Offshore countries are typified by having no corporation tax (at least for foreigners), low or no income tax (or a cap on the maximum amount of income tax payable) and an economy principally based on financial services. Offshore centers vary in reputation depending on many factors (some reasonable such as regulatory infrastructure, due diligence requirements etc. and other seemingly fickle such as current media attention and current opinion). Schemes involving offshore centers can be either intelligently structured (based upon advice and legally compliant) or based on non-disclosure (the illegal withholding of information necessary for a correct tax assessment to be reached; a form of tax evasion). Regardless of however structured, offshore centers will always be the subject of attacks from both the media and onshore taxation authorities concerned at tax leakage to such centers. Such attacks have greatly curtailed the usage of offshore centers and have effectively outlawed many of the more dubious offshore practices such as numbered bank accounts and bearer share companies (in most countries at least).
Offshore Structures have become Indefensible
We maintain that the use of offshore structures has (in most cases) become indefensible and their continued usage is now principally advocated only by service providers established in the offshore centers in question. The use of offshore structures will lead in most cases to no legal tax benefit, or to a tax benefit which is legal at the time it is realized but may later become subject to a tax investigation (with its associated costs and reputational stigma). It should be noted that in many onshore countries it is the practice of taxation authorities simply to ignore offshore arrangements and raise assessments against their beneficial owners personally. In a number of high profile European cases against tax authorities defenses raised by beneficial owners (on the basis that their scheme is, or was, legal) have been upheld by Courts only to lead to changes having retrospective effect being enacted by tax authorities under quasi-legislative powers. It is to be noted that in such cases the tax payment remains due as well as penalties, interest and legal and other fees associated with the investigation and/or class action.
Emerging EU Tax Planning
For EU clients Demontford Bell argues for the use of EU countries for tax planning instead of offshore countries in almost all cases for two main reasons: firstly, there are more than ample means to legally reduce and defer taxation whilst at the same time encouraging investment in other member states; and, secondly, such structures cannot come under attack in the same manner as offshore structures since they are protected as matter of international law (the free movement and freedom of establishment principles agreed between member states of the EU). The only disadvantage is that EU financial centers are generally not able to compete with traditional offshore centers in cost, although in many cases costs will be similar (and in absolute terms are still not high) and in the long term benefits greatly outweigh the difference in cost.
Continued Use of Offshore Tax Planning
The continued use of offshore centers for tax planning has not been entirely outmoded and offshore companies can still play a role in tax planning for EU citizens. Examples of where the reduced cost (and often time saving) of using an offshore structure could be legitimately enjoyed include, for example, the express holding of options which may remain worthless but which can be transferred into a more sustainable structure if they are likely to take on value or the receipt or holding of funds which are not taxable (or upon which tax is already paid).