Criteria for Selecting an Offshore Jurisdiction

In international trade and investment the selection of an offshore jurisdiction requires very careful consideration. It is important to select a jurisdiction that is well suited to specific corporate and personal needs. Most offshore jurisdictions are free from foreign exchange controls and have introduced company legislation to cater for a diverse range of international business requirements.

  • Political and economic situation
  • Essential corporate characteristics
  • Legislation requirements
  • Company law
  • Double taxation avoidance treaties
  • Legal and accounting infrastructure
  • Communications
  • Banking
  • Languages

Political and Economic Situation

The pre-requisites for establishing business or private interests offshore are confidence and corporate security. In order to satisfy these requirements it is important to select a jurisdiction that provides political and economic stability.

Essential Corporate Characteristics

Most offshore and “tax planning” jurisdictions have made efforts to ensure that their company law satisfies the following demands:

  • Limited liability
  • Minimal or optional statutory filing obligations
  • Low capital requirements
  • Nominee shareholders allowance
  • Availability of bearer shares
  • Disclosure of beneficial ownership either not required or limited to special bodies (offshore authorities; central banks)
  • Minimal directors’ liability*
  • Broad range of permitted company names and suffixes to denote limited liability
  • Directors and/or shareholders meetings can be held anywhere in the world
  • No requirement or optional requirement for accounting records to be audited

* DIRECTORS ARE GENERALLY LIABLE FOR THE COMPANY’S ACTIONS. HOWEVER, IN CERTAIN JURISDICTIONS DIRECTORS MAY SEEK INDEMNITIES FROM BOTH THE COMPANY AND ITS BENEFICIAL OWNERS.

Legislation Requirements

The most essential criterion is that legislation should be modern, flexible and well proven. Furthermore, the legislation should preferably guarantee confidentiality and complete privacy with regard to a client’s business dealings. Nowadays there are more than 50 jurisdictions world-wide providing offshore company legislation. Some jurisdictions have introduced new and modern corporate legislation specifically designed for international business; others have amended existing domestic legislation to cater for offshore requirements.

Company Law

There are three main models of Company Law: English Common Law; European Corporate Law; US Corporate Law. Hybrid models of Company Law that are a combination of the above-mentioned models also exist. Let us consider the characteristics of these models.

English Common Law

Company Law based on English Common Law is the most frequent model for classic offshore jurisdictions. Company Law in this case is based on the UK Companies Act 1948. This Act in turn draws on earlier Acts (since 1844) and many other concepts, such as the acceptance of nominee shareholders, based on 19th century Acts. The Joint Stock Companies Act of 1856 introduced the Memorandum and Articles of Association providing incorporation by registration. Examples are the BVI, the Bahamas, Hong Kong, and Belize.

European Corporate Law

European Corporate Law is based on French Law (1864). Usually it is different for a “share” company (with a lower initial capital and a smaller number of subscribers) and a public company (which is allowed to issue publicly negotiable securities).

Incorporation procedures in Civil Law jurisdictions have the following features (compared to English Common Law):

  • An amount of paid-up capital must be subscribed before incorporation
  • A Company’ statutes are essentially a contract between subscribers
  • Procedures are more onerous and time consuming than in English Common
  • Incorporation procedures are carried out by a notary
  • Corporate Law in Civil Law countries demands that the responsibility of a board of directors be shared between an executive and a supervisory board
  • Directors’ powers may be limited
  • A legal reserve may be required
  • Liquidation procedures are time consuming and complex

US Corporate Law

US Corporate Law was formed under the influence of both English and Civil Law. Apart from differences in language, terminology and interpretation, US Company Law differs from English Law in a number of significant ways, including:

  • US Corporations have officers in addition to directors
  • By-laws are often adopted after incorporation
  • Directors are often empowered to change by-laws

Company Law in Liberia, Panama and Nevis has been influenced by US Law.

Double Taxation Avoidance Treaties

The jurisdictions around the world can be divided into two groups: Treaty jurisdictions, and Non-Treaty jurisdictions.

Treaty jurisdiction

Clients wishing to benefit from relief from a double tax treaty must establish a company situated in a Treaty jurisdiction. This is essential for minimum withholding tax on dividend payments and royalties from contracting states. Treaty jurisdictions also convey a non-offshore image and thus provide cosmetic appeal.

Non-Treaty jurisdictions

This type of jurisdiction is mainly used because of the absence of corporate taxes on the company’s profits and usually only requires companies to pay a fixed annual license fee.

It is important to assess the taxation implications for the business and to decide whether a treaty jurisdiction is required. Usually, a treaty jurisdiction is not required for international trade, the movement of goods or most services. However, inward investment into certain countries requires a treaty jurisdiction to minimize the impact of taxation.

Legal and Accounting Infrastructure

Administration of all offshore structures requires both legal and accounting services.

Communications

Since business must be run in an efficient manner, it is important for a jurisdiction to possess modern telecommunication facilities.

Banking

Though offshore companies can open corporate accounts anywhere in the world, it is preferable for many clients to bank in the jurisdiction where their offshore company is domiciled. The banks should be able to meet important requirements, i.e. that a comprehensive range of banking services and access to international banking facilities are available.

Languages

Running the business in English is preferable, though offshore structures are usually capable of providing multilingual services. This concerns the need to exclude any misunderstanding in respect of clients’ requirements.

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