Navigating Offshore Financial Centers: Key Considerations and Potential Pitfalls

Beyond Tax Optimisation

Offshore financial centres are coming under increasing pressure from both the OECD and the European Union. They are seen by many bureaucrats and politicians in OECD countries as facilitating
criminal activities such as laundering drug money as well as tax evasion and tax avoidance by residents of high-tax welfare states. In fact the offshore financial centres have in many cases progressed for reasons other than tax, though without beneficial tax regimes, they may not have progressed at all.

Increasingly offshore financial centres are used for asset protection against the tort liability revolution. Liberalised no-fault divorce laws which give spouses automatic claims to assets regardless of adulterous conduct do not meet with universal moral approval. In many countries, testators are denied freedom to dispose of their estates as they think fit and, increasingly in common law countries, legislation makes it easier for disappointed beneficiaries or others to challenge a ‘will’: usually, at the estate’s cost. Whereas, planning ahead, assets may be moved to vehicles in offshore financial centres to defeat such legislation.

Sometimes governments themselves use offshore financial centres, for example, to trade with other countries when it is not politically correct to do so or to protect themselves against the possibility of sanctions being imposed, such as when Iranian assets were frozen in the United States. Individual investors, such as Taiwanese investing in mainland China, may have similar motives to use offshore centres.

Furthermore, offshore financial centres cater to expatriate investors -including ‘digital nomads’ – who may be working in many countries over time and wish to manage their investments or pension arrangements from one centre.

Additionally, prospectus requirements may influence investment managers in choosing to locate their operations in offshore financial centres. Onshore investors denied access to foreign company prospectuses or life insurance products, may seek to invest via offshore vehicles, moreover, persons planning a company takeover on a stockmarket may not wish to alert the market, particulaly if it’s likely to be a hostile takeover.

As well, multinational groups seeking access to lower insurance premiums through the reinsurance markets may choose to operate captive insurance companies in offshore financial centres, as is often the case the establishment costs and regulatory hurdles in their home juridiction defeat the intended purpose.

Opinions may differ on the morality or otherwise of the use of offshore centres but they do emphasise that tax is not the only, or the most powerful, motivation for the use ofoffshore centres. For that reason, the term ‘offshore financial centre’ is more accurate than ‘tax haven’ as there is often more than one kind of perceived legal inadequacy or repression in the investor’s home or target jurisdiction providing the impetus to locate assets in an offshore vehicle.

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Encroachment of Social Legislation on Private Rights

The growing encroachment of governmental powers poses a significant threat to the rights of individuals and entities to invest freely and preserve wealth. With governments increasingly imposing unnecessary regulations and disclosure requirements, individuals are wise to safeguard their assets offshore to protect against potential confiscation or excessive taxation, of both a direct and indirect nature.

Case in hand, the obvious looming reintroduction of death duties, in countries which abolished them decades ago, or where they never existed, in order to address sovereign deficits further underscores the importance of offshore asset protection for future family generations.

Moreover, the global shift towards a cashless society raises concerns about the erosion of personal and business assets, as governments gain unprecedented control over individuals’ financial transactions and access to their savings, including as to one’s rights to invest or spend their money how they like.

Indeed, as the BRICS currency prepares for introduction, posing a potential challenge to the dominance of the USD and Euro, and thus the stability of satellite currencies, governments may resort to forbidding citizens from acquiring BRICS, effectively exerting dictatorial control over personal and business asset diversifications. Indeed, potential restrictions on currency exchange and investment diversification, as seen in recent policies by countries like Russia and China, highlight the need for precautionary measures.

Accordingly, holding personal wealth and assets, including intellectual property rights, in offshore financial centres serves as insurance against future encroachments on one’s personal financial sovereignty and financial autonomy.