Q. What can Sovereign do for me?

A. Sovereign describes itself as a market entry specialist. We equip businesses with the insight and understanding of new countries that is essential to successful market entry and growth initiatives. We also provide the legal structures and administrative support to maximise their opportunities and achieve long-term sustainability, from full back-office outsourcing solutions to standard tax and regulatory compliance assistance.

We further provide individuals with the knowledge and tools to ensure that they can structure their assets in the most secure, flexible and efficient way to manage, protect and preserve them for future generations. We offer a full range of international wealth management services, such as the formation and administration of onshore and offshore companies, trusts, funds, pensions and other structures to meet the specific needs and objectives of clients.

Sovereign’s consultants combine first-class research and advisory experience with extensive local market knowledge and cross-border expertise. Each project is customised to your specific needs and objectives – there are no pre-packaged solutions – to help you develop optimal strategies for foreign market entry or an expatriate lifestyle.

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 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 that the two directors should be personally liable for the resultant corporate losses. They were ordered to pay $111 million each in damages to the fund’s liquidators. Although the decision was later overturned, it must always be remembered that professional directors are required to perform their duties to a level of skill and care commensurate with their particular knowledge and skill set.

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. 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 above, 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 service providers 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. As from 2018, that information will be transmitted between tax authorities automatically under the OECD’s Common Reporting Standard (CRS).
In April 2016, the UK, Germany, France, Italy and Spain announced a pilot scheme to exchange beneficial ownership information relating to “companies, trusts, foundations, shell companies and other relevant entities and arrangements”. It will be exchanged “in a fully searchable format” and will include “information on entities and arrangements closed during the relevant year. The exchange is to operate as a pilot, during which participating economies will explore the best way to exchange this information with a view towards developing a “truly global common standard”. Ultimately, the system should develop into one of “interlinked registries containing full beneficial ownership information”.

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 Centre attack and the 2008 financial crisis – is that barriers to the exchange of information are in the process of being dismantled. Details of beneficial ownership will therefore be made readily available to tax and law enforcement authorities on a systematic basis but they will not be made publicly available.

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 advantages to using offshore structures that have nothing to do with anonymity but proper advice and correct implementation is essential.

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 without partiality.

Q. Will I have to travel regularly to an IFC?

A. No. There should be no need to travel regularly to your IFC, so your choice need not be constrained by geographical considerations. 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 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 structure 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 and trust service providers based in most 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. 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. As the American judge Learned Hand said in a US Court of Appeals’ decision: “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 – typically by concealing the true facts or failing to complete your tax return correctly. A tax offence occurs when a taxpayer signs an incorrect tax form.


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Europe Focus January 2019

Happy New Year and welcome to Europe Focus, bringing you news and opinions from Sovereign’s offices across Europe, covering…

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Sovereign Trust (Gibraltar) Limited
Tel: +350 200 76173