Conflicting truths: the media and the Panama Papers

Moving beyond the Panama Papers sensational roots, one should not be misled by the dramatic and exagerated information used by the media to capture its audiences attention regarding individuals and financial operators. Despite the questionable accuracy and genuineness of the widely spread information (not to mention the legitimacy of its source), some clarifications should be made about the concept of an offshore company.

The term offshore is used to describe foreign banks, corporations, investments or deposits located outside their national boundaries. Mainly set up as shell companies, the entities exist on paper only without office or employees. Once sold to intermediaries such as international financial institutions as well as prominent law and accounting firms (“the Intermediaries”) based in financial centres like Luxembourg, the registered agent of an offshore company does no longer have control on the ownership and activities of the company it incorporated.

It is perfectly legal and common for companies to establish commercial entities in different jurisdictions for a variety of legitimate reasons, including conducting cross-border mergers and acquisitions, estate planning, personal safety, restructuring and pooling of investment capital from different jurisdictions in neutral legal and tax regimes.

Fundamentally an offshore company is either statutorily exempt from taxation in its jurisdiction of registration, provided that they do not undertake business with persons resident in that jurisdiction (International Business Companies, or IBC’s which may not, for instance, hold bank accounts in their home countries), or an offshore company may be an entity which is not subject to taxation in a country as the tax regime does not consider business activities carried on overseas and none of the profits are repatriated.

Most offshore companies enjoy certain core characteristics:

  • They are broadly not subject to taxation in their home jurisdiction;
  • The corporate regime will be designed to promote business flexibility;
  • Regulation of corporate activities will hence be lighter.

They are legitimately incorporated and must comply with the laws of the countries in which they operate. The absence of taxation or regulation in their home jurisdiction does not exempt the relevant company from taxation or regulation abroad (Some offshore companies are even listed).

Offshore companies are bound by international “know your client” (KYC) protocols and their own domestic regulations and laws. Customers of offshore industry are mainly comprised of professional clients, most of which are regulated in the jurisdiction of their domicile. These Intermediaries abide by their professional obligations to identify the ultimate beneficial owners. These well-established standards oblige the Intermediaries to obtain and hold adequate, accurate and current information on the beneficial ownership of any offshore company which is made available to competent authorities (like regulators or Financial Intelligence Units).