AN INTRODUCTION TO OFFSHORE BANKING
Offshore banking can be explained as the carrying on of banking and financial activities in an environment which is essentially free of fiscal and exchange controls i.e. tax havens or low tax areas, commonly referred to as offshore finance centres. These conditions normally would also include favourable banking regulations or banking laws considerably less stringent than those in most domestic jurisdictions.
Offshore banks are used for a variety of purposes.
Frequently they may be formed as a subsidiary of a domestic or international bank to:
Many other offshore banks are created by corporate groups to handle external borrowing or to consolidate intra-group finance or banking transactions. Corporations involved in international trade may use an offshore bank as a foreign or multi-currency management centre. Eurocurrency market underwriting are often raised through captive offshore banks or finance companies.
The activities of international finance companies also fall within the category of offshore banking. These activities may include external loan raising, provision of confirming finance to clients and group entities, discounting or factoring of intra-group and other debts, and tax effective intra-group loans.
The leasing of equipment through an offshore based captive finance company is another useful offshore banking concept. This activity may be for the purpose of providing vendor lease finance to group customers or to fund group asset acquisitions.
BENEFITS OF OFFSHORE BANKING
The benefits of offshore banking can accrue to the banking institution and its clients. Freedom from taxation and exchange controls are important reasons for the formation of an offshore bank and usually these will be of significant advantage and mutual benefit to both the offshore bank and its client.
A tax free or low tax environment will not only allow the offshore bank to generate a better bottom-line but will also provide it with a stable operating base by avoiding the vagaries or contingencies of onshore fiscal policies. The earnings of the offshore bank from currency management, participation in syndicated loans, money market and securities dealings and deposit-taking activities can be protected from the high rates of income taxes applicable in domestic banks or financial institutions which may well be subject to interest withholding taxes imposed by the domestic fiscal authority. However, these can usually be minimised by careful forward planning.
The absence of exchange controls will obviously enable the offshore bank to move funds with a greater degree of freedom and flexibility than from within an exchange controlled area. The offshore bank should benefit from this enhanced flexibility by being able to conclude transactions promptly, particularly in volatile market conditions.
The banking institution which offers offshore banking facilities to its clients should be able to increase its deposit base at a greater rate that its wholly domestic competitors, its clients will benefit by receiving their interest income free of any withholding tax and the lower tax base of the offshore bank should enable it to be more competitive with its interest rates. If the client is also able to structure his own assets through an offshore trust or investment holding company then his interest income may also be free from tax in his domestic jurisdiction and his deposits not subject to onshore exchange controls. The availability of banking secrecy in the offshore banking environment may be a further benefit to the client.
Corporate groups which establish offshore banks benefit in a variety of ways, including the tax advantages outlined above. In general, the corporate group will aim to maximise interest deductions against profits in high-tax areas whilst protecting group interest income from tax by accumulation in an offshore environment The offshore bank is therefore a most effective means of deploying accumulated group funds. Eurobond issues and foreign currency loans are often raised through the medium of an offshore bank to maximise the overall tax effect by enabling the corporate group to disperse the funds as appropriate within the group. Fee income from intra-group confirming finance, discounts from debt factoring and interest derived from leasing or hire purchase transactions can be protected from the high tax rates applicable in the onshore jurisdictions.
By conducting its banking ordinance activities through an offshore bank the corporate group will be able to carry out these operations essentially without interference from domestic regulatory authorities. The absence of banking laws requiring minimum debt-equity ratios, high capitalisation, and arm's length rules as imposed by most onshore central monetary authorities, will undoubtedly be of benefit to the corporate group.
The use of an offshore bank as the currency management centre of a corporate group will provide a flexible and fiscally effective means of controlling foreign exchange exposure. Group exchange gains or losses, whether realised or unrealised, can be consolidated into one entity with resultant cost and administration benefits Overall foreign exchange risk can be reduced and hedging or borrowing costs minimised. Exchange gains, fees, discounts, and interest income can be treated on a group basis in the most tax effective way. Centralisation of the currency management function allows more direct involvement by the group treasurer and the offshore environment permits him greater flexibility.
