseeable future.

Because, come what may, the world economy will be open for business tomorrow as well. The most important rule of capitalism – the rule of profit – will be just as valid tomorrow. Those wishing to be winners will use the most efficient means to achieve this. Even if from time to time this seems to smell of “doping”. Performance enhancers are present in many aspects of our everyday lives, though we don’t always realise it. A coffee-drinker, for example, gains a certain advantage over the person who abstains from coffee and yawns their way through the morning and only starts working at mid-day. It is the same in the business world, where there have always been those who have used solutions offering tax benefits, and there will continue to be people keen to gain that advantage. From the result point of view, it makes little difference whether they are using the 1.0 version of the software or the 2.0 version, as long as it satisfies the conditions in place at the time.

Wishing you a pleasant read,

Kind regards

László Váradi

Managing Director
Laveco Ltd.


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