There are many jurisdictions to choose from when looking for an offshore location for your investment, but there is also a great deal of difference in what you actually get. Some are simply offshore tax havens, with little else to offer apart from low or no tax and a veil of secrecy. Others are true international finance centers (IFC), offering a pragmatic regulatory infrastructure, advanced communication infrastructure and expertise with privacy. But how can you spot the difference?
Taxation: Individuals and businesses need to consider a number of factors before they assume no tax actually means no tax. The first issue to address is whether withholding tax applies to interest/dividends or gains. The individual or business in question must also ascertain whether there are double taxation agreements in place between the IFC and their country of residence. It is the interplay between these and other factors that determines whether a final tax charge is actually zero.
An assessment of your resident country’s attitude towards doing business or investing within an IFC is another task that should be completed early on in the process.
Stability: Some offshore jurisdictions that are new to the market are simply looking to capitalize on the world’s huge amount of liquid wealth and they may exhibit little pedigree in financial services. Such locations are often characterized by unstable or volatile political infrastructures and thus what might appear to be a good deal for investors today may not be a good deal tomorrow.
If taxation changes, exchange controls are introduced or unexpected bank failures occur, it may mean the wealth of funds you are trying to optimize becomes inaccessible. It is worth noting that the Isle of Man has the longest continuing parliament in the world and political stability due to an absence of party politics.
Infrastructure: Robust telecommunications are essential to running any modern business. You simply cannot run a modern international trading business or rely on professional advisers without access to data, voice and video communication services. There is a need for professional people who have the knowledge and expertise to coordinate multi-jurisdictional deals and answer your questions accurately. These people are not usually all found in one place.
The IFC landscape
Hong Kong remains a strong offering; the British Virgin Islands and Mauritius are becoming less obvious due to measures respectively taken by the Chinese and Indian authorities. The British Crown Dependencies (Isle of Man, Guernsey, Jersey) that provide capital market listings and private wealth management are now well-established centers. Middle East Oil dollars are heading to the burgeoning financial centers of Qatar, Dubai, Bahrain and others, though these IFC are not currently in the top 21.
Chinese investors intending to incorporate offshore should look at jurisdictions that can add value. For individuals, it is secure and sophisticated personal products that provide peace of mind, as well as protection and offshore wealth accumulation. Transparent pricing through products like international pensions, offshore bonds, property structures, and international trading structures is also important.
For businesses, jurisdictions should offer genuine sector expertise and provide competitive advantages and accurate advice. The connectivity of an IFC, the local time zone, the language skills of workers there and tax considerations discussed above all need to weighed.
Choose a jurisdiction that has a proven track record in the things you are trying to achieve, and use reputable firms of advisers who are properly regulated. Remember to take professional advice regarding your tax position so that the tax rate you expect is what you pay. There is a wide choice out there, so ensure that you make use of it.
John Spellman is director of financial services for the Isle of Man’s treasury. The Isle of Man has earned a strong reputation for expertise in hedge fund management, fund management and administration, captive and life insurance. It is currently ranked 21st worldwide on the Global Financial Centers Index.