OFFSHORE- COMPANIES -The legal framework

Any company which is incorporated must meet certain legal requirements and criteria in respect of it.

COMPANY NAME

All companies are required to nominate a suitable name that is acceptable to the Registrar of Companies in the jurisdiction in which they wish to incorporate . Reasons for refusal by the Registrar to accept the proposed name are that a company exists already on the Register with an identical or similar name, or contains unacceptable words inferring connection to a Government, Statutory Body, English or Foreign Royal Family, or suggestion that the company is a Bank or Insurance company without meeting the necessary licensing requirements. Permitted names differ between jurisdictions, for example the words "International" and "Trust" are accepted in some jurisdictions, whilst not in others. The availability of any particular name can normally be confirmed within 24 hours by the Registrar of Companies prior to the application for incorporation being submitted.

REGISTERED OFFICE

All properly constituted companies are required to maintain a registered office in their country of incorporation, where they are able to accept the service of official notices, although the registered office is not necessarily the location where the business is actually carried out.

In certain jurisdictions, especially those in the Caribbean area such as the Bahamas, there is a statutory requirement to appoint a "local resident agent" or "local registered agent" who customarily will be located at the registered office, and will be the person responsible for accepting such process or service of official notices. It should also be pointed out that certain jurisdictions also call for the appointment of either or both a resident company secretary, and a local director, who may similarly be located at the registered office of the company.

MEMORANDUM OF ASSOCIATION

The Memorandum of Association will specify what acts the company is legally able to carry out. In certain jurisdictions such as The Bahamas, The British Virgin Islands, and Panama, no "Ultra Vires" rule applies in the case of International Business Company (IBC) type corporate entities, which consequently means they can undertake any lawful business (excluding acting as Banks or Insurance Companies). This effectively is the meaning of a company being "Generally Empowered".

ARTICLES OF ASSOCIATION

The Articles of Association represent the contract between the Company itself and its shareholders, and stipulates the specific rules for the management of the company's affairs and for the conduct of its business. Additionally the Articles of Association gives details of the subscribers who formed the company, including the shares taken up by them and the total authorised share capital and share classes of the company.

AUTHORISED SHARE CAPITAL

The amount of authorised capital is without limit, although in most jurisdictions duty is payable to the Government at the time of incorporation based on the quantum of authorised capital. It is thus normal to state the maximum authorised capital for the minimum amount of duty payable. It is possible subsequently to increase the authorised share capital by board resolution, and the payment of extra duty to the Government.

ISSUED (PAID UP) SHARE CAPITAL

This will normally reflect the total liability of the members of the company, the requirement being that only the minimum required number of shares are paid up (subscribed) and issued.

SHAREHOLDERS

The Shareholders are the legal owners of the company. The minimum number of shareholders is stated in the company legislation for the particular jurisdiction. Shares of different classes, type and values can be issued, subject to authority being given within the Articles of Association .

The method by which the anonymity of the actual owners can be protected is to appoint nominee (or trustee) shareholders, who will hold the shares "under Declaration of Trust" on behalf of the actual beneficial owners. This involves the issue of a legal "trust deed or declaration"

DIRECTORS

The Directors (who need not be shareholders) of the company will be appointed to administer the Company, duly acting on the instructions of the beneficial owners on a day to day basis. Similarly to Shareholders the responsibilities of the directors are set out in the Articles of Association of the Company. Sometimes directors, who will customarily be tax resident in a low tax or tax free jurisdiction so as not to render the company tax resident in the country from where it is administered.

TRUSTS

The concept of "Trust" is unique to "common law" countries and has existed in English law since medieval times. Developed from English Laws of Equity it was widely used in the United Kingdom as both an effective and legal tax planning medium.

As the concept has evolved it has been introduced by legislation into the laws of a number of civil jurisdictions. A trust is generally created by a written document by which the "Settlor" (person who controls the subject assets), transfers the legal ownership of those assets to an independent third party known as the "trustee", who subsequently holds those disposed assets in favour of either known or unknown beneficiaries under the terms of the trust deed.

Customarily a "Protector" could be nominated by the Settlor who will protect the interests of the beneficiaries of the trust.

It must be noted that for a trust to be effective the title to the asset(s) must pass to the trustee(s). If this is not done it could be claimed that the trust was not legally settled and therefore was not properly constituted trust instrument.

Such transfer infers a heavy burden of responsibility on the trustees, who in practice are more commonly the Trustee Departments of Banks or other financial Institutions or Government licensed "Trust Corporations" or "Trustees" of a corporate nature, which would be bonded accordingly by the respective overseas Government.

