SOME CONSIDERATIONS ON TAX HEAVENS AN OFF SHORE [620016]

SOME CONSIDERATIONS ON TAX HEAVENS AN OFF SHORE
COMPANIES
Author: Corina Alexandra VI ȚELAR
Abstract: The present article introduces the reader in the problem of tax heaven
and offshore companies. We tried to present, both positive and negative as pects of this
problem. On one hand, this type of companies can help a multinational corporation in its
economical and financial global projections, but, on the other hand, these companies can
be use as extremely efficient instruments of tax evasion and mon ey laundry .
Keywords: Fiscal, Fiscality, Fiscal Paradise, Offshore, Corporation, Company
JEL Classification: K34
Whilst there is no precise definition of what amounts to an Offshore Financial
Center (or OFC), the term is usually meant to refer to low -tax, lightly regulated
jurisdictions1which specialize in providing the corporate and commercial infrastructure
to facilitate the use of those jurisdictions for the formation of offshore companies.
Offshore Financial Centers are often (but not always) cur rent or former British Colonies
or Crown Dependencies, and often refer to themselves as offshore jurisdictions. The term
Offshore Financial Center is a neologism coined in the 1980s.
The IMF2considers the following to be characteristics of an Offshore Fi nancial
Center:
Jurisdictions that have relatively large numbers of financial institutions engaged
primarily in business with non -residents;
Executive D irector ,“Pro Iure” Foundation Târgu -Mureș, Romania.
1“Offshore Financial Centers”, Richard Roberts, ISBN 1 -85898 -155-7. in Tolley’s International
Initiatives Affecting Financial Heavens (2001), Tim Bennet, ISBN 0 -406-94264 -1, the author in the
glossary of terms defines an “Offshore Financial Center” in forthright terms as “a politically correct term
for what used to be called a tax heaven.” However, he then qualifies this by adding “The use of this term
makes the important point that a jurisdiction may provide sp ecific facilities for offshore financial centers
without being in any general sense tax heaven”.
2The International Monetary Fund is an international organization that oversees the global
financial system by observing exchange rates and balance of payment s, as well as offering financial and
technical assistance when requested.

Financial systems with external assets and liabilities out of proportion to domestic
financial intermediation desig ned to finance domestic economies; and
Centers which provide some or all of the following services: low or zero taxation;
moderate or light financial regulation; banking secrecy and anonymity.
Views of OFC’s tend to be polarized. Proponents suggest that re putable offshore
financial centers play legitimate and integral role in international finance and trade,
offering huge advantages in certain situations for both corporations and individuals,
allowing legitimate risk management and financial planning. Criti cs argue that they drain
tax from wealthy (and not so wealthy) nations, they are insufficiently regulated, and they
facilitate illegal tax evasion, money laundering and to avoid legal risk by improperly
employing the corporate veil. Proponents point to the tacit support of offshore centers by
the governments of the United States (who promote offshore financial centers by
continuing use of the FSC) and United Kingdom (who actively promote offshore finance
in Caribbean dependent territories to help them diver sify their economies and to facilitate
the British Eurobond market). OPIC, a U.S. government agency, when lending into
countries with under developed corporate law, often requires the borrower to form an
offshore vehicle to facilitate the loan financing.
What is certainly true of offshore financial centers is that recently they have
attracted a deal more attention than in the past and international initiatives spearheaded
by the OECD3, the FATF4and the IMF have a significant effect on the offshore finance
industry5.A number of smaller, less regulated jurisdictions literally went to the wall, and
closed up shop. Most of the principle offshore centers that remained considerably
strengthened their internal regulations relating to money laundering and other ke y
regulated activities.
On 23 February 2007 The Economist published a survey of Offshore Financial
Centers; although the magazine had historically been very hostile to OFCs, the report
represented a shift towards a very much more benign view of the role o f offshore finance,
concluding: “…although international initiatives aimed at reducing financial crime are
welcome, the broader concern over OFCs overblown. Well -run jurisdictions of all sorts,
whether nominally on -or offshore, are good for the global fina ncial system ”6.Although
most Offshore Financial Centers originally rose to prominence by facilitating structures
3The Organization for Economic Co -operation and Development is an international organization
of those developed countries that accept the principles of representative democracy and a free market
economy. It originated in 1948 as the Organization for European Economic Co -operation (OEEC), led by
Frenchmen Robert Marjolin, to help administer the Marshall Plan for the reconstruction of Europe after
World War II. Later its membership was extended to non -European states, and in 1961 it was reformed into
the Organization for Economic Co -operation and Development.
4The Financial Action Task Force on Money laundering, also known by the French name Groupe
d’action financière sur le blanchimen t de capitaux (GAFI), is an inter -governmental body founded in 1989
by the G7. The purpose of the FATF is to develop policies to combat money laundering and terrorist
financing.
5In 2000 the FATF began a policy of listing countries perceived to be non -cooperative in the fight
against money laundering (both offshore jurisdictions and larger countries), and publishing
“recommendations” as to haw those countries might improve. The process had a salutary effect, and
considerable tightening up of both regulatio n and implementation was noted by the FATF over subsequent
years.
6www.economics.com., Official website of “The Economist”, Gary Neil, “Places in the sun”,
February, 23, 2007.

