Offshore companies. The nature of offshore zones and offshore companies III Legal status, ownership and management of an offshore company. IV Advantages of offshore companies and offshore zones.

University Degree Law

00000681 Company Law

Plan:

I Introduction

II The nature of offshore zones and offshore companies

III Legal status, ownership and management of an offshore company.

IV Advantages of offshore companies and offshore zones.

V Disadvantages and problematic issues of off shores

VI Creation of free economic zone in Navoi region

VII Possible solutions and conclusion

Money has no smell

Titus Flavius Vespasianus.

When Tit, the son of Vespasian1 reproached his father in tax levy on public convenience, Vespasian has brought first money, acquired from this tax and asked whether that money smells. Obviously the answer was no and further this expression became a catch – phrase.

Should a civilized society be indifferent to the money origins, the means of money obtaining or those issues don’t have to bother? Should people set a mind on the question that sometimes “dirty” money can raise an economy of developing state?

In this coursework I want to consider not only the schemes of offshore business conducting, but also problematic issues related to offshore business, which became less popular recently exactly because off shores became a money laundry.

Nowadays, the main objective of the entrepreneurs is not only the profit making, but also legal means of tax exemption, deliverance from currency exchange regulation, import/export quota, other fiscal and bureaucratic problems evading or not paying of the taxes at all.

One of the measures of tax minimization planning is offshore business, which is widely used all over the world. This method can be defined as usage of companies, established in the zones with low taxation in the absence of exchange controls.

The term “offshore” have become widespread in the second part of the XX century. Historically first states who have started the policy of foreign capital attraction and linearization of foreign-economic activity were island states, as Bahamas, British Virgin island, Maine, Cyprus and

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1Titus Flavius Vespasianus, known as Vespanian, 9th Roman Emperor.

others. Later, Lichtenstein, Luxemburg, Gibraltar, Panama, etc have also become offshore zones (the list of offshore centers is attached in appendix). Further, the practice of off shores has illustrated that several territories within the country, as Geneva in Switzerland or Delaware State in the USA can also be offshore zones.

The preconditions of the off shore appearance was intensive development of the high – tech branches. As a result, some changes have occurred in the correlation of the forces in the world economy, some branches have appeared, some disappeared.

The leading factor of some zone to be ranked as an offshore one is maximum liberal views on tax regulations and the opportunity for the registration of nonresident company. Another significant factor is political and economical stability in the region. Meaning that offshore zones should not have rough political events, crises and possibility of coup d'etat. As for economical stability then the national currency has to be stable, there should be absence of inflation, broad terms of import/export.

Besides of those factors, high development of telecommunication and international transport network also has great importance. Language, functioning on the territory is also essential, as well as level of confidential commercial information protection, degree of bank service development.

Undoubtedly, the cost of offshore company support (registration fees, budget deduction and payment for secretary, audit and other services).

Offshore company is a company, incorporated in a foreign nation and does not conduct most of its business in a country where it is officially based2.

Legal status, ownership and management of an offshore company.

The legal structure and operation of an offshore company reflects common law-based limited company.

Having the status of a legal person, an offshore company is quite separate from its owners (shareholders) and managers (directors). This fact often considered as a means of protection against litigation.

As any limited company, an offshore company is ...

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Offshore company is a company, incorporated in a foreign nation and does not conduct most of its business in a country where it is officially based2.

Legal status, ownership and management of an offshore company.

The legal structure and operation of an offshore company reflects common law-based limited company.

As any limited company, an offshore company is managed by a board of directors for the benefit of its shareholders and shareholders have the power to elect the company's directors.

In many offshore jurisdictions, a single person of any nationality can act as both the sole director and the sole shareholder.

Offshore companies can be managed from anywhere in the world.

Most offshore companies are permitted to conduct any business activity that is not specifically prohibited by the legislation of their place of incorporation. A typical offshore company can do what any limited company can:

Open bank accounts worldwide
Own cash, securities, commodities

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2 Retrieved from:

Own real estate, land
Own intellectual property
Trade worldwide

Indispensable conditions of tax exemption are:

The owners of a company have to be foreigners
Offshore company cannot conduct business inside its country of incorporation.

Obviously, offshore companies have range of advantages:

Offshore company can be registered by any person, irrespective of nationality and race. In fact, the whole process on incorporation is much easier, comparatively to other companies.

Management of the offshore company is accessible to every competent businessmen, as it is mostly relates to staff management, working in the company and its bank account.

Many offshore companies are completely tax-free: they are exempt from any taxation on their profits or assets, the one exception being the requirement to pay a small annual license fee.