OFFSHORE BANKING LOCATIONS
The principal criteria in determining the location of an offshore bank are:
Legislation
All countries have legislation which regulates the carrying on of banking activities within their respective jurisdictions and in some cases also extends their authority to the external activities of domestic based banks. Locations which are suitable for offshore banking normally limit their primary regulations to control banking operations within the domestic sphere and provide a more relaxed set of banking rules for activities conducted with non-residents. Many offshore banking centres have a dual licensing system with full licences for domestic banking operations and restricted licences for offshore banks which conduct their banking activities with non-resident entities.
The banking legislation of a suitable offshore banking centre should permit:
Obviously some of these benefits will not be required by all offshore banks, particularly those, which are owned by international banking groups.
The corporate legislation or the offshore banking centre is also an important factor and should complement the banking laws. Preferably the corporate law should be consistent with that adopted in jurisdictions in which the banking or corporate group operates. Special factors, such as anonymity of ownership, corporate secrecy provisions, transfer of corporate domicile and minimal reporting requirements may be attractive for some offshore banks.
Taxation
In order to obtain the benefits previously outlined the offshore bank requires an operating environment which is tax free, has a low tax rate or provides concessional rates of tax to an offshore bank. Normally the former is preferred. The need for specific tax factors will vary with the requirements of the offshore bank. In some instances it may be desirable to utilise double tax treaties. However, in many circumstances they will be of no benefit and their exchange of information provisions may be detrimental to the activities of the offshore bank.
An offshore banking centre which does not impose interest withholding taxes will normally be preferred by clients of the offshore bank and will also be attractive to the offshore bank as interest withholding taxes are often part of its funding costs. The absence of a dividend withholding tax will also be an important consideration for the shareholders of the offshore bank.
Taxes other than income taxes must also be considered. Stamp duty on loan or mortgage documents, receipt taxes and stamp duty on securities transfers can be significant cost factors where appropriate. Capital registration fees and business or banking licence fees should be kept to a minimum.
Exchange controls
The flexible banking policies available under suitable offshore banking legislation will be severely restricted unless they are complemented by free movement of moneys. The offshore bank must be able to move its funds freely through the international banking network and the offshore banking centre should provide direct access to that network.
Other criteria
Various other factors should be considered in selecting a location suitable for offshore banking. These include:
OPERATIONAL ASPECTS OF OFFSHORE BANKING
Formation
The procedures for incorporation of an offshore bank vary in each location. However, most of the more suitable jurisdictions the incorporation of an offshore bank is effected by the usual English law registration system. An application for a permit to incorporate must be lodged together with an application for an offshore bank or financial institution licence. Licence applications must be accompanied by the information specified in the offshore bank guidelines. If the application satisfies the guidelines then a licence will be issued promptly. Normally the application is a confidential document and may be subject to the secrecy provisions of the relevant corporate legislation.
Banking activities
Subject to the terms of its licence the offshore bank will be able to undertake any form of banking activity but the most common offshore banking operations include:
Management
The management and administration of the offshore bank should not be conducted in the domestic jurisdictions of the corporate group and care must be taken to ensure that offshore deposit-taking activities do not breach domestic banking laws. If too many of the management activities of the offshore bank are effected in the domestic locations the offshore bank may be deemed to be carrying on business there through a branch, with adverse consequences under both tax and banking legislation. The management functions should therefore be carried out by the offshore bank.
The offshore bank can either employ its own permanent staff and base them in the offshore location or in another suitable management location. Alternatively it can engage the services of a local trust company or professional management firm who would work closely with the management of the corporate group.
Most offshore banks choose the latter alternative which keeps management on an arm's length basis. It should also be remembered that the appointment of local management in the offshore location will avoid potential complications with tax and banking authorities in the domestic jurisdictions.
THE GLOBAL SOLUTIONS GROUP INC., provides a full range of offshore bank management services and manages a number of international offshore banks, and has many years experience of selecting the most suitable offshore banking jurisdiction for it's clients.
