What is “Offshore banking”?
June 17, 2022
2 min read
Offshore banking relates to financial services provided by banks to individuals or companies that do not reside in that location. The Ancient Romans first encouraged it by creating a tax-free port in Delos for merchants. In 1713, Switzerland became a major offshore banking destination by enacting laws on banking privacy. This status was enhanced by the 1815 Congress of Vienna, where Switzerland declared its political neutrality, and its low tax rates in the 1900s during and after the two World Wars.
Both individuals and companies use offshore financial services to organise financial transactions. For the wealthy or those living in lots of different countries, they protect their assets in easy to access, offshore jurisdictions. Companies set up subsidiaries offshore to structure themselves for tax efficiency. If they are organising complex transactions, e.g. an international loan agreement, it can be simpler to set up an offshore purpose vehicle (a company made just for that purpose), instead of directly contracting with the foreign company or bank in their jurisdiction. Law firms often advise clients on which jurisdictions to choose for their businesses and the potential tax liabilities of each location.
An offshore financial centre (OFC) is a jurisdiction where most of the financial transactions are started or controlled by non-residents. These include the British Virgin Islands, the Cayman Islands, and Jersey, who hope to attract international investment with low tax rates, loose regulation, and more privacy.
Tax is the main thing that comes to mind with offshore banking. Offshore trusts are a popular way for wealthy individuals to store assets so that their beneficiaries avoid the worst of inheritance or capital gains tax that might have been charged based on where they live. OFCs are a stable option for keeping assets as you travel and can protect important assets from creditors.
This is why OFCs are often called tax havens. They have gotten a bad reputation since the Panama Papers leak in 2016, which highlighted how big companies, politicians and celebrities hoard and grow their wealth. But taking advantage of lower tax rates is not illegal. Keeping assets in OFCs and declaring them to the tax authorities where you live is not the same as hiding them there to avoid taxes you should be paying (tax evasion, which is illegal). In fact, many of the transactions leaked in the Panama Papers were entirely legal.
For companies, OFCs are a neutral space to facilitate multinational deals. It also provides certainty because many of them have legal systems similar to English law.
But they are not totally in the clear. The Panama Papers did reveal that OFCs were being used for money laundering and organised crime because the transactions can be highly private or even anonymised. Additionally, most people do not have the resources to be ‘smart with money’ and may not think kindly of rich people and companies dodging tax while others struggle with living costs. The debate around offshore banking arguably leans towards the ethical implications of these locations, rather than their legality.
Report written by Meghna Dinesh
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