The perfect offshore corporate and trust structuring strategy, should one exist, would constitute the ‘holy grail’ of commerce and wealth management.

It would free its employer from the chains of taxation (both domestically and internationally), render assets immune from adverse adjudication and cloak finances with an impenetrable veil of privacy insurmountable by even the most determined and capable of inquirers.

Firms of expensive lawyers and accountants earn fortunes each year from companies and individuals with deep pockets looking for strategies to maximise and preserve their wealth. As a consequence, to this end individuals and companies (particularly those with international interests) are deploying increasingly sophisticated arrangements of offshore agreements, trusts, corporations, foundations, powers of attorney, bank accounts and other mechanisms.

This series of articles will consider some of the common components of offshore corporate and private wealth management strategies typically employed by high net worth individuals and corporations around the world.

What is an ‘Offshore’ Jurisdiction

The term ‘offshore’ generally refers to any territory outside of one’s home jurisdiction. In the context of finance management however, the term refers to a jurisdiction which offers attractive financial and legal incentives to non-residents who assume a legal presence or hold assets there.

These incentives tend to include tax concessions or exemptions together with banking facilities and confidentiality rules which purport to enable non-residents to maximize the value of, protect and conceal their wealth. Examples of the tax concessions available offshore include the complete exemptions for all international business of non-residents offered by Belize, St Lucia and the Seychelles. Other examples include the exemptions from income and capital gains taxation for companies incorporated in the British Virgin Islands and the tax concessions on investment income available in the Bahamas and the Cayman Islands. There are currently in excess of fifty jurisdictions offering such incentives to offshore businesses.

The IBC

An individual or company wishing to establish a presence in an offshore jurisdiction in order to take advantage of the incentives available there usually does so by way of an International Business Company (‘IBC’) incorporated under the laws of the offshore jurisdiction.

In the more popular offshore jurisdictions, an IBC may be incorporated quickly and relatively cheaply. Where privacy is of particular concern to the beneficial owner, the IBC is often incorporated with nominee corporate directors and shareholders thereby obscuring the beneficial owner’s interest in the company. Other mechanisms are available to further enhance the privacy afforded by the offshore arrangements if so required.

It is a common misconception that simply contracting through an offshore IBC circumvents the tax liability that would otherwise have arisen. The tax rules of most ‘normal’ and ‘higher’ tax jurisdictions include anti tax avoidance provisions carefully crafted to prevent the use of offshore entities in the avoidance of taxation of domestically sourced income. For example, Jamaican legislation includes tax withholding obligations and rules specifically applicable to offshore entities which own and deal with immovable property located in Jamaica.

However, notwithstanding such domestic legislation, a properly executed offshore strategy may, in appropriate circumstances, reduce, defer or completely eliminate liabilities that would otherwise arise. Some of the more common uses of IBCs are outlined below. These examples have been substantially simplified and are not specific to Jamaica. The legality and effectiveness of such arrangements will depend on a range of very important factors including the laws of the home and offshore jurisdictions as well as those of the jurisdiction in which the business is conducted. The existence and terms of any applicable double taxation treaties are also critically important, particularly as it relates to the operation of withholding taxes and other anti avoidance mechanisms.

Common IBC Strategies

IBCs are frequently included in a trading corporate group as a distribution, import/export, procurement or sales intermediary. For example, where goods are being sourced from a producer in one country for sale to a consumer in another, an offshore IBC may be used to purchase the goods from the manufacturer for shipment directly to the end consumer. Similarly, IBCs are often used by importers for procurement of goods sourced abroad, and by producers for foreign distribution. The ultimate objective of these arrangements is to accumulate the trading profits in the tax-free offshore jurisdiction. IBCs are also used by professional consultants, athletes and entertainers as service companies through which fee income is accumulated offshore. Contracting through an IBC also reduces the individual service provider’s personal exposure to liability for breach of contract.

Many private investment funds are administered through offshore investment companies. Although the fund’s investments would in many cases be subject to withholding tax or capital gains tax at source, there are a number of investment instruments where no such taxation applies.

IBCs are also used to hold and exploit intellectual property rights. Such offshore IP holding strategies have become less prevalent as a result of the withholding taxes applied on royalty payments at source by most of the higher tax jurisdictions. Depending on the territories involved, a double taxation avoidance treaty may operate to reduce the withholding taxes.

One area in which there appears to be very good scope for offshore structuring is the provision of international electronic services. This is because transnational e-commerce challenges the concept of legal jurisdiction which is traditionally based on clearly defined geographical boundaries – boundaries which are not so easily delineated in ‘cyberspace.’ IBCs are increasingly being used to hold domain names and operate service providing websites from their tax friendly offshore territories.

Perhaps the most popular use of an IBC is to hold shares of subsidiaries and real estate based in other jurisdictions with less friendly tax regimes. However, the utility of IBCs in this regard has declined as a result of the various withholding taxes and rules applicable to ‘immovable property’ imposed by many of the higher tax jurisdictions. Despite these rules, IBCs are still frequently used to acquire and hold property with a view to simplifying the subsequent disposal process. The transfer of shares or real estate held by an IBC may be accomplished by transferring ownership of the IBC itself circumventing domestic red tape. Depending on the jurisdictions involved, this may also save on some legal fees, transfer taxes and duties levied by the state. Where an individual owns a number of assets in different countries, by consolidating ownership through an IBC, estate transfer upon death may become less complicated, expensive and time consuming.

The above examples have been simplified and are provided for illustrative purposes only. Offshore trust and corporate structuring is highly risky and extremely complex. A misconceived or improperly executed strategy may result in severe criminal and/or civil liability. Most jurisdictions, including Jamaica, now have very well developed anti avoidance rules which have significantly limited the tax planning capabilities of IBCs. Individuals or companies seeking to explore offshore options should ensure that they are properly advised by suitably qualified and experienced legal and accounting professionals.

Principal of boutique business law firm Cheeks & Co, Randolph Cheeks Jnr. is a dual qualified commercial lawyer admitted to practice in the jurisdictions of Jamaica and England & Wales. Mr. Cheeks is advises on a range of commercial matters including offshore corporate and private wealth management strategies. Cheeks & Co, through its network of source providers, offers offshore incorporation services in most of the major offshore havens. A keen supporter of Jamaican sports and music, he sits on the board of the Commonwealth Boxing Council. He represents the legal interests of a number of sports and entertainment personalities both locally and abroad in matters of contractual negotiation. Petiteen Cheeks is an ACCA qualified chartered accountant currently based in London. She is employed by an industry leading global online fashion retailer.

W: www.cheeks-co.com, E: rcheeks@cheeks-co.com, Twitter: @CheeksCo.