THE GLOBAL SOLUTIONS GROUP INC., has several ready made Licensed Offshore Banks & Financial Companies available for immediate purchase and delivery. Clients wishing to establish or purchase an offshore bank are invited to contact our offices where they will receive prompt and personal attention from an experienced staff.
Offshore banks operate on an offshore basis. Offshore banks provide services only to non-residents of the jurisdiction where such banks are established. For example a Belize-registered offshore bank can provide services to clients from any country, except to permanent residents of Belize. This is the main formal difference between offshore and onshore banks.
What is more important is the environment in which offshore banks operate. Offshore banks carry on banking and financial activities in an environment which is free of fiscal and exchange controls, i.e. tax havens or low tax areas, commonly referred to as offshore finance centers. These conditions normally also include favorable banking legislation which is considerably less strict than those in most onshore jurisdictions.
Offshore banks can be controlled by residents of any country in most offshore banking jurisdictions. It is much easier to obtain a banking license in an offshore location than in strictly controlled domestic jurisdictions. You can enhance your business structure and gain extra advantages compared to your competitors by establishing an offshore bank.
Offshore banks are used in many typical situations. Offshore banks are often established by already existing onshore banking or financial institutions for the following reasons:
Offshore banks are established not only by banking or financial institutions, but also by corporate groups to handle external borrowing or to consolidate the group's financial or banking transactions. For example, when your company is involved in international trade and financial resources are handled through an outside bank, it may seem quite reasonable to establish your own offshore bank. You may well want to use an offshore bank as a foreign or multi-currency management center. Frequently large, and very often, medium sized, companies have their own offshore banks, which handle their liquid assets and current accounts of their branches. Thus, if a group of your companies requires banking services, it really makes sense to establish your very own offshore bank as you can conduct all your transactions with regular clients or suppliers, provide Letters of Credit, etc. through your own bank. The activities of international finance companies also fall within the category of offshore banking. These activities may include external loan raising, provision of confirming finance to clients and group entities, discounting or factoring of the group and other debts, and tax effective corporate group's loans. The leasing of equipment through an offshore based captive finance company is another useful offshore banking concept. This activity may be for the purpose of providing vendor lease finance to group customers or to fund group asset acquisitions.
However, offshore banks are established also to satisfy the needs of small groups or even one person. Offshore banking is traditionally oriented towards fulfilling the needs of the wealthy.
The advantages of offshore banks are two-dimensional. Both - the banking institution and its clients - benefit from the advantages of an offshore bank.
Low tax or tax free environment
Offshore banks are either tax exempt or taxes are reduced to
several per cent of the amount of the profit. This enables
an offshore bank not only to generate a better bottom-line but
will also provide it with a stable operating base by avoiding the
vagaries or contingencies of onshore fiscal policies. No
taxes are levied at the source of income, e.g. on bank interest,
dividends and other similar payments. Expenses are limited
to administrative expenditures and annual dues necessary to renew
an off-shore status. The earnings of the offshore bank from
currency management, participation in syndicated loans, money
market and securities dealings and deposit-taking activities can
be protected from the high rates of income taxes applicable in
domestic banks or financial institutions which may well be
subject to interest withholding taxes imposed by the domestic
fiscal authority. No taxes are levied at the source of
income, e.g. on bank interest, dividends and other similar
payments. Expenses are limited to administrative
expenditures and annual fees necessary to renew an offshore
status.
No exchange control
The absence of exchange control will obviously enable the
offshore bank to move funds with a greater degree of freedom and
flexibility than from within an exchange controlled area.
The offshore bank should benefit from this enhanced flexibility
by being able to conclude transactions promptly, particularly in
volatile market conditions.
Less strict license requirements
The license requirements for offshore banks are simplified to a
large extent and quite a lot of applicants are eligible for such
a license. Unlike the majority of the countries throughout
the world, a foreign applicant does not have to be a "world
class bank" to get a banking license in an offshore
jurisdiction. Such a license could be issued to a small
bank, financial institution, trading company or even an
individual.
More competitive interest rates
An offshore bank is able to increase its deposit base at a
greater rate than its wholly onshore competitors. Its
clients will benefit by receiving their interest income free of
any withholding tax and the lower tax base of the offshore bank
should enable it to be more competitive with its interest
rates. If the client is also able to structure his own
assets through an offshore trust or investment holding company
then his interest income may also be free from tax in his
domestic jurisdiction and his deposits not subject to onshore
exchange controls.