Offshore company can help in further development of a business. Nowadays, significant part of the currency funds of many companies are on the bank accounts of foreign banks and apparently they help neither businessman nor state. Over the strict system of currency regulation and unstable economic situation in the world the owners of the assets do not want to return them back, is spite of the liability for the irrevocability of the funds. Therefore, offshore company creation is not only the means of tax degression but also possibility to legalize currency assets abroad.

One more advantageous factor of an offshore is that an ideal offshore company does not need to file annual accounts or returns.

Offshore zones also enjoy some benefits:

Effective attraction of foreign investments to national economy.
Promotion of the export potential of the offshore zone country.
Effective employment rate of the population
Improvement of the living standard.

At the same time, offshore zones and companies, incorporated in those zones may cause various problems, onerous for the economy as a whole.

Offshore companies become more and more risky instrument of business conduct and funds keeping. Statistics illustrates that often agreements, signed with firms located in offshore zones are not fulfilled. Most of those companies have bank accounts in biggest financial institutes of the world. For instance, Switzerland banks willingly open bank accounts for offshore companies, as such firms initially created for tax withdrawal. Often accounts of such companies’ funds are accumulated significantly. In Switzerland many offshore companies are used by big local and strong legal entities for setting apart of the bargain with «economically unfavorable» states. Goods and services, being objects of those transactions cause damage to the main company.

When the moment of accountability take place such firms either disappear or get off with meaningless excuses, since they are sure that nothing can threat them.

In case of litigation arbitration proceedings such firms “pump over” their funds, saved on their bank accounts in Switzerland or US to other accounts and when enforcement proceeding pronounce judgment on the sum exaction to the claimant there is nothing to exact. The transfer of the funds happens usually right after defendant receives the arbitrage summon on the legal procedure beginning, with attached claim of the plaintiff.

Offshore companies are not always designed for clear business conducting. Frequently, such firms arrange funds of their counteragents and disappear from the scene, leaving false founders and name, possibly registered in Africa.

International arbitration proceeding is time – consuming and not always applicable for the suffered side. Moreover it is quite expensive in terms of payment for the service of lawyers, arbitrary fines and duties. Furthermore, according to procedural rules only lawyers from those countries are admissible. Hence often the other side refuses from the litigation procedure.

Businessmen from the CIS countries, including Uzbekistan more then 10 years use off shores in their activity. Such firms often use them simply as a “piggy bank” for their funds. They keep money on their banks account with a purpose of saving or further investment abroad. Also businessmen can hide information on the actual owner of the assets and retain a possessory right.

Companies registered in offshore zones are also used in export-import operations. For instance, so as to diminish the article of importation’s price in a custom – house. The typical combinations looks approximately like this: importer from Uzbekistan opens an offshore company, purchases a consignment of goods by real price and then sells it to the main company by distress prices so as to allow it to do a custom clearance on minimal price. Obviously this scheme is criminal, but very popular though. Export procedure also meets similar schemes.

Finally offshore companies serve to corporate computation centers outside the Uzbekistan. Domestic businessmen conduct significant part of the settlement with their business associates via off shores, at last transfer of the payment to somebody else’s offshore account impossible: it should be proved for book - keeping.

Earlier, the address of the company was considered as an address of the head office and a sign of its economical bond. Offshore business has turned this principle inside out. It is assumed that such companies have no right to conduct business on the territory where they have initially been registered. The reason is that almost all off shore companies are small countries and they try to protect their local market from the foreign business. The feature of the legal entity, as independence of the economic interests is also has been putted aside. Most of the offshore companies are used for specific aims and do not have their own economic filling.

Now, the legal control of organizations in various countries of the world is turning back to its origins – respect of the main principles of the legal entities theory.

More often companies, not responding to the traditional features of the legal entities are declared as fictitious and not representing to their owners any limited liability.

World court practice on such issues is developing actively now. For instance, in Russia case of “Yukos” Plc and criminal case of Hodorkovskiy, M. and Lebedev, P. Sale companies of “Yukos”, registered in offshore zones “actually did not have functions and features of legal entities, prescribed in article 48-50 of the Russian Civil Code, namely they did not have detached property, could not independently, without prescription of Hodorkovskiy buy and fulfill an activity, the main object of which was profit maximization ”3.

The most useful advice in that tendency is not to buy company in the risky jurisdiction. It is essential that in the foreign practice (Europe and USA) control and fiscal bodies often try to use measures on exposure and even arrest of the assets kept in offshore bank accounts by their residents.

They also have created system of methods for determination of whether created in offshore zone company has features of legal entity. Therefore now, only owners of firms who can prove that their companies are real legal entities will be protected from tax and expropriation measures.

