Q. What can Sovereign do for me?
A. Sovereign provides specialised tax advice with an emphasis on international opportunities. Our services will be of use to anyone wishing to minimise current or future tax liabilities, for themselves, their family or their business. To assist with this, Sovereign establishes and administers secure and efficient corporate and trust structures for expatriates, businesses, entrepreneurs, private individuals and families
Q. What is the difference between tax avoidance and tax evasion?
A. Tax avoidance is doing everything possible within the law to reduce your tax bill. Learned Hand, an American judge, once said in a US Court of Appeals case: “There is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible – nobody owes any public duty to pay more than the law demands.”
Tax evasion means paying less tax than you are legally obliged to – normally by concealing the true facts or failing to complete your tax return correctly. There may be a thin line between the two but, as former UK chancellor Denis Healey put it: “The difference between tax avoidance and tax evasion is the thickness of a prison wall.”
Q. What are the benefits of using offshore structures?
A. Offshore structures can be used to defer or save tax, increase confidentiality and help preserve assets. International Financial Centres (IFCs) were traditionally characterised by low or no taxes, less onerous compliance requirements, and secrecy. Recent initiatives, led by the Organisation for Economic Cooperation and Development (OECD) against financial secrecy and by the Financial Action Task Force (FATF) against money laundering have obliged all IFCs to increase transparency and regulation, and to permit the exchange of information for both criminal and fiscal matters. This means that, under certain prescribed circumstances, the beneficial ownership of an IFC structure can and must be revealed upon request by an inquiring tax authority. But confidentiality will not be of paramount importance to anyone undertaking legitimate tax mitigation rather than illegitimate tax evasion.
None of this means that offshore structures are any less useful but it is absolutely critical to arrange the ownership and management of an offshore structure correctly if they are to be effective. For instance, it is usually imperative that entities are administered by a board of directors that is based offshore. By using a combination of offshore companies, life insurance contracts and offshore trusts, Sovereign is able to create structures that legitimately and legally defer or avoid tax in the taxpayer’s home country. Legal opinions confirming the effectiveness of these structures can be obtained on behalf of clients and are available upon request.
Q. Can I act as a director of an offshore company?
A. Yes, but this will generally make the offshore company liable to tax on its worldwide income in the owner’s home country because the company would then be “managed and controlled” in the owner’s home country rather than in the IFC. For example, an offshore company with UK resident directors will be subject to UK tax on its worldwide income because it is managed and controlled in the UK and the directors would be duty bound to inform the UK tax authority. That’s the law in the UK and the same principle is applied in most high tax countries.
Q. Can I “instruct” the directors of an offshore company?
A. Yes, but by doing so you may be acting as a “shadow director” and the directors would be duty bound to inform the UK tax authority that the company was managed and controlled from the UK. This risk was emphasised in two recent UK Court of Appeal decisions – R v Dimsey and R v Allen – involving a Jersey-based accountant who acted as director of a number of Jersey companies that were beneficially owned by a person resident in the UK. The beneficial owner regularly issued instructions to the Jersey accountant and effectively made decisions on the management of the company. The courts therefore found that the UK person was a “shadow director” and, as a result, that the companies were resident in the UK for tax purposes. It followed that both the accountant in Jersey and the UK resident had failed in their duty to declare the liability of the Jersey companies to UK tax. The beneficial owner was jailed for tax evasion and the Jersey accountant was jailed for collusion for his part in “rubber stamping” the transactions of the companies.
Q. Can Sovereign provide directors?
A. Yes, but you should be aware that there is no such thing as a “nominee” director. Directors provided by Sovereign will consider (and may agree to) commercial suggestions that would be of benefit to the company but they will not act in any way that is improper, illegal or immoral. It is not sufficient for professional directors merely to appear to manage and control the affairs of the company from offshore; they must be able to demonstrate clearly that they do so. Should they delegate their authority back to the beneficial owner, or anyone else for that matter, it would have tax consequences for the company and create potential liabilities for the directors.
This danger was highlighted by the Weavering judgment in the Cayman Islands in 2011 when the Grand Court found two directors (who just happened to be the younger brother and stepfather of the investment manager) of a failed hedge fund guilty of “wilful neglect or default” in exercising their supervisory powers as directors. It said they “went through the motions of appearing to hold regular quarterly board meetings” and “provided an ‘administrative service’ in that they signed documents or took responsibility for documents when asked to do so (by the investment manager) without making any enquiry or attempt to understand their content.” In its decision the court held, for the first time, that the two directors (who were fully indemnified in respect of corporate losses, except as a result of “wilful neglect or default”) should be personally liable for the resultant corporate losses. They were ordered to pay $111 million each in damages to the fund’s liquidators. This judgement has since been quashed on appeal due to a technicality but the general principle remains that directors remain liable for the good governance of the companies for which they act whether they be full time employees, non-executive or otherwise.
