Definition of the Term ‘Offshore’

The term ‘offshore’ is widely used in financial planning circles but despite its popularity it might come as a surprise to some that ‘offshore’ has no legal definition.
Generally speaking, an offshore centre is one which offers concessionary rates of taxation usually for, but not necessarily restricted to, individuals, corporate entities and trusts. The rates of taxation would be considered to be concessionary if they are lower than those prevailing in ‘onshore’ centres such as the United Kingdom, the United States of America, Canada and Germany (to name but a few examples ).

Centres in Europe

There are in the region of 60 jurisdictions which could be classified as offshore centres and the following is a list of those which are perhaps the most widely known and used:

Alderney, Canary Islands, Cyprus, Gibraltar, Guernsey, Ireland, Isle of Man, Jersey, Liechtenstein, Luxembourg, Madeira, Malta, Monaco, Switzerland.

Centres in Asia and the Pacific

Cook Islands, Hong Kong, Labuan, Mauritius, Singapore, Vanuatu, Western Samoa.

The majority of offshore centres are islands which have their own legal systems, the autonomy to introduce their own laws and the power to introduce their own systems and rates of taxation. Such centres can therefore implement legislation which is designed to attract foreign investors.

Financial Services Provided by Offshore Centres

There are a variety of financial services which are provided from offshore centres although it must be noted that not all the centres provide all of these services. The following is a list of the most commonly used financial services:

1. Banking

2. Trustee services

3. Company incorporation and company management

4. Investment management

5. Custody of investments

6. Creation and administration of investment funds

7. Captive insurance

8. Pension funds

9. Ship registration and management

It is worth mentioning that although offshore centres provide a variety of different financial services it is generally the provision of fiduciary services which have sparked the growth in this very specialised industry. A fiduciary service is generally considered to be one where the service provider owes certain duties to the person on whose behalf he is holding the assets or he has certain responsibilities which he must fulfil. The two most commonly quoted examples are trustee services and company management services, as trustees and directors are considered to act in a fiduciary capacity as they owe duties and responsibilities to the beneficiaries and members respectively.

Benefits Offered by Offshore Centres

1. Taxation
   A client might decide to place his assets in an offshore centre for a number of reasons but arguably the most common is to reduce his potential tax liabilities. This is because offshore centres impose only a low or in some cases a nil rate of tax on structures or accounts which have been created locally for the benefit of non-residents. You will no doubt have come across the term ‘tax haven’ in relation to offshore centres, a direct reflection of the possible tax benefits which they can create.
   
    

2. Exchange Controls
   Exchange controls are in place in a few offshore locations (most notably perhaps in South Africa), and their effect is to restrict the flow of assets. Such controls can make it illegal for cash or other assets to be transferred or transported out of the country where the rules exist and can also make it illegal for citizens of that country to own foreign assets. Any foreign assets which are held could be subject to a forces sale and the eventual repatriation of the proceeds to the ‘home’ country. Exchange controls are not imposed in offshore centres on assets which are held for international clients. Funds can therefore flow freely into and out of offshore centres although investors should be aware that if restrictions are in place in the investor’s ‘home’ country, the ‘home’ country would consider it illegal to transfer funds out of that country and into an offshore centre.
   
    

3. Client Confidentiality
   In an offshore centre the reporting requirements are much less onerous that those onshore (if in place at all). Some centres, such as the Bahamas and the Cayman Islands, also offer legislation which makes the release of client information a criminal offence (unless there are exceptional circumstances which dictate that information should be made available).
   
    

4. Minimal reporting requirements
   General speaking, the regulators or authorities in most offshore centres will not require information on the clients or investors who are conducting business in that centre. Instead, they will rely upon (and indeed expect) the service providers in their centre to perform thorough checks on the suitability and integrity of the clients on whose behalf they perform or provide financial services. This ‘self policing’ can appeal to many clients, especially those who are interested in remaining as ‘anonymous’ as possible.
   
    

5. Legal System
   It is important that an offshore centre possess a first class legal system which contains clear and precise laws governing both domestic and international issues. The vast majority of offshore centres have based their legal systems on English common law principles but have added local provisions which are designed not only to suit the local region but also, and more importantly, to attract investors and international business. Through their legal systems, offshore centres can provide an opportunity for international clients to protect their assets from claims or legal actions which may arise from foreign countries. For example, a foreign country might have the power to expropriate assets of its citizens and to obtain legal ownership of those assets. However, if those assets were held offshore, through, perhaps an offshore trust or company, those assets would usually be protected by the laws of the offshore centre concerned. The laws of most offshore centres would usually fail to recognise, let alone defend, the laws and claims of foreign governments in relation to the forced seizure of property.
   
    

6. Local Expertise
   Most offshore centres boats a high standard of local expertise in respect of their service providers. Indeed, in the majority of centres there are now a good spread of international banks, trust companies, legal firms, accountants and brokers, making the servicing of the clients’ needs much easier and more efficient and also adding to the growing reputation of the professionalism of offshore services providers in general and offshore centres in particular.
   
    

7. Regulation
   It is generally true to say that financial services in onshore centres are regulated to a greater extent that financial services which are provided from offshore centres. However, a growing number of offshore centres now impose some degree of regulatory control over their finance sectors, usually by requiring service providers to be licensed to conduct certain types of activities, such as taking deposits, providing investment services and acting as trustees.
   Note: * Regulation appeals to many clients as they will have the comfort of knowing that the service provider they have chosen will be accountable locally for their actions and that they must meet certain ‘fit and proper’ requirements. *
   
    

8. Communications
   The majority of offshore centres have excellent fax and telephone links and also have sophisticated computer technology to assist with the preparation and flow of information. Most centres are also serviced by excellent air and / or sea links which can also be an attraction to clients and their advisers.
   
    

9. Geographic distance
   To some clients, the appeal of an offshore centre will be how far away it is from their ‘home’ country. There is a perception that with distance comes greater confidentiality. This may be true in some cases but should not be relied upon.
   
    

10. Attitude of local government
    The governments of the vast majority of offshore centres are aware of the importance which their finance sectors have in relation to the future growth and development of their jurisdictions and are therefore keen to ensure that the industry receives the support which it needs to expand. For example, this could take the form of capital expenditure programmes (perhaps to improve the local infrastructure or communication systems) or the introduction of legislation requested by service providers (designed to make the centre more attractive to foreign investors). It is generally accepted that those centres which have supportive governments are seen as a more suitable and better long-term choice than those centres which struggle to gain the support of their ruling authorities.
    
     

11. Political and economic stability
    Many offshore centres are able to boast a long history of political stability and strong local economies, both of which help to build confidence in those centres. After all, if a centre has recently undergone civil or political unrest there might be a risk attached to the safety of the assets which have been placed there. Similarly, if the local economy is weak, unemployment might be a problem which could affect the availability of a suitable workforce. In addition, the cost of the services might increase (making the centre less appealing) and the general mismanagement of the jurisdictions financial affairs could affect its overall reputation