which helped to minimize tax, the increasing sophistication of onshore tax codes has
meant that there usually is little tax benefit to moving a transaction structure offshore.
Most professional practitioners in offshore jurisdictions refer to themselves as
“tax neutral”, referring to the fact that, whatever tax burdens the proposed transaction or
structure will have in its primary operating juri sdiction or market, having the structure
based in an offshore jurisdiction will not create any additional tax burdens. For example,
international joint ventures are often structured as companies in an offshore jurisdiction
when neither joint venture party wishes to form the company in the other party’s home
jurisdiction, but both parties wish to ensure that the company’s jurisdiction of
incorporation will not attract unwanted tax consequences.
Many offshore financial centers used to “ring fence” offshore co mpanies formed
in those jurisdictions (International Business Companies formed in the British Virgin
Islands is a good example). However, recent international pressure has brought an end to
ring-fencing in most jurisdictions, and most Offshore Financial ce nters simply
restructured their tax codes so that the activity of the offshore companies, whilst
technically subject to tax in the jurisdiction, was never likely to result in tax being
assessed. Critics of Offshore financial centers argue that a lack of tr ansparency in
Offshore Financial centers means that they are vulnerable to being used in illegal tax
evasion schemes.
A number of international organizations also suggest that Offshore Financial
centers engage in “unfair tax competition” by having no, or very low tax burdens, and
have argue that such jurisdictions should be forced to tax both economic activity and their
own citizens at a higher level. Another criticism leveled against Offshore Financial center
is that whilst sophisticated jurisdictions hav e developed tax codes which prevent tax
revenues leaking from the use off offshore jurisdictions, less developed nations, who can
least afford to lose tax revenue, are unable to keep pace with the rapid development of the
use of offshore financial structur es.
Most OFC’s now promote themselves on the basis of “light but effective”
regulation, and generally only seek to regulate high -risk financial business, such as
banking, insurance and mutual funds. Many capital market bond issues are structured
through a special purpose vehicle incorporated in an OFC specifically to minimize the
amount of regulatory red -tape associated with the issue. Some offshore jurisdictions have
sought to replicate this success with equity issues by forming local stock exchanges, but
these have not been a notable success to date. A number of internet -based businesses
have recently set up business on OFC’s which, whilst lawful in the OFC, would not be
lawful in its target market. These businesses often relate to pornography or gambling.
Critics of OFC’s suggest that they are not effectively regulated in all areas, and in
particular that they are vulnerable to being used by organized crime for money
laundering. However, partly in response to international initiatives and partly in a
defen sive move to protect their reputations, most OFC’s now apply fairly rigorous anti –
money laundering regulations to offshore business. Some even argue that offshore
jurisdictions are in many cases better regulated than many onshore financial centers.7For
example, in most offshore jurisdictions, a person needs a license to act as a trustee,
whereas (for example) in the UK and the USA, there are no restrictions or regulations as
7Legitimate asset protection against future political or economic risk shoul b e distinguished from
unlawful attempting to evade creditors.