Modern trust legislation is being constantly improved upon and The Bahamas is regarded as a leader in workable up to date legislation.

Trusts may be used to protect assets from taxation, currency control, potential creditors, or litigious ex spouses. They can provide a means to pass on the settled assets without exposure to inheritance tax or transfer tax.

Many countries are now implementing anti-avoidance legislation to lessen such advantages. It is therefore extremely important that the trust deed is drafted with due consideration being given to anti-avoidance legislation which may exist inv the jurisdiction of residence of either the Settlor or of the beneficiaries.

The Elco Group is fortunate in having two Attorneys on their staff who specialise in all Trust related matters.

TYPES OF OFFSHORE COMPANIES

The efficiently planned use of an individual, or more complex structure of Tax Planning entities, can give many commercial and fiscal advantages to the discerning user. We detail herewith the various general uses of trust entities however we would remind clients that their jurisdiction of tax residence, local anti-avoidance legislation, coupled to the geographical location where, or the type of business for which they intend to use the offshore entity may dictate what jurisdiction or type of structure is more suitable to meet their requirements.

We would also point out that the comments made herein are purely for information purposes and are not meant to constitute legal or other professional advice. Where appropriate we always recommend clients to consult with either legal or accountancy professionals in their country or residence or of the proposed business activity. We regularly co-operate with and advise such professionals in determining a suitable corporate structure to satisfy the specific requirement of their clients.

TRADING COMPANIES

A company involved in import-export business may establish its "Trading Company" in a no tax or low tax jurisdiction. The location of such would depend on the nature and geographical terms of the business itself.

HOLDING COMPANIES

Probably the most common use for holding companies is where an individual does not wish it to be known that he is the "owner" of a particular company he will "adopt a corporate identity" which will become the actual owner. One of the most common (and lowest priced) jurisdiction nowadays for holding companies is the Bahamas.

Another common use for holding companies is the registration overseas of the company as a foreign business venture, either as a wholly owned subsidiary, joint venture, or representative office. Significant tax advantages can also be gained by utilising these companies for the acquisition of residential or commercial property. When owned by a no tax or low tax jurisdiction company personal inheritance tax or capital gains tax on a subsequent disposal may be avoided. The sale of property is effected by the transfer (and sale) of the shares of the company, with the reduction of property purchase costs to the purchaser.

INVESTMENT COMPANIES

Somewhat similar to Holding Companies in terms of the commonly used jurisdictions, Investment Companies rely on the confidentiality aspects of their controlling and beneficial interests. Commonly an "Investment Company" will open a bank account in a no tax jurisdiction and earn interest free of taxation on deposited funds.

Similarly high net worth individuals will incorporate "Investment companies" for holding their own investment portfolio in stocks, bonds, securities etc. in a third country. The investments would be held in the corporate name, thus protecting the ultimate beneficial owner's identity, and their exposure to taxation on trading profits and dividends.

INTERNATIONAL CONSULTANCY COMPANIES

With the movement of certain European Countries and the USA and Canada towards taxing their nationals on their worldwide income, there still exists scope for the self employed professional such as lawyers, architects, designers or business consultants, to employ a company in a second jurisdiction to receive their professional fees since such an entity would be considered a different legal "person" to the consultant.

INTELLECTUAL PROPERTY COMPANIES

Subject to prior planning, no tax or low tax jurisdiction companies can be effectively utilised to reduce taxes on income derived from intellectual property.

SHIPPING COMPANIES

The use of shipping companies can eliminate both direct and indirect taxation on shipping revenue. Over the recent years there has been a transfer of merchant tonnage from the more traditional jurisdictions of Great Britain, Norway and Greece to specialist shipping jurisdictions such as The Bahamas.

CAPTIVE INSURANCE COMPANIES

Captive Insurance Companies have been created by many multi national companies to provide a legitimate method whereby the company may reduce its overall tax liability. The multi-national will establish its own "in house" or "captive" insurance company, so that not only can its insurance risks more effectively be managed, but also reduce its overall tax position and yet maintain control over its insurance expenditure.

BANKING CORPORATIONS

Many offshore banking institutions have been established in low tax Jurisdictions over the last few years. Most of these institutions are wholly owned subsidiaries of` major international banks paying interest to depositors free of withholding or income tax. They commonly are involved in international commercial financing from jurisdictions where there is no exchange control regulations.