Q. Will I lose control of my assets?
A. You will give up direct control of your assets by placing them in the company and, for the reasons explained in the previous answers, this company must be managed and controlled by the offshore directors. But you will retain the ability to regain control whenever you wish because the agreement with Sovereign will state that all officers provided by Sovereign will resign upon request.
Q. What other safeguards do I have where Sovereign provides directors?
A. You must have a certain level of trust in your service provider and for that reason you should only use companies that can demonstrate a good track record of providing fiduciary services. They should also be properly licensed in well-regulated jurisdictions, have professional indemnity insurance, appropriate levels of expertise, integrity and an unblemished reputation. Sovereign can meet all these criteria.
Q. Can I be a shareholder in an offshore company?
A. Yes, but this will also almost certainly have tax consequences. Controlled Foreign Corporation (CFC) rules and other anti-avoidance legislation common to most “onshore” jurisdictions mean that the income and capital gains of an offshore company may be attributed to a shareholder, who will then be taxed on the proportion of profits of the company equal to their percentage shareholding regardless of whether they actually receive any money. There is a duty to declare the shareholding and account for the tax due. For most shareholders, therefore, offshore companies on their own will be ineffective in reducing tax, but an offshore company that forms part of a more complex structure can often be extremely effective.
Q. What if the shares in the offshore company are held by an offshore trust?
A. This may be effective, but in sophisticated jurisdictions the same sort of anti-avoidance legislation will often also apply to offshore trusts thereby rendering them ineffective for deferring or reducing income and capital gains tax. There will generally be a way of structuring an offshore company to be highly effective in reducing tax, but it will rarely be simple. If it were simple, nobody would pay tax!
Q. Can I hold shares in an offshore company anonymously?
A. Shares can be issued to nominee shareholders provided by Sovereign and this would certainly increase the level of confidentiality. However this does not relieve the beneficial owner of their duty to report their interest, if so required, to their home tax authority. The OECD now requires all IFCs to implement exchange of information procedures so that details of the beneficial ownership of offshore companies may be revealed to an onshore tax authority upon request. These procedures were implemented by 2003 in relation to criminal tax matters and by 2005 for civil tax matters. Identifying the beneficial owners of legal persons (companies) and arrangements (trusts) are also key Recommendations of the Financial Action Task Force.
Q. So is there any confidentiality left offshore?
A. All professionals and directors who are entrusted with somebody’s personal or private matters owe a duty of confidentiality to that person. Where professional directors and nominee shareholders are employed, information about beneficial ownership is not available for public inspection. This is the case both onshore and offshore. What has changed in recent years – particularly since the 2001 World Trade Center attack and the 2008 financial crisis – is that barriers to the exchange of information in criminal and fiscal matters are in the process of being dismantled and information regarding beneficial ownership must be passed to any requesting authority to assist that authority “to collect the correct amount of tax from its residents”.
This process has been accelerated by the Financial Action Task Force’s (FATF) Recommendations on anti-money laundering and terrorist financing, the OECD’s initiative on exchange of information, the US FATCA regime and the EU Savings Tax Directive (see section 6.4). It has also been assisted by the purchase, by various OECD governments, of stolen account information from banks in Switzerland and Liechtenstein, together with US legal actions against Swiss banks, particularly the landmark UBS agreement.
Q. If there is no anonymity, why set up an offshore structure?
A. Offshore structures that rely purely on secrecy are probably being used for illegal tax evasion rather than legal tax avoidance. There is nothing illegitimate or immoral in setting up an offshore structure but failure to make the correct reporting to the home country tax authority is illegal and the onshore world is demonstrating a growing intolerance of those who evade tax by failing to make the reports required by law. There are many ways in which an offshore structure can still help to mitigate or avoid tax but proper advice and correct implementation is essential.
Q. How might going offshore affect my beneficiaries?
A. Positively. If you are able to arrange your affairs in a tax efficient way, then beneficiaries under a trust (or a will) stand to receive more than would otherwise be the case. Provided that the planning you undertake is legitimate and compliant with your local tax laws, then large savings in tax can be made to the advantage of your beneficiaries.
