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The offshore banking industry. Multi-level-analysis of Tax-Haven legislations of onshore and offshore governments

Hausarbeit 2018 15 Seiten

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Tax Haven – Offshore Banking




Rationale behind investor’s decisions

Offshore Financial Centres

Offshore banking effect on local governments





In this paper we are presenting a multi-level analysis on the topic of offshore banking industry, more commonly defined as “tax haven”. The goal is to set a theoretic base behind the definitions of “offshore banking” and “tax haven” as well as identify the most important legislations of both onshore and offshore governments which highly impact the size of the offshore banking industry. Finally, we aim to take a glance at different perspectives: local and offshore governments and, on the other hand, companies or individuals who add up to the population using offshore banking. The latter includes naming benefits and disadvantages of every variable of this analysis as well as focusing on real life examples such as Cayman Islands and Cyprus as “tax havens” and US together with EU for law and ongoing campaigns background.

Keywords: tax haven, offshore banking, legislation, taxation, OFC, onshore, Cayman Islands, Cyprus.


In order to understand the concept of this paper, it is important to begin with identifying the main terms used in this research.

By definition “offshore” and “tax haven”, mean countries which provide foreign individuals, investors, corporations and even banks, a possibility to reduce taxation (W.I.S. International, 2017).

In more detail, offshores have banks which are located beyond the origin domain of the investors native country and these banks provide individuals and companies with a big variety of financial services. Furthermore, one of the characteristics of the offshore banks is paying higher interest rate, in comparison with analogue banks onshore. Considering that interest rate nowadays is low, it is possible, in some cases, that the inflation rate might be higher which leads to a loss (Black S., 2014).

Moreover, offshore banking is a well-known term in a modern financial world which indicates a separate finance industry and is described as “haven for individuals’ wealth” (Nyekano S., n.d.). And this is a term which this paper will continue referencing to later on.


How and where offshore banking began and spread out?

According to Jeremy Hodges (2013), the birth of the offshore banking industry can be traced back to Vienna, Austria, in 1815, when during the Vienna Congress the main European countries agreed to recognize permanently Switzerland’s independence and neutrality. As a consequence of an unstable economic and political situation in Europe, many wealthy families and successful merchants partially moved their assets to neutral Switzerland. (Hodges J., 2013)

Ronen Palan (2009), believes that the origins of a tax haven were developed in New Jersey and Delaware, U.S., in 1889, when incorporation laws were liberalized to attract out-of-state corporations to register their headquarters in New Jersey or Delaware by limiting the taxes they were required to pay.

From the end of Great War onward, the Swiss benefited from its neutrality even more. Since the major part of European countries were devastated and their governments implemented fiscal policies (raised taxes) to get more money for reconstruction. Switzerland was lucky to avoid these increased costs and keep a low tax base. That influenced a significant capital flows into the Swiss financial market for tax-related reasons (Black S., n.d.)

In 1925, the U.K. passed a legislation that made it easier for individuals to access financial trust services to keep their financial affairs confidential. (Hodges J., 2013). In 1929, London courts ruled that Egyptian Delta Land and Investment Co. Ltd., a company registered in London and headquartered in Cairo, did not have to pay tax to the U.K. government, setting a precedent for future tax avoidance (ibid.).

A British author and investigator, Nicholas Shaxson (2011) stated that after the Second World War, the U.K. influence on its remaining colonies started to fade out and colonies started transforming towards the secret financial centres with an extreme freedom for private sector operators. (, 2016). Therefore, the agreement between Bank of England and British banks was signed in 1957, the main purpose of the temporary contract was to conduct unregulated deals with foreign customers and dealt in a foreign currency (Nyekano S., n.d.). The connections that offshore banks in these jurisdictions had with the U.K. banks meant that the institutions could legally, easily, and covertly make any financial transactions (ibid.)

According to Santana Nyekano: “The prominence and success of offshore banking were further reinforced by trade treaties that countries entered post the World War II.” (n.d.).

Rationale behind investor’s decisions

Why investors seek offshore accounts?

In terms of the offshore banking, it is possible to group reasoning behind investors’ decisions into four sections.

The first reason is tax avoidance. Offshore banks are usually used to gain additional cash from reducing the taxes payable by changing a host country for core business (Nyekano S., n.d.). For example, a business owner or a company has a 20 percent tax rate on their profit which makes it inefficient and less profitable. In order to pay less taxes, owners go to the offshores.

The second reason corresponds to a high level of security - local authorities are not obliged to share financial information with domestic country (ibid). This is useful because there is a possibility to make another account in order to hide the real business owner. Most often this strategy is used to cover shadow capital which might even be retrieved in illegal ways.

Also, asset protection offered by the tax havens is a big advantage for individuals concerned with the ownership of their property. If a person is exposed to a huge amount of debts and potential lawsuits, one may choose to transfer the ownership of their assets to a foreign entity to keep them out of reaches of the law, by forming private trust companies inside the regions of the tax havens (Jeffrey H. Corbett, 2009). For example, an individual may setup a private trust company in Cayman Islands for an initial registration fee of $7000, thus protecting his riches from the clutches of the law.

Furthermore, investment diversification is an important feature of the offshore banking. A lot of countries limit their residents’ ability to purchase financial instruments internationally. However, offshore accounts are much more flexible and allow the possibility of a truly diverse portfolio establishment. Nigel Green, founder and the chief executive of “de Vere Group” claims that “a well-diversified portfolio should always include several industrial sectors and asset classes, as well as geographical regions. In fact, the majority of finance experts would agree that failure to sufficiently diversify a portfolio is one of the most commonplace mistakes made by investors.” (2017). Therefore, investing offshore provides investors the geographical spread which means diversifying their portfolio in regions of different economic growth.

In conclusion, with these reasons in mind, having offshore bank accounts and keeping your income there sounds like a preferable decision for an investor. IFRS’s (International Finance Reporting Standards) continuous efforts to pressure companies to keep taxing their income inside their home country and high setup costs seem like minor risks compared to the possible rewards. In the eyes of the investor – from the financial standpoint - tax havens are heaven on earth.



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multi-level tax-haven



Titel: The offshore banking industry. Multi-level-analysis of Tax-Haven legislations of onshore and offshore governments