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March 2009-Interview of one of SFM’s director on Exel Magazine
The collective unconscious often associates the idea of offshore companies with the idea of tax fraud. To help us separate true from false, the director of SFM has agreed to answer our questions.
Can you define the Offshore Companies concept for us?
An offshore company is a company established in a jurisdiction where there are few or no taxes and few or no accounting requirements to be fulfilled. When one of these two criteria is satisfied, you can talk of an offshore centre or jurisdiction, and companies established in these centres become offshore companies. Many jurisdictions such as Cyprus and Gibraltar are now considered to be offshore centres since even though there are taxes the rates are very low and avoidance may even be possible. Currently four main areas of offshore centres have been identified around the world. First there is the Caribbean, with the Cayman Islands, British Virgin Islands, Belize, etc. Next there is Europe, with the Channel Islands, Cyprus and Gibraltar. Then there is the African region, which includes the Seychelles and Mauritius since these jurisdictions are, geographically speaking, closest to this continent. It should be noted that in 2008 the Seychelles was the jurisdiction in which there were the largest number of incorporations in the world. This is the jurisdiction that has experienced the greatest growth in the last few years. Finally there is the Asia-Pacific region, with the Cook Islands, Singapore, Hong Kong, etc. Currently all offshore companies are located in these four main areas, and there are a total of some fifty jurisdictions.
What precisely does your business involve?
In order to create a company, it must have what is called a resident agent. Unlike Switzerland, for example, where you just need to go to a notary, in the caseof an offshore jurisdiction you need to have a local company, which is called a resident agent and which undertakes the creation of the company for you from A to Z. We ourselves are resident agents in several jurisdictions. When we are not, such as Panama, we use the services of a local resident agent with whom we have very good conditions. But, whatever the jurisdiction, you need a resident agent who registers the company for you and is controlled by the local government. You can consult the list of resident agents on the jurisdictions’ web sites.
The notion of ‘offshore company’ is sometimes confused with the idea of tax evasion. How is the border between these two ideas defined?
Today most offshore companies are used in a framework that is perfectly legal. By legal framework I refer to completely recognised policies of fiscal optimisation or estate planning, in particular through Trusts and foundations that are themselves legal instruments. Recognised in England, for instance, which places so much pressure on offshore jurisdictions the law on trusts and their tax benefits is also recognised in many other countries (except for Switzerland). This process allows you to transfer the ownership of all or part of your bank account or real estate assets to a Trust. Depending on the type of trust, the person defines who shall be entitled to these assets and he/she no longer has access to them. As the name ‘Trust’ makes clear, this is a method in which trust is essential because the trustee, the person who manages the money, has (almost) complete power over it. Since the money no longer belongs to you, you are consequently no longer taxed on it. The Trust then generally has an offshore company to hold the money of which it will be the shareholder. In our case, many of our services involve requests for estate planning. Then there are many offshore companies in the framework of hedge funds, which are both legal and recognised and where we carry out our activities. Finally the facts must be faced: the current pressures facing offshore jurisdictions are legitimate, to some extent, since over the last few years many bankers and asset managers have used these offshore centres to receive, in particular, commissions from financial instruments that have themselves gone bankrupt. Clearly, if your manager has received commissions for selling a hedge fund that has subsequently gone bankrupt, it is natural to want to have increased control over these jurisdictions. It is nevertheless true that most companies in offshore centres have a completely legal framework. To return to this pressure exerted on the offshore centres, I think that this is actually a bit hypocritical. In effect, it often involves countries like France and the United Kingdom, which have their own offshore centre (Jersey and Guernsey for the United Kingdom and Monte-Carlo for France) from which they profit directly. Of course, if the centres used are centres where the G20 countries do not benefit, they increase their pressure on them and the current crisis allows them to sway public opinion more easily. In the end, while there are legitimate reasons behind these measures, they are more often motivated by the prospects for profits. Be that as it may there always have been, and there probably always will be, offshore centres. While some will close others will open. I am thinking in particular of the British Virgin Islands which were, for a long time, the best known and most used of the offshore centres and which, under pressure, had to sign tax information exchange agreements with several governments, including the United Kingdom, in 2008. As a result the map of offshore centres is constantly being redrawn and is gradually moving to the Middle East and the Asia-Pacific, regions that are less subject to pressure. Indeed, there has been so much pressure on the Caribbean centres that activity has switched to other centres, the Seychelles in particular.
Do you have to create a company in order to be present in these jurisdictions or can an already existing company open a subsidiary there?
There are two ways of proceeding: either the customer is present and wishes to create a new company. In this case we check that the name is available and then we incorporate the company. In the other case, a client can ask us for a company that has already existed for several years, which is called a “shelf company”. This is a procedure that is completely valid in these jurisdictions and in which we create a company that we do not sell initially. We leave it to, in a way, “sleep” for a while in order to divest it after several years for the benefit of the client who wishes to own it. This procedure means that those who wish to do business through these companies can have more credibility, given the age of the company.
What risks are linked to offshore companies?
As in the case of the British Virgin Islands, there is the spectre of “tax exchange information agreements” which, to a greater or lesser extent, dissuade clients from setting up a company there since they feel that sooner or later there is a risk of information being exchanged with another country. There can also be risks relating to the stability and reputation of these offshore centres.
Given the advantages, why aren’t more companies established in an offshore jurisdiction?
You should be aware that you can’t do everything with an offshore company. For example, you cannot register a company offshore and do business in Switzerland without paying taxes. In effect, all business generated from the Swiss territory is liable to tax. On the other hand, it is more profitable to create an offshore company with a Swiss subsidiary than to create a limited company. Today you create an offshore company for about €1000 and a subsidiary for about the same amount. As a result you obtain more or less the same services for a cost of approximately 3000 Francs.
Can this procedure lead to tax evasion?
In theory no, since the money generated in Switzerland will be liable to tax. However, it is possible that some companies record their earnings in the offshore company’s accounts in order to avoid these taxes. This is tax evasion and is completely against the law. We mustn’t ignore the fact that some offshore centres are used for this reason, but it’s out of the question for us to encourage clients to do this!
What can you do if you become aware that one of your clients, who approached you regarding fiscal optimisation, was evading taxes?
With regard to us, our role is limited to creating the company and managing it at the administrative level. However, we have a policy of refusing to help with tax evasion.
What are the most important criteria in selecting an offshore jurisdiction?
There are a number of criteria that may lead to a company being incorporated in one jurisdiction rather than another. To begin with, it must enjoy recognised political stability. Next, it must have a good reputation since bank accounts are going to be opened and money managed there. It must also have significant communication resources. Imagine wanting to make major changes to the company and the telephones weren’t working! The corporate laws in force must also be recognised. Costs are another factor. Some jurisdictions increase their costs each year, while others, such as the Seychelles, guarantee the same costs for life! Finally the last but by no means least important factor is confidentiality. You don’t want your company’s data to be made public. Once these criteria have been carefully examined, the list of jurisdictions where it is acceptable to register a company is reduced to 20.