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Where Do You Want to Park Your Money?
Key Factors in Picking a Jurisdiction

February 2020 | By: David I. Faust, Esq.| GDB 2020 Winter Newsletter
Beginning in the 1900s, “financial centers” were established in a wide variety of offshore jurisdictions around the world.  They were essentially tax havens and/or places to park assets away from prying eyes of spouses, governments with restrictions on capital outflows and other creditors.  There was also the “need” for places to place illegal or immorally obtained funds.
Most of such “offshore” jurisdictions were essentially conduits.  They had no business or industry capable of using the funds housed there.  They may be distinguished from places like Switzerland or modern day Singapore, which have robust manufacturing and service industries alongside very friendly tax and asset protection regimes for non-citizens.  The Netherlands and Ireland are examples of other jurisdictions with well-developed manufacturing and service business but which also became tax havens for non-resident entities.  Some U.S. states with low or no state income and estate taxes and asset protection laws which mimic the asset protection laws of offshore jurisdictions also fit this description.
For decades, this byzantine system grew and worked more or less as intended, with a lot of winking and nodding.  Beginning around the turn of the century, it began to crumble.  Why? 
Several factors:  The cracking of the wall of secrecy regarding Swiss accounts, followed by public revelations of “hidden” accounts in Luxembourg, Germany, Panama and elsewhere; better technology which enabled authorities to monitor complex structures and money movement, budget pressures, increasing concerns about not only tax avoidance but also drug dealing, arms dealing, terrorist financing and other forms of money laundering; and the sheer size of the real or imagined hidden or artificially structured schemes.
At least two different challenges to these haven jurisdictions emerged, besides the crackdown on clearly illegal activities, and the carrot and stick approach to egregious tax evasion.
  • One is the challenge to open and transparent “tax planning.”  The best examples of this are US legislation regarding transfer pricing, Controlled Foreign Corporation (“CFC”) and Passive Foreign Investment Company (“PFIC”) rules and, as recently as 2017, new legislation trying to recapture income of US companies which had been – openly and legally – parked offshore.  France and other countries, as well as the European Union itself, are challenging allocations of income to low tax jurisdictions like Ireland, for income allegedly earned elsewhere.
  • Another is the “economic substance” approach: “Prove to me what you are doing in Island X other than placing income there, tax free.”  Question:  Can the economic substance challenge be restated: “We are here because your regulators understand our business and have sensible, sophisticated laws, rules and regulations which permit us to operate transparently as well as profitably.  In this new age of technology, we do not need bricks and mortar for what we do.”
How will this evolve?  There is some tendency among the “offshore” jurisdictions to homogenize their laws and guidelines on this topic, to avoid forum shopping.  There will also likely be some competition.  To the extent that there is competition, those jurisdictions with little or nothing else to offer will most likely have the most “friendly” laws – but may well have limited access to international financial markets and little attraction for all but fringe players.  Do you want to rely on the legal system in Vanuatu or Samoa?  Putting aside access to the international financial markets, will customers/clients be comfortable dealing with entities in such places?
The following key factors will remain in picking a jurisdiction:
  • The acceptance of the jurisdiction in the marketplace for the service product;
  • The regulatory regime;
  • The tax regime – corporate and personal;
  • Political, social and economic stability;
  • Solid banking infrastructure;
  • Lack of corruption; and
  • Professional service providers (bankers, trustees, accountants, attorneys, etc.)
Picking a jurisdiction does not end the matter.  The choice should be regularly reconsidered in light of the constantly evolving environment: an ongoing project with risks and opportunities.