During the last weeks we have been bombarded with information about Panama papers, offshore companies and bank accounts in countries of low taxations rate.

First of all it is necessary to recall that it is completely legal to have an account abroad and it is also legal to set up a company in a country of low taxation. The problem comes when the owner of the bank account or the beneficial owner of the company does not inform the Tax Office of the country where he is resident about the incomes he had abroad. It is supposed that if you are resident in Spain you have to declare all your worldwide Income Tax in this country. Summarising, not all the cases of the so-called “Panama-papers” mean fraud.

OFFSHORE ENTITIES: The term offshore company is used in different ways. These companies are usually based on islands (that is why the term “offshore” is used) although many of them are located in mainland, such us Delaware (USA), Andorra. Basically it refers to a legal entity (commercial company) incorporated or registered in an offshore financial centre (also called “tax haven”). The offshore financial centre is a country or jurisdiction that provides financial services to non-residents on a tax rate much lower than the tax rate of the domestic country.

TAX HAVEN: The most popular tax havens are Bermuda, British Virgin Island, Cayman Island (among others). There are intermediate countries (Hong Kong, Singapore) and also other special tax regimes within the EU like Ireland, Netherlands and even the UK (in some cases). In general terms, offshore companies are companies exempted of taxation within their jurisdiction (providing that they do no trade within such jurisdiction) called IBC (International Business Companies) usually incorporated in countries like Panama.

CHARACTERISTICS OF AN OFFSHORE COMPANY: in basic terms, 1) it is not subject to taxation on its home jurisdiction, 2) it is created to promote business stimulation (pay less taxes, banking facilities), 3) the regulation is more flexible than in a developed country. The most important feature is the limited amount of information available to the public and especially to the domestic country of residence of the beneficial owner. In the case of Spain and other EU countries there are Double Taxation Treaties (i.e.: Panama-Spain, whose Treaty was in vigour since 2011) by which it is agreed between the signing members to exchange information. Those countries, then, are not technically considered tax haven due to the possibility of exchange information, if requested.

OFFSHORE COMPANIES ACTIVITIES: Offshore companies are used for various commercial and private purposes, some legitimate and others not (criminal purposes, tax fraud, money laundering). More than 20 years ago many UK residents used to incorporate an offshore company in Gibraltar or Jersey Islands to buy a property in Spain (even nowadays this system is still used). In these cases the activity or the origin of the funds were completely legitimate (generally used by retired couples to buy a second residence in a resort place) being the outcome of the incorporation of such company i.e.: to avoid the payment of high inheritance taxes and tedious inheritance proceedings. Due to the change of legislation during the last 20 years, this type of mechanism is no longer recommendable (although many advisors consider that it is a good system to save taxes). This matter is to be developed in another blog as it exceeds the matter of this one.

REGULATIONS: The use of this type of companies incorporated in a tax haven is controversial due to the opaque nature of many of their businesses and because they are used to keep confidentiality of transactions and individuals. Intermediate uses of offshore companies (such as investments funds) could be considered legitimate or illegitimate depending on the cases. Nowadays due to the Regulation and Directives of the EU and laws in vigour in such EU countries added to the signature of Double Taxation Treaties with countries with low taxation (meaning the exchange of information) the possibility of finance illegal activities is becoming more and more difficult. That is why not all companies incorporated in a low tax jurisdiction countries must be necessary involved in illegal activities.

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