to who may serve in a fiduciary capacity. Some commentators have expressed concern
that the differing levels of sophistication between OFC’s will lead to “regulatory
arbitrage”8, and fuel a race to the bottom, although evidence from the market seems to
indicate the investors prefer to utilize better regulated offshore jurisdictions rath er than
more poorly regulated ones.
Critics of offshore jurisdictions point to excessive secrecy in those jurisdictions,
particularly in relation to the beneficial ownership of offshore companies, and in relation
to offshore bank accounts. The criticisms a re slightly difficult to assess. In most
jurisdictions banks will preserve the confidentiality of their customers, and all of the
major offshore jurisdictions have appropriate procedures for either law enforcement
agencies to obtain information regarding s uspicious bank accounts. Most jurisdictions
also have remedies which private citizens can avail themselves of, if they can satisfy the
court in that jurisdiction that a bank account has been used as part of a legal wrong.
Similarly, although most offshore jurisdictions only make a limited amount of
information with respect to companies publicly available, this is also true of most states
in the USA and the EU, where it is uncommon for share registers or company accounts to
be available for public inspection .
In relation to trusts and unlimited liability partnerships, there are very few
jurisdictions in the world that require to be registered, let alone publicly file details of the
people involved with those structures. However, there are certainly well docum ented
cases of parties using offshore structure to facilitate wrongdoing, and the strong
confidentiality laws in offshore jurisdictions have clearly played a part in the selection of
an offshore vehicle for those purposes.
The bedrock of most OFC’s is the formation of offshore structures. Offshore
structures are characteristically involving the formation of an:
Offshore company;
Offshore partnership;
Offshore trust;
Offshore foundation;
Offshore structures are formed for a variety of reasons.
Legitimate rea sons include:
Asset holding vehicles. Many corporate conglomerates employ a large
number of companies, and often high -risk assets are parked in separate
companies to prevent legal risk accruing to the main group (where the
assets relate to asbestos, see th e English case of Adams v Cape
Industries9). Similarly, it is quite common for fleets of ships to be
8In practice, such attempts are rarely effective. A trustee in bankruptcy will usually have access to
all of the debtor’s financial records, and will usually have litle difficulty tracing where the assets were
transferred to. Transfers to defraud creditors are prohibited in most jurisidictions ( offshore and onshore)
and a bamkruptcy trustee usually have little difficulty persuading a local court to nullify the transfer.
Despite the poor prognosi s forsuccess, applications to courts in offshore jurisidictions seem to indicate that
insolvent individuals still try this strategy from time to time; notwithstanding that it is usually a serious
criminal offence in both jurisidictions.
9See Adams v Cape Industries plc (1990) Ch433. The case resolved a number of important issues
under English Law. The case is most often cited for the comprehensive of the corporate veil under English
company law. However, the case also addressed long -standing issues under t he English conflict of laws as

separately owned by separate offshore companies to try to circumvent
laws relating to group liability under certain environmental legislation.
Asset protec tion. Wealthy individuals who live in politically unstable
countries utilize offshore companies to hold family wealth to avoid
potential expropriation or exchange control restrictions in the country in
which they live. These structures work best when the w ealth is foreign –
earned, or has been expatriated over a significant period of time.
Avoidance of forced heir -ship provisions. Many countries from France to
Saudi Arabia continue to employ forced heir -ship provisions in their
succession law, limiting the te stator’s freedom to distribute assets upon
death. By placing assets into an offshore company, and then having
probate for the shares in the offshore determined by the laws of the
offshore jurisdiction (usually in accordance with a specific will or codicil
sworn for that purpose), the testator can sometimes avoid such strictures.
Collective Investment vehicles. Mutual funds, Hedge funds and Unit
Trusts are formed offshore to facilitate international distribution. By being
domiciled in a low tax jurisdiction investors only have to consider the tax
implications of their own domicile or residency.
Derivatives trading. Wealthy individuals often form offshore vehicles to
engage in risky investments, such as derivatives trading, which are
extremely difficult to eng age in directly due to cumbersome financial
market regulation.
Exchange control trading vehicles. In countries where there is either
exchange control or is perceived to be increased political risk with the
repatriation of funds, major exporters often form trading vehicles in
offshore companies so that the sales from exports can be “parked” in the
offshore vehicle until need for further investment. Trading vehicles of this
nature have been criticized in a number of shareholder lawsuits which
allege that by m anipulating the ownership of the trading vehicle, majority
shareholders can illegally avoid paying minority shareholders their fair
share of trading profits.
Joint venture vehicles. Offshore jurisdictions are frequently used to set -up
joint venture compani es, either as a compromise neutral jurisdiction and/or
because the jurisdiction where the joint venture has its commercial center
has insufficiently sophisticated corporate and commercial laws.
Stock market listing vehicles. Successful companies who are un able to
obtain market listing because of the underdevelopment of the corporate
law in their home country often transfer shares into an offshore vehicle,
and list the offshore vehicle. Offshore vehicles are listed on the NASDAQ,
AIM, the Hong Kong Stock Exc hange and the Singapore Stock Exchange.
It is estimated that over 90% of the companies listed on Hong Kong’s
Hang Seng are incorporated in offshore jurisdictions.
to when a company would be resident in a foreign jurisdiction such that the English courts would recognize
the foreign court’s jurisdiction over the company.

