Isle of Man: The Offshore Industry

A quarter of a century ago, there was only a handful of offshore centres, and to many, their use was surrounded in "mystique". Also, there were only a few professionals specialising in offshore practice and those that did, typically made use of only one or two jurisdictions. Over the last twenty years, startling advances in technology and the telecommunications revolution, have made it easier to access offshore facilities - so much so, that today’s offshore industry has developed in to a major global business, spanning all quarters of the world, involving, in one way or another, approximately half of the world’s financial transactions by value.

Consequently, International Financial Services Centres are no longer surrounded by the "mystique" of twenty years ago. They are used globally, twenty-four hours a day, each and every day, as an integral and important part of the world’s financial system.

Over the next few years, there will be major changes in world geo-politics. The current world population is increasing by 90 million a year - 15 million of who are born in China.

Presently, thirty per cent of the world’s working population is unemployed. Additionally, the world’s population is increasingly expecting higher standard s of living and improved work opportunities.

These radically changing patterns in expectations, population and wealth will continue to create political and economic instabilities. Governments in both the developed and the developing world will have no option but to continue to levy high taxes to meet these expectations and the associated costs of providing new and improved infrastructure.

Thus, one does not need a "crystal ball" to see clearly that the offshore industry will continue with its rapid development and growth.

The users of International Financial Services Centres are becoming increasingly demanding. They expect high quality service at a reasonable cost, and access to sophisticated investment services - as well as confidentiality.

Tomorrow’s offshore users will be looking for centres that can compete with today’ s onshore financial centres in the following areas:

• Regulation.
• Communications.
• Specialisation.
• Credibility.
• Infrastructure.
• Stability.
• Expertise.
• Flexibility.

We define the term "International Financial Services Centre" as a business location possessing elements of the following four characteristics:

• Business is transacted mainly with non-residents.
• Financial regulation and corporate legislation are designed to attract international business.
• Confidentiality in financial affairs is paramount.
• Advantageous tax regimes are deliberately managed.

The principal motivations behind the demand for offshore services from both individuals and corporations are:

• Tax Minimisation.
• Asset Protection.
• Risk Management.
• Cost Reduction.
• Confidentiality.
• Asset Enhancement.
• Escape from bureaucracy and over regulation.

With global instability, currency fluctuations and political uncertainties set to continue, our clients’ needs will be not only to minimise their global tax exposure, but also to protect and preserve their assets and investments in safe havens. Thus, risk management has become as important a motivation for using International Financial Services Centres as international tax planning.

In 1997, some 60,000 or so offshore companies were incorporated in the various Caribbean centres. The most popular jurisdiction is the BVI whose registrar has incorporated approximately 200,000 IBC companies in the last ten years. Some 35,000 IBC’s were incorporated there last year.

It is estimated that 15,000 companies a year are incorporated in Hong Kong for offshore purposes and another 50,000 or so in the other offshore jurisdictions.

This means that the total number of companies formed for offshore purposes exceeds 130,000 per annum.

Over the last twenty years increasing client demand for offshore facilities has not only resulted in an ever growing number of International Financial Services Centres but also in more competition amongst the existing centres.

The political and economic catalysts that influenced the growth of the offshore industry in the eighties and nineties will continue to influence growth in the next two decades.

These catalysts are:

• Political and economic instability.
• Market globalisation and deregulation.
• The internationalisation of business.
• The lifting of trade barriers.
• Trends towards steady global economic growth.
• A global relaxation of foreign exchange controls.

In addition to political and economic catalysts, there are also global tax related catalysts that continue to influence the growth of the offshore industry.

These include:

• High tax regimes.
• More effective tax recovery.
• The opportunities of utilising double tax treaties.

What are the profiles of the users of International Financial Services Centre facilities?

Individual Users
High Net Worth Individuals.
Immigrants and Expatriates.

Corporate Users
Financial Institutions.
Large Companies.
Specialist Corporate Users.
Owner Managed Businesses.

Traditionally high net worth individuals originated from Europe and North America. Today, substantial new wealth is being generated in Asia and South America.

This trend is likely to continue well in to the next century.

Today’s high net worth individuals are much more demanding and financially sophisticated than those of a decade ago.

Immigrants and expatriates are another important category of individuals using IFSC facilities.

Immigrants are individuals who have moved from one country to another.

Expatriates are individuals living away from their home countries, and who express a desire to return there some time in the future.