Maximum confidentiality
Offshore banks provide the highest level of
confidentiality. There are some cases, when an anonymous
offshore company opens an anonymous account in an anonymous
offshore bank. This way, triple-layered protection of
confidential commercial information is achieved. Nominee
owners and directors are often assigned to ensure anonymity.
Small amount of required equity capital
In offshore banking jurisdictions, it is significantly lower than
in the onshore locations of the world. For the majority of
businessmen it is the only opportunity to establish a foreign
commercial bank, since other possibilities are unacceptable due
to the requirement of high capital, personnel, reputation and
business-planning of the bank. It is no secret that by
establishing an offshore bank large companies and banks can keep
their expenses low and business opportunities are boosted.
No reserve requirements and liberal bank control
There are no requirements, or they are minimal, on required
reserves, capital structure, liquidity of funds, compulsory
deposit insurance, etc. Auditors' and local agencies' control is
very moderate. Offshore banks are operated via management
companies and other banks on special agreement basis.
Effective currency management. The use of an offshore bank as the currency management center of a corporate group will provide a flexible and fiscally effective means of controlling foreign exchange exposure. Group exchange gains or losses, whether realized or unrealized, can be consolidated into one entity with resultant cost and administration benefits. Overall foreign exchange risk can be reduced and hedging or borrowing costs minimized. Exchange gains, fees, discounts, and interest income can be treated on a group basis in the most tax effective way. Centralization of the currency management function allows more direct involvement by the group treasurer and the offshore environment permits him greater flexibility.
Enormous business opportunities
Eurobond issues and foreign currency loans are often raised
through the medium of an offshore bank to maximize the overall
tax effect by enabling the corporate group to disperse the funds
as appropriate within the group. Free income from the
group's confirming finance, discounts from debt factoring and
interest derived from leasing or hire purchase transactions can
be protected from the high tax rates applicable in the onshore
jurisdictions. By conducting its banking ordinance
activities through an offshore bank the corporate group will be
able to carry out these operations essentially without
interference from domestic regulatory authorities.
In general, the corporate group will aim to maximize interest deductions against profits in high-tax areas whilst protecting group interest income from tax by accumulation in an offshore environment. The offshore bank is therefore a most effective means of deploying accumulated group funds.
The main in determining the location of an offshore bank are:
Taxation
In order to obtain the benefits previously outlined the offshore
bank requires an operating environment which is tax free, has a
low tax rate or provides concessional rates of tax to an offshore
bank. Normally the former is preferred. The need for
specific tax factors will vary with the requirements of the
offshore bank. In some instances it may be desirable to utilize
double tax treaties. However, in many circumstances they
will be of no benefit and their exchange of information
provisions may be detrimental to the activities of the offshore
bank. An offshore banking center which does not impose
interest withholding taxes will normally be preferred by clients
of the offshore bank and will also be attractive to the offshore
bank as interest withholding taxes are often part of its funding
costs. The absence of a dividend withholding tax will also be an
important consideration for the shareholders of the offshore
bank. Taxes other than income taxes must also be
considered. Stamp duty on loan or mortgage documents,
receipt taxes and stamp duty on securities transfers can be
significant cost factors where appropriate.
Capital registration fees and business or banking license fees should be kept to a minimum.
Legislation. All countries have legislation which regulates the carrying on of banking activities within their respective jurisdictions and in some cases also extends their authority to the external activities of domestic based banks. Locations which are suitable for offshore banking normally limit their primary regulations to control banking operations within the domestic sphere and provide a more relaxed set of banking rules for activities conducted with non-residents. Many offshore banking centers have a dual licensing system with full licenses for domestic banking operations and restricted licenses for offshore banks which conduct their banking activities with non-resident entities.
The banking legislation of a suitable offshore banking center should permit:
Obviously some of these advantages will not be required by all offshore banks, particularly those which are owned by international banking groups.
