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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.
Choosing The Right Jurisdiction
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:
Low capitalization without statutory minimum capital and reserve requirements;
Loan raising without mandatory debt-equity ratios;
Unrestricted lending activities;
Complete foreign ownership of offshore banks;
Cash management without minimum liquidity rules;
Administration free from excessive reporting obligations;
Non-disclosure of client activities.
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:
Political and economic stability;
Availability of banking and professional expertise;
Access to telecommunications.
Operational Aspects
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:
Deposit taking
Syndicated loans or Eurocurrency under writings
Corporate loan raising
Intra-group lending
Foreign currency management
Provision of confirming finance
Lease finance
Debt factoring
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.
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