April 2009-Leading Swiss financial newspaper AGEFI writes about SFM

Offshore, or how to optimise your assets legally

The concept

An offshore company is a company established in a jurisdiction with few or no taxes and few or no accounting requirements to be fulfilled. When one of these two criteria is satisfied, we can talk of an offshore centre or jurisdiction, and companies established in these centres become “offshore”. Many jurisdictions such as Cyprus and Gibraltar are now considered to be offshore centres since although there are taxes the rates are very low and avoidance may even be possible. Currently four main areas of offshore centres have been identified around the world. First there is the Caribbean, with the Cayman Islands, British Virgin Islands, Belize, etc. Then there is the African region, which includes the Seychelles and Mauritius since these jurisdictions are, geographically speaking, closest to this continent. It should be noted that in 2008 the Seychelles was the offshore jurisdiction that recorded the largest number of incorporations in the world. It is therefore the jurisdiction that has experienced the greatest growth in the last few years. Finally there is Asia, with the Cook Islands, Singapore, Hong Kong, etc. Currently all offshore companies are located in these four main areas, and there are a total of some fifty jurisdictions.

The most important criteria in selecting an offshore jurisdiction

There are a number of criteria that may lead to a company being created in one jurisdiction rather than another. To begin with, the jurisdiction in question must enjoy recognised political stability. Next, it must have a good reputation (important for business relations and for opening bank accounts). It must also have significant communication resources. You would never consider making major changes to a company where the telecommunications don’t work! The corporate laws in force must also be recognised. Costs are another factor. Some jurisdictions increase their costs each year, while others guarantee the same costs for life! Finally the last but by no means least important factor is confidentiality. What data might be made public about your company? Once these criteria have been carefully examined, the list of jurisdictions where it is acceptable to register a company is reduced to 20.

Offshore companies and legality

Most offshore companies are used in a framework that is perfectly legal. By legal framework I refer to completely recognised policies of fiscal optimisation or estate planning, in particular through Trusts and foundations that are themselves legal instruments. Recognised in England, for instance, which places so much pressure on offshore jurisdictions the law on trusts and their tax benefits is also recognised in many other countries (except for Switzerland). This process allows ownership of all or part of a bank account or real estate assets to be transferred to a Trust. Depending on the type of trust, the person defines who shall be entitled to these assets and he/she no longer has access to them. As the name ‘Trust’ makes clear, this is a method in which trust is essential because the trustee, the person who manages the money, has (almost) complete power over it. Since the money no longer legally belongs to you, you are no longer taxed on it. Generally the Trust then has an offshore company to hold the assets of which it will be the shareholder. In our case, many services involve requests for estate planning or fiscal optimisation. Then there are many offshore companies in the framework of hedge funds that wish to domicile their activities in a fiscally advantageous location. The procedure we carry out is therefore both legal and recognised. Finally, it is also possible to create an offshore company with a branch in Switzerland. The start-up costs will be considerably lower for said branch than for a limited company, while offering more or less the same benefits. Once again, this option allows the company to remain legal while optimising its costs.

Current pressures and the risks

Even if they may be legitimate in specific cases, the pressures are nevertheless largely hypocritical: In effect, very often they come from countries such as the United Kingdom which is, moreover, one of the greatest tax havens in the world. As a result of its trusts, its non-domiciliation and residence benefits, and the Channel Islands, the United Kingdom is probably the country that has allowed the largest amount of tax avoidance to take place in the world. Nevertheless, we think that the facts must be faced. There is also a legitimate aspect to the current pressures facing offshore jurisdictions, since over the last few years many bankers and asset managers have used these offshore centres to receive, in particular, commissions from financial instruments that have themselves gone bankrupt. Clearly, if a manager has received commissions for selling a hedge fund that has subsequently gone bankrupt, it is natural to want to have increased control over these jurisdictions. Of course, if the centres used are centres where the G20 countries do not benefit, they increase their pressure on them and the current crisis allows them to sway public opinion more easily. In the end, while there are legitimate reasons behind these measures, they are more often motivated by the prospects for profits. Be that as it may there always have been, and there probably always will be, offshore centres. While some will close others will open. I am thinking in particular of the British Virgin Islands which were, for a long time, the best known and most used of the offshore centres and which, under pressure, had to sign tax information exchange agreements with several governments, including the United Kingdom, in 2008. As a result the map of offshore centres is constantly being redrawn and is gradually moving to the Middle East and the Asia-Pacific, regions that are less subject to pressure as a result of their size and their importance on the business scene. Indeed, there has been so much pressure on the Caribbean centres that activity has switched to other centres. With regard to sanctions in the context of the current crisis, they have not yet been clearly defined at the moment but everything points to taxation on transfers to tax havens being the most effective of the sanctions. It is moreover in this perspective that the Federal Council has softened its position concerning banking secrecy, since taxing all transfers to the Swiss Confederation would be catastrophic for the country’s industry.