Offshore jurisdiction: the modern meaning of the phrase

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Today, the phrase ‘offshore jurisdiction’ does not necessarily refer to an insular state located away from the mainland. It must be admitted that this expression used to have negative connotations before. Small island states (offshore countries in the literal meaning of the word) used to attract foreign investors by offering favorable business opportunities to them. One important advantage of registering a company in an offshore country was the opportunity to pay little in taxes there. Another advantage was total secrecy of company ownership information.

Why would these business advantages give negative connotations to the expression ‘offshore jurisdiction’? The opportunity to pay little in taxes annoyed the fiscal authorities of the so-called ‘first-world’ countries. When an avid entrepreneur from the United States or from a Western European country set up an offshore company, he or she could conduct business operations via the company, make profits, and … pay nothing in taxes in his/ her home country! The internal revenue agency could get nothing from the entrepreneur because the revenue was actually external rather than internal.

Business people from all over the world were happy to be able to save on taxes so they registered offshore companies in large quantities. On the other hand, the irritation on the part of their home countries’ fiscal authorities was quite understandable. When you are not getting the money that you should be getting (as you think), you feel ill at ease, to put it mildly.

However, this fact was insufficient for launching a de-offshorization campaign. After all, the tax incentives that international entrepreneurs found in offshore jurisdictions were legal. Every national state (or self-governed territory) has the right to set the tax rates at the level that it desires. The second opportunity that offshore countries offered (to keep the company UBOs’ personal information secret) was abused though. The fact that some offshore-registered companies were used for illegal purposes triggered the international campaign against offshore jurisdictions that started over 20 years ago now.

Sadly, some offshore companies were used for laundering the money earned from drug trafficking or weapon trade. When the names of the real company owners are unknown and when the reporting requirements are lax or non-existent in the country where the company is registered, it is rather easy to use the company for money-laundering purposes. And some criminals did.

This already was an issue of great concern for international law enforcement agencies. To make the matters even worse, offshore companies were also used to finance terrorists. Now, this was something that the international community could not put up with. Tax evasion might be tolerable. Money laundering is a criminal practice but it’s a monetary issue anyway. When people’s lives are threatened, the matter becomes serious indeed. Thus, the ongoing de-offshorization campaign is about preventing terrorism financing in the first place. Combating tax evasion and money laundering is an important supplementary goal too.

As of today, it has become impossible to hide money from fiscal authorities and to conceal the company ownership information. Wherever your company is registered – in a small island country or on the continent – these opportunities are simply unavailable any longer. The world has changed and the meaning of the phrase ‘offshore jurisdiction’ has changed too. In today’s language, an offshore country is not a country with a poor international reputation for hosting tax evaders or helping criminals launder money. Rather, it is a country that offers some perks to foreign investors that they are probably unable to find in their home countries.

Business benefits that can be found in offshore countries

What kinds of perks can you make use of if you register a business company in an offshore jurisdiction (in a foreign country?) First and foremost, there are jurisdictions on the planet that do not charge very much in taxes. Take the Cayman Islands, for example. Officially, it is an overseas territory of Great Britain but it enjoys a high level of autonomy. The Cayman Islands is often referred to as the last tax haven remaining in the world. This is not exactly true because there are other countries that do not put too heavy a tax burden on the shoulders of the foreign business people who choose to register companies there. But taxes in the Caymans are extremely low indeed. Most taxes applied in other states are non-existent in the Cayman Islands. This explains why thousands of international companies, hedge funds, banks, and other sorts of legal entities are domiciled in the Caymans.

Now, the Cayman Islands is an offshore country in the literal sense because it is an insular state located in the Caribbean Sea. Liechtenstein, however, sits on the continent but it is a tax haven too. Did you know that the number of foreign companies registered in Liechtenstein is about twice as high as the number of the Grand Duke’s subjects? Why is this so? Because it makes a lot of economic sense for international entrepreneurs to register companies in Liechtenstein: the taxes are low there. Thus, the Grand Duchy of Liechtenstein is an onshore country in the literal sense but it can also be referred to as an offshore country because it offers serious tax benefits to foreign entrepreneurs.

The Grand Duke takes good care of the wellbeing of his subjects. Every foreign company registered in Liechtenstein shall have at least one local director, in accordance with the legislation. And a company director gets paid. Now think about the correlation between the number of companies registered in Liechtenstein and the number of citizens of the country. Do you wish you were a Grand Duke’s subject?

In any case, an offshore country is not a refuge for criminals. It is a country that offers better business opportunities than most other national states.  

 

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