Legitimate Uses For Offshore Companies: Past and Present
Offshore financial facilities have evolved remarkably due to economic globalization, political and economic instability, technology advances and evolution in telecommunications. These dimensions have led to a significant increase in the demand for offshore operations. The offshore company industry has developed into a major international business, linking all regions, comprising, in one way or another, roughly half of the world’s international lending and deposits by value. However, despite the fact that we live in a globalized and open economy that offers numerous options for investments and capital mobility, still offshore companies and offshore financial structures are often in the middle of worldwide controversies, attracting considerable attention which eventually harms the reputation of these financial and trade facilities. The indisputable fact is that these low- tax overseas jurisdictions are an important and indispensable part of the global financial system and the reason, of course, is not their illegal use by some entities. Nevertheless, before seeing the real reasons that offshore companies have legitimate and important uses in the global trade and economy we will first take a look on the origins of these tax-efficient economic zones.
Historically, in order to boost trade, increase capital movement, and secure trade gains, free-tax economic zones were developed, since the 2nd century B.C. in the Mediterranean region and especially in the area of Greece with the Delos island playing the role of the special economic zone. The type of trade that was taking place there, was free of customs duties and it faced no taxes. Important role to this economic regime of that time, played of course the geographical positioning of the island. Throughout the history, the generation of low-tax states always serviced the needs of traders and seamen. From the medieval period to the industrial revolution, the need for friendlier towards the commerce regimes never stopped. The important fact here is that most of the times these beneficial economic zones existed in islands and ports, the places where the real risk takers, the seamen traders were living and working when they weren’t in the sea. By reaching the 19th century and the 2nd industrial revolution with the respective expansion of capitalism, these tax-friendly jurisdictions also grew. It was after the First World War that European and United States tax rates started rising. This, combined with the increased global uncertainty of that period and the easy methods of incorporation in the offshore jurisdictions, led to the growth of these jurisdictions like for instance the ones in the British overseas. In a post-colonization era, and as the economy was becoming more interconnected and the foreign direct and indirect investments grew, the demand for international financial services increased. The Demand for global offshore financial facilities also grew in the 1970s, partially because of the substantial amount of money that petrostates needed to reutilize after OPEC effectively raised oil prices. Moreover, the downfall of the Bretton-Woods system also increased the risks from the exchange rate fluctuation. The international nature of cross-border businesses led to the increase of cross-currency transactions in all the quarters of the world and the need for international management of cash and tax planning by the companies, made the need for offshore companies and offshore structures and financial services to flourish. Of course, in the course of history, there were entities that misused these business friendly offshore facilities in order to promote illegitimate practices and this is something that can only be regulated with global efforts and cooperation between countries. However, there is a global legitimate use and need for these jurisdictions that make the global trade easier and more efficient, especially in a period where the global economic, political and geopolitical risk is elevated.
There is a variety of reasons for the utilization of offshore companies and structures both for legal and physical entities. The focus of this article is on the corporate users of the offshore companies and facilities.
From Holding companies to royalty and intellectual property companies, major financial institutions, shipping companies, middle market companies that seek international expansion, multinational corporations, and conglomerates, they may need at some point of their corporate structuring to conduct their operations through offshore entities that will facilitate the specific characteristics of a particular business need. For instance, it is common practice in the shipping industry to use constantly offshore companies in order to facilitate its global trade and banking needs in the most efficient way particularly when there is the need for a ship registration or for a Flag of Convenience. Another example has to do with treasury management operations. The ultimate goal of treasury management is managing the firm’s liquidity and mitigating its operational, financial and status risk by concurrently taking care of the investment and funding activities. The treasurers of corporations often allocate their money market instruments and cash resources between their subsidiaries which as a process, is regularly carried out through offshore facilities and structures. It is also common for International joint ventures to be often structured as offshore companies when the parent entities want to keep the venture as jurisdiction neutral. Other important legitimate uses for offshore companies is that they can be used as asset holding companies where risky assets are held isolated from the main entity, thus reducing any unnecessary risk transition to the rest of the group. In the case of a company having non-risky assets that it wants to protect from a politically unstable environment where the rest of the firm operates, then with the use of an offshore company can accomplish that goal also. Investment companies also use offshore companies at a great extend in order to invest in derivatives and securities trading without facing regulatory limitations for their investment and trading undertaken risk. Finally, companies expedite their capital raising needs both in equity and debt capital markets, by forming offshore companies. This usually happens as in many occasions, a more efficient and simple structure may be needed or the existing legal framework of the main country of operation, may not support or help the company raise capital in a non-conventional way.
Originally published at alexanderchristodoulakis.ca.