States with high taxes in the course of struggle with offshore structures started to work out on the features of real legal entity. For instance the term “substance” was introduced. It assumes the degree of companies’ real filling. The mere fact that the company is entered in the corporate list is not sufficient ground for determining it as a real existing legal entity in the country of its registration.

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3 quotation from the inquiry of the Office of General Public Prosecutor of Russian Federation on the criminal case of Hodorkovskiy, M. № 18/41-03.

Besides of the package of constituent documents, company must have some “physical covering”. It has to be linked with the country of registration: director, office, secretary, phone number and fax. Company has to conduct an activity, leave some funds in the country and pay minimal taxes (if they are prescribed). Moreover, there can be economical reason of the firm’s registration in the given state, besides of the desire to minimize taxes. For example, existence of foreign partner, who does not agree to create joint company anywhere, besides his native country. Sometimes it is hard to find qualified staff or it costs more expensive in the country of the founder.

Now in Europe it is hard to receive consent of the tax bodies for a certain work scheme, not proving the “substance” of the company itself and its covenanters.

In Uzbekistan, under the concept of “substance” can be assumed presence of the legal entity features, prescribed in the Civil Code (articles 43-46). Criminal code also prescribes some measures in article 179 “pseudo - business undertakings”. Corpus Delicti sounds as “Pseudo – business undertakings, i.e. establishment of companies and other entrepreneurial organizations without intention to fulfill charter activity with a purpose of loan receiving, profit release for tax exemption or other profit benefiting…”

Furthermore, there are some problems with determinations of tax residency of foreign structures, especially of the offshore companies. The point is that many tax-free financial zones as British Virgin Iceland, Bahamas and others prohibit fulfilling activity of the offshore firms in the country of incorporation. Per se, it is automatically advertised that those firms work beyond the country of registration. Question arises: where companies conduct their activity, where they have to pay taxes and to be registered in tax bodies? English legal concept can give an answer to those questions. It determines the country of residence of organization and by the place of its executive body location and from where the management takes place. This concept is widely used in most of the developed countries.

There is no any law in Uzbekistan, prohibiting businessmen to register their companies in offshore zones. Probably, there is a need of such law issuing with a view to create positive image of Uzbek entrepreneurs, considering all mentioned negative features of off shores above.

In our republic there is a Law “On free economic zones” adopted 25.04.1996. The aim of this law is to create auspicious conditions for foreign investments attraction for organization of modern high – tech manufacture, development of industrial potential.

Free economic zones almost do not have similarities with offshore ones their activity is strictly regulated by the law and controlled by the government. In accordance with this law, the decree “On creation of free economic zone in Navoi region” 02.12.2008 was adopted recently.

Lately, the transparency of financial operations increases and the reason for this is universal issue of the laws, struggling against money laundering. It can guarantee that after 5-10 years or even earlier there will be no islets of secrecy. As a consequence, all realized schemes with off shores usage and other non – residential structures will have to either fully correspond with the legislation or just stop working. This tendency compulsory has to be considered under long – term tax planning and assets protection with foreign instruments usage.

Currently it would be reasonable to transfer long – term schemes of property possession from offshore zones to common countries.

In order to provide secrecy of the business, civil basis (option transactions, offers on shares and others) can be used. For the tax minimization – agreements with tax bodies on reduced tax rate can take place. It already exists in Switzerland, Luxembourg, Austria and Holland.

Obviously every businessman has an objective of profit maximization in the business activity. However how appropriate in modern business the rule “profit by all means”? In my opinion, humanity has left behind the period of initial capital accumulation when those principles did take place. None of the states has to deal with a businessman whose business relates to criminal and possibly somebody’s blood.

Reference:

Ashukin, N., 1955. Catch - words. Moscow: fiction.

Civil Code of Republic Uzbekistan, Tashkent, 01/ 03/1997 № 257-I

Criminal Code of Republic Uzbekistan, Tashkent, 22/09/1994 № 2012 – XII

Decree “On creation of free economic zone in Navoi region”, Tashkent 02/12/2008

Electronic legal database “Pravo”. Version 5.52 V

Investor Glossary .What is offshore company? Retrieved December, 10, 2008 from

Law “On free economic zones”, Tashkent. 25/04/1996

Pettet, B., 2005. Company Law. Great Britain: Longman.

Typical offshore company: structure and features, 2008 Retrieved December, 8, 2008 from

Ubaydullaev, U., 2007. “Off shores become less popular”, Nalogovie I tamojennie vesti, 16 November, p. 7.

Why register as an offshore company? 2008 Retrieved December, 5, 2008 from: