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Glossary offshore terms

Offshore (OS). Offshore is an international term meaning not only out of your country (jurisdiction) but out of the tax reach of your country of residence or citizenship; synonymous with foreign, transnational, global, international, transworld and multi-national, though foreign is used more in reference to the IRS.

Offshore Banking. In popular usage, the establishment and operation of US or HK or foreign banks in such offshore tax havens as the Bahamas and the Cayman Islands.

Offshore Centres. Countries and jurisdictions which most commonly are small islands with little to no resources for revenue, and specializing in the provision of financial services. These centres specialize and focus on offering non-residents more favourable tax environments than those enjoyed in their home territory by means of international trading activities and/or investments via that country. Other beneficial features of offshore centres may include banking secrecy, privacy, various types of discretionary services and other favourable aspects of the legal environment.

Offshore Finance Company. A company organized in a foreign country, almost always in a tax haven country, which handles such financing services as arranging foreign loans in Eurocurrency markets and floating bonds or other forms of indebtedness abroad in United States dollars or other hard currencies. Generally the offshore finance company is created to handle the financing requirements of its parent or related companies but is used occasionally to handle the financing needs of the parent company's distributors or agents overseas.

Offshore Holding Company. A company organized in a foreign country which controls one or more affiliate companies and which manages, administers or services its affiliate companies, usually located outside the country in which the parent company is incorporated.

Offshore Investment Centre (or Jurisdiction). A financial centre used as a foreign base for overseas operations where the investor may move in and out of his investment freely and which fits the needs of the user. Large amounts of financial assets or foreign currencies may be sold without delay at low cost compared with other types of financial centres. An offshore investment centre is also used as a base for such international activities as export-import trading, commodity transactions, mutual and other investment funds, exchange and securities hedging, futures trading for options, calls and puts, and patent and trademark licensing. Once referred to exclusively as the traditional "tax haven", the title given to this type of offshore operation (offshore investment centre or jurisdiction) is now also universally accepted in order to strengthen its image in the worldwide business community.

Offshore Trading Company. A company organized in a foreign country to buy goods from an exporter in one or more other foreign countries and to sell these same goods to importers in other foreign countries. The documents are processed by the offshore trading company and it handles all managerial, administrative and day-to-day financial transactions. The goods are shipped from the seller in one country to the buyer in the other country without ever being shipped or landed in the country where the offshore trading company is located.

Ready-Made Company. See Shelf Company.

Shelf Company. A company that previously has been organized with designated capital and registration costs paid and is placed on an inactive basis, with annual registration, capital and stamp duty fees currently paid but shares held in bearer form and the directors and officers substituted at the time the company is taken off the shelf and becomes active.

Adverse trustee. One who has a substantial, beneficial interest in the trust assets as well as the income or benefits derived from the trust. A trustee that is related to the creator by birth, marriage or in an employer/employee relationship.

Annuitant. The beneficiary or beneficiaries (in a last-to-die arrangement) of an annuity who receives a stream of payments pursuant to the terms of the annuity contract.

Annuity. A tax sheltering vehicle. An unsecured contract between the company and the annuitant(s) that grows deferred-free and is used to provide for one's later years. All income taxes are deferred until maturity of the annuity. Capital gains and income accumulate tax on a deferred basis. Results in a stream of payments being made to the annuitant during his or her lifetime under the annuity agreement. Taxes are paid on the income, interest earned and the capital gains but only to the extent as and when they are received. Currently, there is no annual limit on purchases, but there is no tax credit for purchases. An annuity is not an insurance policy.

Apostille. An apostille is a special seal applied by an authority to certify that a document is a true copy of an original. Apostilles are available in countries which signed the Hague Convention Abolishing the Requirement of Legalization of Foreign Public Documents, popularly known as The Hague Convention. This convention, created in 1961, replaces the time-consuming chain certification process used so far, where you had to go to four different authorities to get a document certified.

Asset manager. A person appointed by a written contract between the IBC (or the exempt company) or the APT and that person to direct the investment program. It can be a fully discretionary account or limitations can be imposed by the contract under the terms of the APT or by the officers of the IBC. Fees to the asset manager can be based on performance achieved, trading commissions or a percentage of the valuation of the estate under his or her management.

Asset Protection Trust (APT). A special form of irrevocable trust, usually created (settled) offshore for the principal purposes of preserving and protecting part of one's wealth offshore against creditors. Title to the asset is transferred to a person named the trustee. Generally used for asset protection and usually tax neutral. Its ultimate function is to provide for the beneficiaries of the APT.

Badges of Fraud. Conduct that raises a strong presumption that it was undertaken with the intent to delay, hinder or defraud a creditor.

Bank of International Settlements (BIS). Structured like America's Federal Reserve Bank, controlled by the Basel Committee of the G-10 nations' Central Banks, it sets standards for capital adequacy among the member central banks.

Bank Secrecy. In most countries one of the terms of the relationship between banker and customer is that the banker will keep the customer's affairs secret. Staff members are normally required to sign a declaration of secrecy as regards the business of the banks. Where numbered accounts are used, their purpose is to limit the number of persons who know the identity of the client. In certain countries (e.g. Switzerland and the Cayman Islands) specific legislation makes breaches of bank secrecy subject to criminal law sanctions. However, in all legal systems (including Switzerland) there are specific cases where the duty of secrecy of a banker is discharged, e.g. where fraud, money laundering and narcotics are involved. The exchange of information clause contained in most tax treaties may enable the tax administration of one treaty country to obtain information concerning bank accounts which its residents have in the other country.

Bearer Bond. A bond issued in bearer form rather than being registered in a specific owner's name. Ownership is determined by possession.

Bearer Shares. Shares in the capital of a company which are transferable by delivery of the certificate. They do not display a shareholder's name but instead grant ownership rights to any individual who is in actual physical possession of the certificate(s). Unlike registered shares, which are transferred by an instrument of transfer and display the shareholder's name on the actual share certificate, the name of the holder is not registered in the books of the company.

Beneficiary. The person(s), company, trust or estate named by the grantor, settlor or creator to receive the benefits of a trust in due course upon conditions which the grantor established by way of a trust deed. An exception would be the fully discretionary trust. The beneficiary could be a charity, foundation and/or person(s) which or who are characterized by classes in terms of their order of entitlement or their hierarchy.

Current Account. An offshore, personal savings or checking account.

Exempt Company. A company exempted from tax or from compliance with specified regulations of the country in which it is established.

Family Limited Partnership (FLP). A limited partnership created for family estate planning and some asset protection. It is family controlled by the general partners. A highly appreciated asset is transferred into the FLP to achieve a capital gains tax reduction. Usually, the parents are the general partners holding a 1 to 2 percent interest. The other family members are the limited partners holding the balance of the interest in the partnership.

Flight Capital. Money that flows offshore and is likely never to return. Flight is exacerbated by a lack of confidence as government grows without bounds.

Foreign Corporation. A corporation organized under the laws of a foreign country and whose parent company in the home country may participate in any percentage of shares of the affiliate corporation.

Foreign Personal Holding Company (FPHC). Different to a controlled foreign corporation. Discuss with your CPA.

Free Zones. Free zones are designated areas which receive special treatment through their exclusion from the area to which the country's normal customs rules apply. A free port is one at which imports may be landed without paying customs duties. The system of free zones or free ports favours export processing, transshipment and entrepot trade since there is no need to pay and then reclaim customs duties. Though free zones are often part of a tax incentive package in what would otherwise be a high tax jurisdiction, they may also be found in tax havens, e.g. Freeport in the Bahamas.

Headquarters Company. A company organized in a foreign country, usually a tax haven, which exclusively services its affiliate companies through managing or administering activities. It does not buy or sell products and does not involve itself in financing activities as may be practiced by offshore holding companies. A headquarters company is a fixed installation belonging to a foreign enterprise or an international company having its registered office in a specific foreign country, selected because its laws permit it to act for the sole benefit of one or more companies in a group for the purpose of performing management control, servicing or coordination functions, usually in a specified geographical area. The eadquarters company generally is allowed a tax deduction by granting permission to base its taxation on a national profit amounting to approximately 5% to 8% of the total operating expenses incurred in the particular country where it is organized to operate as a headquarters company. In some countries, e.g., the Philippines, there is no taxation on income and expenses are not used as any base of computation. In other countries, e.g., France, the headquarters company may be either an incorporated company of the host country or a branch of an international company.

Holding Company. A company whose activity is limited to holding and managing investments or property but not having ordinary commercial or trading activities. The requirements to achieve holding company status vary in different countries (in particular Liechtenstein, Luxembourg, Nauru and the Netherlands).

International Business Company (IBC). A corporation formed (incorporated) under a Company Act of a tax haven, but not authorized to do business within that country of incorporation; intended to be used for global operations. Owned by member(s)/shareholder(s).  Has the usual corporate attributes.

Letter Box Company. A corporation set up in a tax haven with nothing more than a mailing address to take advantage of tax provisions. Severely criticized in many quarters as an evasive measure, the company whose existence is little more than a name-plate has been outlawed in Monaco but is allowed to function in many other havens.

Limited Company. Not an international business company. May be a resident of the tax haven and is set up under a special company act with a simpler body of administrative laws.

Limited Liability Company (LLC). Consists of member owners and a manager, at a minimum. Similar to a corporation that is taxed as a partnership or as an S-corporation. More specifically, it combines the more favourable characteristics of a corporation and a partnership. The LLC structure permits the complete pass-through of tax advantages and operational flexibility found in a partnership, operating in a corporate-style structure, with limited liability as provided by the state's laws.

Trust. An entity created for the purpose of protecting and conserving assets for the benefit of a third party, the beneficiary. A contract affecting three parties, the settlor, the trustee and the beneficiary. A trust protector is optional but recommended, as well. In the trust, the settlor transfers asset ownership to the trustee on behalf of the beneficiaries.

Trust Protector. A person appointed by the settlor to oversee the trust on behalf of the beneficiaries. In many jurisdictions, local trust laws define the concept of the trust protector. Has veto power over the trustee with respect to discretionary matters but no say with respect to issues unequivocally covered in the trust deed. Trust decisions are the trustee's alone. Has the power to remove the trustee and appoint trustees. Consults with the settlor, but the final decisions must be the protector's.

Trustee. A person totally independent of the settlor who has the fiduciary responsibility to the beneficiaries to manage the assets of the trust as a reasonable prudent business person would do in the same circumstances. Shall defer to the trust protector when required in the best interests of the trust. The trustee reporting requirements shall be defined at the onset and should include how often, to whom, how to respond to instructions or inquiries, global investment strategies, fees (flat and/or percentage of the valuation of the trust estate), anticipated future increases in fees, hourly rates for consulting services, seminars and client educational materials, etc. The trustee may have full discretionary powers of distribution to the beneficiaries.


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