Many people hear about offshore banking, but have no idea what it is and how it works. In addition, offshore banking is often (wrongly) associated with criminal activities like tax evasion or money laundering, as there are people who use offshore companies for illegal activities. More on that later. This article explains some fundamentals for beginners.
Tax haven in offshore jurisdiction
Mostly tax havens are sunny islands, which have zero or very low taxes. Some even have special tax systems which exempt foreigners or foreign companies from taxation. They have very strict laws about secrecy and often there are no public registries of companies and their shareholders and directors. That’s why all sounds so secretive.
In Hong Kong, for example it’s possible to form a company which pays no local taxes. To form a Hong Kong company click here. In Switzerland business owners have to pay company taxes, but it is quite low. In Panama, business owners have to pay taxes only on income earned locally (like in Hong Kong) and is also known for strong banking secrecy.
Offshore corporation (or company) is any company formed in a jurisdiction, which is different from the business owner home country. For example, if a business owner is an American and he opens company in Germany to do a business locally, that means this company is an offshore, even though it is not in tax haven.
Offshore company is often used for secrecy, where investors want to stay anonymous and for tax reasons, where offshore company is often exempt from tax.
Offshore Bank Account
An offshore bank account is any account formed in different jurisdiction than owners home country. Most often than not, it is formed in tax haven. In the past offshore bank accounts have been known for strict banking secrecy, however these days most of the old secrecy is gone, due to international treaties and pressures on tax havens.
You may wonder why would you need an offshore bank account then if it is not much different than your local bank account. There are number of reasons, which we discuss here.
A trust is an agreement (contract) between two or more people, where settlor entrusts assets to trustee for the benefit of a beneficiary or beneficiaries.
Trust is not a company, but rather a simple contract.
Foundation is a hybrid of a company and a trust. Foundation is a legal entity, but cannot do commercial activities. Assets in foundation are supervised by a council. There are many structures of a foundation, which is described in its founding documents.
Second citizenship in tax haven can have a number of benefits. Some tax havens offer economic citizenship, where you can obtain a citizenship by investing a usually high amount of money into government designated program, or in some cases by buying real estate.
Money laundering and tax evasion
In the past tax havens were known to be used by a criminals for money laundering and tax evasion, among other reasons. These days however, it is a different story. FATCA by the US and CRS/AEOI by OECD is making tax evasion very difficult.