Ludovic C Verbist is Managing Director of AAMIL Ltd, a corporate financial services provider (www.aamil.com).
So called international financial service centres are no longer the preserve of large corporations but have emerged as a highly credible arena for fiscally prudent family businesses
International financial service centres (IFSCs) are increasingly associated with large multinational companies which use them to structure their deals and ensure cash flows in a fiscally efficient matter. Less focus is given to family or private business, except in the case of private banking or asset management, where assets would be held through an International Business Company (IBC) rather than in the family's own name or numbered account. Not all IFSCs operate in the same way, however, and some are more focused on the needs of family businesses than others.
So what credentials do an IFSC need to fulfil to be considered a valid place to conduct family business? In order to qualify, an IFSC needs to be credible, internationally recognised and have an appropriate and attractive range of financial products on offer.
There are several factors to be taken into account when considering an appropriate IFSC:
- political stability;
- time difference;
- language fluency;
- long-term commitment and strong government support to the international financial services sector;
- excellent telecommunications;
- ease of physical access (usually by plane if not by car);
- no exchange controls;
- a large number of Double Taxation Agreements (DTAs), and possibly Investment Promotion and Protection Agreements (IPPAs),
- leading member of regional governmental organisations;
- financial services sector backed by a strong and vibrant general services sector.
The legal environment and the rule of law must be well-developed, permanent and respected for its role in the stability of commercial and business activities. The laws pertaining to corporations, investment funds, insurance and trusts must be modern and comprehensive. But the legal history and jurisprudence is also important, particularly in matters relating to corporations and trusts.
Bank secrecy and confidentiality are obviously essential. This does not prevent or replace due diligence and knowing one's client. But once the initial acceptance procedure has been completed, strict confidentiality must
Asset protection is another reason wealthy individuals may choose an IFSC. Wealthy individuals and enterprises in countries with weak economies and fragile banking systems may want to keep assets overseas to protect them against the collapse of their domestic currencies and banks, and outside the reach of existing or potential exchange controls. If these individuals also seek confidentiality, then an account in an IFSC is often the vehicle of choice. Fear of wholesale seizures of legitimately acquired assets is also a motive for going offshore. Many individuals facing unlimited liability in their home jurisdiction seek to restructure ownership of their assets through offshore trusts to protect those assets from onshore lawsuits. Some offshore jurisdictions have legislations in place protecting those who transfer property to a personal trust from forced inheritance provisions in their home country.
Taxation must remain low
The level of taxation must remain low. It is worth noting that low or zero taxation is no longer considered by the OECD as being proof of harmful tax competition.
Similarly, the regulatory environment must conform with the accepted standards of financial centres. This includes active legislation on current and crucial issues such as money laundering, terrorism or corruption. There should also be a competent and strong regulatory body, in charge of both the issuing of licences to operators and supervision of laws, ensuring the safety and security of client transactions. The regulator must prevent any 'bad apples' from tarring the reputation of the financial sector of that country.
What about blacklists?
No jurisdiction wants to be included on so-called blacklists. Blacklists have been compiled by two international bodies, the OECD and the Financial Action Task Force (FATF). The aim of the OECD was to combat 'harmful tax competition', and the FATF's goal was to combat money-laundering. All jurisdictions not on the FATF blacklist have agreed to include mandatory customer identification for any financial transaction and mandatory reporting by financial institutions in FATF member countries to the Financial Intelligence Unit in that member State. If an IFSC does not conform to these regulations, it could see restrictions or complete prohibition being imposed on all financial transactions with other countries.
An IFSC wants to be recognised internationally. Any jurisdiction with a sound political, legal and economic environment will be easily accepted by the international community, and its corporate structures accepted.
International recognition will be more successful for those jurisdictions with DTAs. These are an attractive asset where a resident of one country has taxable income arising in another country. These agreements provide that income is taxed either solely in one country or, if it remains taxable in both, the taxpayer's country of residence will grant a credit for the tax paid in the other country.
A tax system where one has either a 'participation exemption' as in Luxembourg, or a territorial tax system (where only locally generated or repatriated income is taxed) such as Singapore, or where one can deduct foreign taxes paid such as in Mauritius, is highly attractive. It allows the customer to accumulate wealth with minimal tax liability. Several 'high-tax' countries have established their own blacklists for companies (and countries) with zero corporate taxation rates. This does not include companies in the same jurisdiction with access to DTAs.
Go with the flow
An IFSC with a respected reputation will attract major worldwide banks to conduct business there. This provides a good endorsement for a family or business when selecting a particular jurisdiction – they know they will have access to good market research and sound banking practices. These banks will also provide e-banking services which means that a family business or corporation can operate their bank account from anywhere in the world.
Investors should consider the range of activities that are likely to be developed in an IFSC. This can range from setting up an IBC-type structure to more elaborate measures such as the creation of a captive insurance company or investment fund. Some jurisdictions are limited to the incorporation of IBCs whose appeal is limited within global business planning.