Immigrants and expatriates are motivated to move away from their home countries by factors such as:

• The desire to escape from social, political, economic or other forms of instability.
• The search for a better quality of life.
• Foreign employment.
• The pursuit of business opportunities.
• Tax efficiency.

By way of example, there are estimated to be over four million British citizens resident outside the United Kingdom. Furthermore, between fifty and one hundred thousand British citizens go abroad to work every year.

The flow of immigrants and expatriates continues to change with new groups becoming more significant in relation to the numbers flowing to and from Western Europe. For example, over the last few years nearly 12,000 Russians have established residence in Cyprus.

The numbers of expatriates and immigrants are certain to increase, as living or working abroad becomes less difficult - and, as business becomes more international and less constrained by national boundaries.

Corporate users fall under four broad headings:

• Financial Institutions.
• Large Companies.
• Specialist Corporate Users.
• Owner Managed Businesses.

As we move in to the 21st Century, there will be major developments in the use of International Financial Services Centres by financial institutions. By way of example we will consider the insurance, fund management, pension and private banking sectors.

Life and composite insurance companies are increasingly making extensive use of IFSC facilities. A significant opportunity has recently arisen in this area resulting from the completion of the European Union’s single market in insurance. Under the European Unions’ Third Life Directive - life assurance companies established in one Member State are able to sell products to clients in other European Union countries.

With the diversity and range of global investment products, there has been an ever increasing growth of funds.

The growth in offshore funds will continue as cross-border investment activity, due to factors such as European Monetary Union and the emergence of China and Brazil as economic powers, is growing at a spectacular rate. The capital base of offshore funds is now increasing at twice the rate of US domestic funds, and this has attracted an increasing number of US fund managers to the market.

The dismantling of the Eastern Block and the easing of international trade barriers have opened a wide range of new markets. Such opportunities have led financial institutions to develop funds, such as: The India Fund, the Chile Fund, the Israel Fund and the Vietnam Fund - all of which have been launched through offshore vehicles.

The growth in offshore mutual funds has encouraged centres to develop their infrastructure and regulatory systems in line with internationally accepted standards. It has also led to the need for specialist professional expertise in such centres. This includes not just the provision of expert advice but also full administrative services, including global custody.

It is predicted that a pan European market for the provision of pension will emerge that will present opportunities for centres such as Ireland and Luxembourg.

Major international banks have long recognised the attractions in establishing private banking operations in International Financial Services Centres.

Other major corporate users of IFSC’s are multinational companies.

For many years, multinational companies have used centres to establish companies for their international business activities. The main areas that these companies utilise International Financial Services Centres are shown here.

• Establishing holding companies.
• Structuring foreign direct investment.
• Owning intellectual property rights.
• Setting up headquarters companies.
• Establishing physical operations.
• Capital raising exercises.
• Obtaining stock market listings.
• Managing treasury operations.
• As domiciles for captive insurance companies.

Examples of Specialist Corporate Users include shipping and aviation companies. Since the 1920’s, shipping companies have been using offshore shipping centres for ship ownership, registration and management. Open registries, are one of the oldest features of this industry. There are three types of open register:

• Independent Registers.
• Dependency Registers.
• Offshore Registers.

An "independent register" is one run by sovereign states. The Panamanian Register is an example of an independent register and since the 1920’s, Panama has been one of the most popular location s for the registration of US owned vessels.

Liberia is another well-known independent register since the establishment of its registry in 1949.

The Cayman Islands and other British ports of registry are examples of dependency registries as their basic law and standards are based on those of the United Kingdom.

Countries that wish to provide a special register offering a more liberal operating environment establish offshore registers, such as the Norwegian International Register.

Over the last seven years, there has been a dramatic recovery in the world-wide shipping industry and several offshore centres have been offering attractive incentives to secure this lucrative business.

There is an active offshore market for offshore aircraft registration. The most active centres include Aruba and the Seychelles.

Much of what has been said about multinational users of International Financial Services Centres applies equally to owner managed businesses. The profiles of these users incorporate every aspect of international business, including manufacturing, distribution and the service industries.

As owner managed businesses become increasingly involved with international business, they are responsible for the establishment of a growing number of offshore structures, in both treaty and non-treaty jurisdictions.

This trend will continue and owner managed businesses will continue to account for the majority of new offshore structures.

If you are interested in our international professional corporate services please contact us.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.