Trade finance vehicles. Large corporate groups often form offshore
companies, sometimes under an orphan structure to enable them to obtain
financing (either from bond issues or by way of a syndicated loan) and to
treat the financing as “off balance sheet” under applicable accounting
procedures. In relation to bond issues, offshore special purpose vehicles
are often used in relation to asset -backed securities transactions
(particularly securitizations).
Illegitimate purposes include:
Creditor avoidance. Highly indebted persons may seek to escape the effect
of bankruptcy by transferring cash assets into an anonymous offshore
company.
Market manipulation. The Enron and Parmalat scandals demonstrated how
companies could from offshore vehicles to manipulate financial results10.
Money laundering. A number of high profile money laundering
investigations h ave indicated schemes facilitated by offshore structures.
Tax evasion. Although numbers are difficult to ascertain, it is widely
believed that individuals in wealthy nations unlawfully evade tax trough
not declaring gains made by offshore vehicles that the y own.
Terrorist financing. It is often suggested that offshore vehicles might be
used to assist terrorist financing, although exhaustive investigations have
yet to obtain any evidence of this. Proponents of offshore jurisdictions
argue that because their regulatory structures tend to be designed to focus
closely on high risk geo -political areas, and since September 11, 2001
attacks all financial institutions tend to scrutinize United Nations
embargoed persons lists with enormous care in international trans actions,
trying to use an offshore structure for terrorist financing would be like
putting a red flag on it.
Although these structures are characteristically set up as companies, they can also
be set up as trusts or partnerships, and many offshore jurisdi ctions offer specialized forms
of these entities (for example STAR trusts in Cayman and the VISTA trusts in the British
Virgin Islands).
10Enron Corporation was an American energy company based in Houst on Texas which achieved
infamy at the end of 2001, when it was reveald that it’s reported financial condition was sustained mostly
by institutionalized, systematic, and creatively planned accounting fraud. Enron has since become a popular
symbol of willfl corporate fraud and corruption. The lawsuit against Enron’s directors, following the
scandal, was notable in that the directors settled the suit by paying very significant amounts of money
personally. Enron still exists as an asset -less shel corporation. I t emerged from bankruptcy in November of
2004 after one of the biggest and most complex bankruptcy cases in US history. On september 2006, Enron
sold Prisma Energy International Inc., its last remaining business, to Ashmore Energy International Ltd.
Accord ing to the final restructuring plan submitted to bankruptcy court, Enron will be dissolved at the final
conclusion of the restructuring process.
The Parmalt case is similar but the consequences were less important then in Enron’s case.
ForEnronCasesee
http://www.rics.org/Management/Businessmanagement/Communication/A%20new%20identity%20for%2
0a%20new%20life%20(F inancial%20Times).html
For Parmalat see “A new identity for a new life”, 23 October 2003 http://en.wikipedia.org/wiki/Parmalat

There are a large number of OFC’s (by some measures, there are more countries
that are OFC’s than not), but the followi ng jurisdictions could be considered to be
“market leading” jurisdictions for various reasons:
Bahamas, which has a considerable number of registered vessels. The
Bahamas used to be the dominant force in the offshore financial world, but
fell from favor in 1970’s after independence11.
Bermuda, which is market leader for captive insurance, and also has strong
presence in offshore funds and aircraft registration.
British Virgin Islands, which has the largest number of offshore
companies.12
Cayman Islands, which has the largest value of AUM in offshore funds,
and is also the strongest presence in the US securitization market.
Gibraltar, which, whilst not dominating the offshore market in any
particular specialization, retains a strong presence in most fields.
Jersey, which is a dominant player in the European securitization market
and the European REIT market.
Luxembourg, which is the market leader is UCITS and is believed to be
the largest offshore Eurobond issuer, although no official statistics confirm
this.
Panama, which is a significant international maritime center. Although
Panama (with Bermuda) was one of the earliest offshore corporate
domiciles, Panama has not been a key market player in numbers of
offshore incorporations since the late 1980s and early 19 90s13.
Although there are many, many other offshore jurisdictions, some of which are
relatively sophisticated (for example, Guernsey and the Isle of Man are particularly well
developed and well regulated offshore centers, although they tend to be overshado wed by
Jersey; and the offshore aircraft registration market, unusually, is not dominated by one
jurisdiction but is fragmented amongst Bermuda, Cayman, Aruba, Netherlands Antilles
and the Seychelles), those seven jurisdictions are generally considered to be the key
market participants, and to possess the most sophisticated offshore infrastructure.
11At about this time the jurisdiction was also rocked by a number of banking scandals. It is also
imposed an ill -advise practice of restricting admission to the Bahamian bar to nationals of the Bahamas,
which had a diluting effect on the quality legal talent in the jurisdiction (by prev enting the recruitment of
expatriates), which is critical to the success of setting up sophisticated offshore structures. Not
coincidentally, the rise of Cayman as the dominant force in offshore finance almost precisely mirrors the
decline of the Bahamas. See generally Tolley’s Tax heavens (2000), ISBN 0754504719.
12Over 700.000 offshore companies have been formed in the British Virgin Islands, although only
approximately 450.000 remain active. This would account for approxemately 42% of the estimated 1.1
million offshore companies incorporated worldwide.
13Retrieved from " http://en.wikipedia.org/wiki/Offshore_Financial_Centre "