Q. Can I protect my assets from creditors?
A. Yes. A properly structured trust will provide some protection from creditors but only if the trust is set up before both the debt has arisen and the facts and circumstances that would give rise to the debt are known. In other words, if you have done something that is likely to lead a creditor to make a claim, it is already too late to set up an asset protection structure. Such structures should be set up well in advance of any creditor claim being contemplated.
Q. Will the costs be prohibitive?
A. No. The fees paid should be a small fraction of the tax savings that will result. The fees you will pay for setting up a particular structure will vary considerably depending on which service provider you use. It is unlikely that the cheapest service provider will be the best but the most expensive may not be the best either. You need to select a service provider that holds professional licences, has professional indemnity insurance, has a proven track record of setting up and administering offshore structures correctly, and which can demonstrate that it has the necessary expertise and resources to provide an efficient and solid service. You must also take into account that there are likely to be two costs involved – the cost of the structure itself and the cost of the advice that leads to the structure being set up and subsequently used. You would be unwise to set up an offshore structure without receiving comprehensive advice about the implications in respect of tax or other matters.
Q. Does it matter where I live?
A. Yes, it matters greatly. Anti-avoidance legislation varies enormously from country to country. It is essential to understand this legislation and how it may affect you and any structure you might set up. Not surprisingly, a structure that is effective, compliant and legal for a resident of the UK may be completely different to a structure that achieves the same result for a resident of South Africa. It is vitally important to understand the legislation in your country of residence and how it affects any offshore structure you may be contemplating.
Q. What do I have to tell my home tax authority?
A. This will vary depending on your country of residence. Sometimes it is possible to create a structure in such a way that your interest in it does not have to be reported. Sometimes it is possible to create a structure that has to be reported but which is still effective. And sometimes it is possible to create a structure that doesn’t have to be reported, but which would be still be effective if it were. The latter is the ideal solution but any of the three possibilities should assist in legally mitigating tax.
Q. What is the best International Finance Centre (IFC) for me?
A. The answer to this will vary considerably depending on a number of different factors:
- Your country of residence;
- Your nationality;
- The purpose for which you are setting up the structure;
- The location of your customers or anybody who deals with your entity;
- The changing perceptions of public opinion and foreign governments – for example, an IFC with a very good reputation may not keep that reputation.
Sovereign has offices or agents in all major IFCs and is therefore well placed to advise on this aspect
Q. Will I have to travel regularly to an International Finance Centre?
A. No. There should be no need to travel regularly to your IFC so the choice need not be limited by geographical considerations. As explained earlier, to be effective for residents of most countries the offshore structure will almost certainly have to be managed offshore. For example, a Hong Kong company could have a bank account in the Isle of Man and directors based in Monaco. The beneficial owner of the company could, subject to relevant anti-avoidance legislation, be resident anywhere in the world and need never actually travel to Monaco, the Isle of Man or Hong Kong. It would however be prudent to visit the service provider that is going to have control over the affairs of your company to make sure that you are compatible and to satisfy yourself that it has the expertise and infrastructure to ensure that your company is run smoothly and effectively.
Q. Is there less regulation offshore?
A. No. Quite the opposite. IFCs, certainly the reputable ones, are more heavily regulated than onshore jurisdictions. For example, a company in the UK that sets up and manages UK companies is not required to have any form of licence or authorisation. The same is not true offshore. Corporate service providers based in IFCs are heavily regulated and are required to obtain a licence before commencing business and to renew that licence every year. The conditions under which licences can be obtained and retained are increasingly onerous.
Q. Why do I have to explain the source of my assets?
A. For many years the leading industrial countries, acting largely through supranational organisations such as the OECD and the FATF, have been trying to combat money laundering, particularly in relation to drug trafficking. This process was accelerated and refocused after 9/11, with the major objective being to prevent terrorists from receiving funds. All financial institutions of any description, both onshore and offshore, now have to identify their clients, monitor their transactions, understand their business and know where, when and how a client has accumulated wealth.
Q. Why do I have to give proof of my identity?
A. For the same reason that you must prove the source of your assets. It is part of the due diligence required before any regulated operator is allowed to take you on as a client. Criminal activities and terrorist financing can only function by having access to untraceable funds. The need to provide due diligence is a source of irritation to many clients (and represents a major cost to the service provider). Unfortunately, there is no way round this. It is a legal requirement to obtain and verify this information before doing business.