Shifting Tides in the Offshore World

Shifting Tides in the Offshore World

Shifting Tides in the Offshore World 2121 1414 Blackpeak

Often reduced as tiny tropical island paradises where the rich hoard their wealth, the offshore world is far larger and more complex than just a network of Caribbean hideaways. Recently, the offshore world has increasingly come under media and regulatory scrutiny following multiple politically embarrassing document leaks. In response, regulators have imposed new disclosure rules for ultimate beneficial ownership on companies in the Cayman Islands and British Virgin Islands (BVI). Now, alternative offshore hubs, such as the United Arab Emirates (UAE), have emerged to provide sought-after alternatives.

Since its emergence some 50 years ago, certain Caribbean islands and select European enclaves have dominated the offshore domicile industry. This dominance took a severe hit with the release of the Panama Papers (2016) and the Paradise Papers (2017), exposing the extensive use of these havens by ultrarich and politically powerful figures to hide wealth from public scrutiny and, in many cases, to evade taxes. In the ensuing backlash, countries around the world demanded regulatory reform and improved disclosure from Caribbean and European corporate registries. These demands gained more political impetus in January 2020 after the Luanda Leaks revealed that Africa’s richest woman had used the offshore world to siphon away huge parts of Angola’s oil wealth.

The public outcry and political fallout caused by these various journalistic leaks culminated in new laws passed in 2019 in the UK’s overseas territories of the BVI and Cayman Islands, under severe pressure from London. The new laws mandate the disclosure of director and shareholder information – but little else – for various entity types, including exempted and foreign companies. Malta and Cyprus, favored European tax havens, also issued comparable laws.

Figure 1: The Offshore Landscape in 2021

The Offshore World

 

Caribbean Shuffle

While the imminent demise of offshore jurisdictions might seem likely, the reality is quite different. In fact, the BVI and Cayman Islands will probably not lose their standing as the leading Caribbean offshore hubs. However, there may be some shuffling of the offshore jurisdiction pack.

Prior to the new laws, what previously distinguished Caribbean offshore hubs from one another really came down to small nuances. Some countries, such as the Bahamas, were regarded as especially favorable for individual investors and family offices, while others, notably the BVI and Cayman Islands, excelled in servicing multinational companies and international investors. The Cayman Islands and the BVI were especially successful due to their statuses as British Dependent Territories, which means that they use English Common Law and are regarded as more stable and reliable than other countries in the Caribbean. The new laws do not affect this reputation.

Of course, it is likely that those using BVI and Cayman Island companies to hide wealth from prying tax collectors will likely look elsewhere to stash their money, and indeed there has been a modest increase in investors leaving these territories. Neighboring countries – including the Bahamas, Belize, Nevis, and Panama – have benefitted from this exodus of discreet wealth since they have yet to adopt the same disclosure rules and already offer similar offshore corporate services.

The bulk of the Cayman Islands and BVI’s business, which comes mostly from multinational companies and large international investors and funds, will not change. This is especially true for public companies, for which discretion is not a priority as leading stock exchanges already impose stricter disclosure requirements on these companies anyway. Both jurisdictions still continue to be popular for incorporating holding companies for initial public offerings, even though the UK Parliament first passed the law necessitating greater transparency in its overseas territories in May 2018.

Offshore Goes Onshore

With increased global scrutiny and political pressure on offshore jurisdictions to improve disclosure and transparency, investors are expected to consider onshore jurisdictions to hold wealth rather than use traditional offshore havens. This is especially true for US and Canadian investors, who have existing access to economic zones that are beginning to rival the Caribbean powerhouses in scale and expertise.

If the function of an offshore hub is to provide a stable and discreet economic environment with low taxes, then North American investors can already easily find that in several existing jurisdictions, including Delaware, Vancouver, or Nova Scotia. While perhaps not pure offshore hubs, these onshore jurisdictions now offer more privacy than the Cayman Islands and BVI and are convenient from a legal and cost perspective.

The convenience of investing domestically is not new to North American investors. Over the past 10 years, North American advisors have seldom encouraged investors to hold money offshore, a trend expected to continue. Moreover, recent years have seen an increase in wealthy foreigners, particularly East Asian investors who hold wealth in favorable North American states and jurisdictions.

Preeminent Emirates

Europe, the Middle East, and Africa (EMEA) are home to numerous offshore hubs – from tax havens in Western Europe to exotic, discreet locations like the Seychelles. Malta and Cyprus have traditionally functioned as the primary offshore locations in the region, given their proximity to Western Europe and the perception of political stability with low taxes and significant privacy.

New disclosure laws in the last two years, however, have made both jurisdictions dramatically less favorable for offshore investment. This has given other economic zones in EMEA the ability to compete – more so than in other parts of the world. The UAE, via its special economic zones, has emerged as a key player in the region, making the country EMEA’s likely new top offshore destination.

Over the past 30 years, the UAE has developed what is now a complex web of offshore hubs. The country has over 40 economic zones, catering to both onshore and offshore investment. All of these zones function either partially or fully as offshore hubs since they allow for 100% foreign ownership, have favorable tax laws, and do not disclose director or shareholder information. Additionally, the country has built supporting infrastructure to attract foreign investment. The UAE has two court systems that observe English Common Law, its corporate registries are English-language friendly, and the country is becoming increasingly politically neutral, especially since having recently recognized Israel as a state.

Ironically, the UAE may not be the best option for high-net-worth Emirati nationals to store their money. Many of the country’s free zones cater to foreign investors and have provisions that limit free zone shell companies from owning property in the UAE. Emirati investors, instead, have traditionally invested outside the region, especially in Southeast Asian countries such as Thailand and Singapore. Nevertheless, the UAE has consistently trended toward having favorable disclosure laws, suggesting that domestic investors may look toward home in the near future.

Further Change in 2021?

The demand for discreet tax havens has consistently outpaced new laws and regulations for the past decade. While that demand is expected to continue for the foreseeable future, 2021 may be an inflection point for the offshore world. On 8 December 2020, the US House of Representatives passed the 2021 National Defense Authorization Act, which includes provisions to prohibit anonymized shell companies. This law, as of 1 January 2021, has since come into effect and will provide a real test of the United States’ power and resolve to regulate the offshore world. It will also likely strengthen legal efforts around the globe to regulate offshore jurisdictions, notably from the European Union.

Seismic moves in the offshore world do not signal the end of tax havens but will make way for new players to enter the market, such as the UAE. No one expects the offshore world to disappear, but it is going to change.

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