The corporate legislation or the offshore banking center is also an important factor and should complement the banking laws. Preferably the corporate law should be consistent with that adopted in jurisdictions in which the banking or corporate group operates. Special factors, such as anonymity of ownership, corporate secrecy provisions, transfer of corporate domicile and minimal reporting requirements may be attractive for some offshore banks.
Exchange controls
The flexible banking policies available under suitable offshore
banking legislation will be severely restricted unless they are
complemented by free movement of funds. The offshore bank
must be able to move its funds freely through the international
banking network and the offshore banking center should provide
direct access to that network.
Other criteria
Various other factors should be considered in selecting a
location suitable for offshore banking. These include:
Banking activities
Subject to the terms of its license the offshore bank will be
able to undertake any form of banking activity but the most
common offshore banking operations include:
In other words, an offshore bank can carry out all usual banking operations of an ordinary onshore bank. However, in some jurisdictions an offshore banking license is issued on a special condition that the bank may accept deposits from only a limited circle of clients. Usually these are the bank's share-holders or persons mentioned in the bank's charter or license. Such a license is defined as "limited". In this case the bank may have a limited number of clients. Sometimes, an off-shore bank may begin its activities with "limited" operations and widen the spectrum of its services by acquiring a less regulated license in the future.
Foundation documents of an offshore bank usually provide for trust operations. The bank functions as a trustee and manages the clients' securities portfolios. Investment portfolios may include not only financial resources but also precious metals and other assets. Clients are serviced on a trust contract basis.
The following structures are often used: combinations of an offshore bank and an offshore investment fund, or offshore bank and an insurance company. Business activities of commercial banks are becoming more and more international and trust operations constitute a large part of these activities.
Formation
The procedures for incorporation of an offshore bank vary in each
location. However, most of the more suitable jurisdictions
the incorporation of an offshore bank is effected by the usual
English law registration system. An application for a
permit to incorporate must be lodged together with an application
for an offshore bank or financial institution license.
License applications must be accompanied by the information
specified in the offshore bank guidelines. If the
application satisfies the guidelines then a license will be
issued promptly. Normally the application is a confidential
document and may be subject to the secrecy provisions of the
relevant corporate legislation.
Banks with a solid international standing get preferential treatment and certainly can obtain offshore banking licenses in any jurisdiction in the world. However, Eastern European banks for example, even the largest ones, could face some difficulties. It's much easier for them to obtain a limited offshore banking license. Not only large but medium or small sized banks, non-banking companies and even individuals are eligible for an offshore banking license in more liberal jurisdictions like Nauru and Vanuatu in the South Pacific. Usually recommendations from other banks, as well as lawyers and auditors are required to register an offshore bank. Proof of the applicants' solvency and, in some cases, business plan of proposed offshore bank is required.
An off-shore bank must have a registered office, minimum number of Directors and shareholders. A Registered Agent is a must in all offshore banking locations. Management and the accounting department are usually located in the place of the owners' domicile. In some offshore banking locations the management of the offshore bank must actually be located within the jurisdiction.
Management
Business activities of an off-shore bank are often conducted via
its representations (registered or non-registered) around the
world, through which business partners and clients can be
contacted. The management and administration of the
offshore bank should not be conducted in the domestic
jurisdictions of the corporate group and care must be taken to
ensure that offshore deposit-taking activities do not breach
domestic banking laws. If too many of the management
activities of the offshore bank are effected in the domestic
locations the offshore bank may be deemed to be carrying on
business there through a branch, with adverse consequences under
both tax and banking legislation. The management functions
should therefore be carried out by the offshore bank.
The offshore bank can either employ its own permanent staff and base them in the offshore location or in another suitable management location. Alternatively it can engage the services of a local trust company or professional management firm who would work closely with the management of the corporate group.
Most offshore banks choose the latter alternative which keeps management on an arm's length basis. It should also be remembered that the appointment of local management in the offshore location will avoid potential complications with tax and banking authorities in the domestic jurisdictions.
NOTE: If you are a U.S. citizen, as to any tax planning technique described herein, you should consult with your licensed tax attorney or CPA prior to beginning any tax planning.
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