Onshore? Offshore? [Part 1 of 2]

Introduction - Basic Concepts

This is the first part of an article on offshore and onshore financial centres, and what each involves. This article aims to be pretty basic, reducing corporate jargon to a minimum and explaining it where necessarily. The first part of the article will deal with the fundamentals between the two types of jurisdictions, explaining important differences which exist between them. The second part of the article will be a bit more complex. It will enter into more detail on these two types of financial centres, using real examples. It will demonstrate that the difference between these two types of jurisdictions is not as ‘black’ and ‘white’ or as ‘good’ and ‘bad’ as is often demonstrated in the media or by the political and governmental establishments. The reality is much more complex, and some jurisdictions might even surprise the reader in that they often involve more than that which meets the eye.

This article does not aim to take ‘sides’, and does not intend to promote the cause of one type of jurisidiction over the other. Furthermore this article does not aim to be academic. Instead, its purpose is to explain complex mechanisms using simple terminology, allowing even laymen to understand the fundamental concepts.

Very generally, offshore financial centres are usually jurisdictions with little or no tax, specialised in the provision of corporate services to companies incorporated in their territory, having foreign Ultimate Beneficial Owners (UBOs).

A UBO is the person who ultimately owns the company. So, normally this would be the shareholder. However, at times the shares are held by fiduciaries. These are people and/or companies holding shares on behalf of somebody else, the “true owner”. This “true owner” is the UBO.

One of the characteristics of offshore financial centres is that they include a form of ‘ring-fencing’ mechanism protecting the so-called offshore companies (i.e. those companies having foreign UBOs) from other companies found in that jurisdiction which on the other hand would have local resident UBOs. Therefore ‘ring-fencing’ is a legislative measure which differentiates between the owners of the companies, thereby allowing foreign owners to pay little or no tax, whilst taxing people resident in that country at higher rates. Consequently, offshore jurisdictions are often accused of eroding the tax base of other countries whilst being very careful to protect theirs.

On the other hand, onshore financial centres do not differentiate between locally resident UBOs and foreign resident UBOs. Instead they have a rate of tax (traditionally a high rate of tax) which is imposed on everybody indifferent as to their residence.

Furthermore another fundamental difference between the two type of jurisdictions concerns privacy. Offshore financial centres have a reputation for being secretive, making it difficult to understand who are the true shareholders (“owners”) of the companies. They achieve this because the Company Registers are not public, helping to preserve a veil of confidentiality. On the other hand, a public Company Registry would be one which is open to the inspection of the public, where anyone can search for a particular company name and get all relevant information about such company, including its shareholders. However, one must keep in mind that there are also subtle differences between the Registers which are not public. Some registries contain all the information, but are simply not public. Other registries do not contain any information, because that is kept at the registered agents. Registered agents are the people who have to take care of the company in that territory. Finally, there are some jurisdictions where it isn't even the registered agent which maintains this information, but it is the Company itself, in its internal records.

To be continued...