Offshore corporations explained

Offshore corporations under attack

Incorporation strategies for today

Alternative corporate tax havens

Offshore corporations in a changing offshore world. Alternative tax havens and offshore strategies. Offshore corporations in a changing offshore world. Alternative tax havens and offshore strategies.

End of the offshore company
as we know it?

The tax-free, anonymous offshore company is having a hard time under pressure from high-tax governments who want to see it extinct.

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with Peter Widder

In January 2001 Hubert Ingraham, the Prime Minister of the Bahamas, said:

"The reality is, IBCs, as we knew them, can be no more."

The Prime Minister was referring to an ingenious piece of corporate legislation, previously found in the Bahamas and other offshore havens, which provided for the incorporation of an IBC -- or International Business Company.

As a concept, the International Business Company has become perhaps the most popular form of offshore company in the history of offshore planning. Once we look at the main features of a typical IBC, it is easy to understand why:

  • Tax free;
  • Anonymous ownership: no public register of shareholders, bearer shares allowed;
  • Anonymous management: no public register of directors;
  • Flexibility: broad objects; any business activity except banking and insurance;
  • Ease of use: no admin except once-yearly payment of small annual fee;
  • Quick incorporation: 24 hours.

Hundreds of thousands of IBCs were incorporated in the Bahamas and other offshore havens year after year. Often seen as a cheaper and more flexible alternative to a trust, the IBC grew in popularity as masses of over-taxed and privacy-hungry individuals from around the world realised its potential.

The IBC, in a way, brought the offshore world a whole lot closer to the average man on the street. And this, some would say, was the cause of its eventual downfall.

Offshore under attack

Offshore companies have always been disliked and distrusted by would-be global tax legislators.

For the entrepreneur in the global economy, offshore companies provide a very real tax advantage -- which would you rather pay, 40% or 0% tax? For most first-world governments, offshore companies provide nothing except a very annoying loss of revenue.

Understandably, the undue pressure and continuous intimidation that most offshore tax havens have experienced at the hands of industrialised nations has taken its toll. The offshore landscape has changed dramatically in the last few years, and the age-old, quick-and-easy offshore solutions are gone. The Bahamian IBC is one of them.

Goodbye, Bahamas. We'll miss you

The Bahamas in particular, once one of the world's leading offshore havens, has folded in spectacular fashion.

In June 2000, The Bahamas found itself included on an OECD blacklist of offshore centres practicing so-called harmful tax competition and, at the same time, the Financial Action Task Force, an arm of the OECD, accused it of not taking sufficient action against money launderers.

The government of Prime Minister Hubert Ingraham was galvanized into unexpected action and announced to stunned bankers that it would substantially relax its traditional secrecy laws to permit cooperation with other jurisdictions, including the exchange of tax information with the United States.

Subsequently, a whole new raft of legislation was introduced, sweeping away decades-long traditions of anonymity and bank secrecy.

Changes in the Bahamian offshore company legislation included the banning of anonymous ownership of the more than 100,000 International Business Companies (IBC) registered in the country.

Following the pressure from the US, the Bahamian government went even further and in February 2001 closed two offshore banks and revoked the licences of five others.

Dame Dr. Ivy Dumont, Government Leader in the Senate, commented:

"The Bahamas has sought to preserve, defend and protect bank secrecy as enshrined in legislation in 1965 and strengthened in 1980 for as long as was possible and/or practical... We did not wish to be amongst the first to move. In fact, we determined to be amongst the last and it might be said that we held the line to the end. Now is the end."

But Mrs Dumont was not entirely correct: The Bahamas certainly did not hold the line to the end. In fact, the country was one of the first to surrender. There are many tax havens still fighting -- and at times winning -- what has already been a long series of David vs. Goliath-like battles for offshore freedom.

Whilst most in the offshore industry will miss the Bahamian International Business Company, once such a favourite, it is the Bahamian population that will miss out most due to their government's failure to stand up to intimidation. The author predicts a detrimental long-term effect on the Bahamian economy, which in the past relied on its offshore sector as an important source of cash revenue and employment.

The Bahamas: Not alone

But The Bahamas wasn't the only country to introduce sweeping changes to its offshore corporate legislation; many other popular offshore havens also relented under pressure and said goodbye to legal anonymity for fear of being turned into international outcasts.

The aggressive campaign against the offshore financial industry began in the late nineteen nineties under the direction of the Paris-based Organisation for the Economic Co-operation and Development (OECD).

Through its Fiscal Affairs Committee, as well as through the Financial Action Task Force on Money Laundering (FATF) and the Financial Stability Forum (FSF), the OECD set out to persistently stigmatise, isolate and devastate offshore financial centres worldwide.

The OECD, it might be noted, was founded in 1961 to stimulate the world's economic progress by liberalising free trade and the movement of capital between countries. It has since grown into a huge, money-wasting bureaucracy, funded by those same developed G7 nations that are seeing their revenues shrink as capital moves offshore.

The series of OECD's anti-offshore campaigns has ranged from "recommendations" for legislative change, through the publication of various "name-and-shame" lists of "uncooperative" tax havens, to the threats of economic sanctions.

Phillip Pierre, the minister for financial services in Saint Lucia, in 2000 accused the OECD of trying to "cripple the financial services sector in the Caribbean." This followed mostly ridiculous observations about St. Lucia's offshore financial sector from the OECD itself and its offshoot, the Financial Stability Forum (FSF). The latter organisation claimed that St. Lucia -- a tiny tropical island deriving most of its income from tourism, the cultivation of bananas and the production of cardboard cartons -- posed a potential threat to world economic stability unless its offshore legislation changed!

Behind the Corporate Veil

In November 2001, the OECD staged an offensive against one of the foundations of the offshore business: the offshore company itself.

Under the leadership of Donald Johnston, a former tax lawyer, the OECD published "Behind the Corporate Veil", a 102-page report that attempts to be the basis for stripping away any and all useful offshore corporate legislation, wherever it is detected in the world.

Using the classic OECD tactic of selective presentation of facts to arrive at a pre-determined conclusion, the report questions the legitimacy and purpose of the offshore company as such, arguing that offshore companies have no justifiable role to play in today's world.

This is a significant development, not least because offshore companies are the bread and butter of the offshore financial industry. The majority of asset protection or tax-minimisation strategies use an offshore company or two as their integral part. Without offshore companies, we would have hardly any offshore industry to speak of.

So is this the end?

Let us end with the thought of Giuseppe Tomasi di Lampedusa, the Sicilian author of Il gattopardo:

"If you want things to stay as they are, things will have to change."


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