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Offshore zones: definition, international cooperation, and current trends

Financial crises never stop weakening the world economy, and debt liabilities of some countries have long ago exceeded the billion dollar mark. In this never ending chaos, the entrepreneurs and the potential investors of the leading world powers don't stop trying to find the tools for optimization and reduction of the existing tax burden.

International resistance to the companies in tax havens

The tendency of resistance and implementation of the effective methods of tax optimization had originated at the beginning of 2000s, when the authorities of such countries as Great Britain, the USA, Germany, and France drew their attention to the fact that the withdrawal of the financial assets outside their economies significantly reduced the revenues in the budget. Then the pursuit of the capitals, which flew into offshores, was started, and as a result, they introduced the number of international standards and actions.

Offshore zone definition and types

At first, we should provide a definition of the concept of an offshore jurisdiction. In fact, an offshore zone is a specialized territory, which provides different competitive advantages and corporate privileges for the companies that have no tax resident status. In the international practice, offshore zones exist everywhere. These can be small island countries, separate administrative and territorial units with special economic status or even the entire countries.

If we look at the official statistics, about one hundred international financial centers, which provide the possibility of registration of companies and legal entities in tax havens exist around the world. As a rule, the attractiveness of such jurisdictions is provided by a loyal tax climate and a simplified procedure of incorporation of a foreign company.

At the same time, the current international practice divides the tax haven zones into two conventional categories, respectively, midshore and classic offshore zones. The classic tax haven zones provide the full exemption from such forms of taxation as the capital-gains tax, dividend tax, interests, inheritance and gift tax, income tax and etc.

Midshores, are the modern jurisdictions, which have taken the best international experience. Flexible corporate law and low tax rate are typical for midshores. Typically, these are the counties, which seek the maximal tax transparency at the expense of tax and financial reporting of the business. These jurisdictions include a number of European countries, like Malta, Cyprus, the Netherlands, and Sweden.

International cooperation and general tendencies

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As it was mentioned above, the initiative of opposition to the tax haven jurisdictions was first announced by the representatives of Great Britain and the United States. If to appeal to history, one can find that the first offshore formations had appeared on the planet after Britain had granted independence to its colonies, which in their turn had to look for the ways to attract the direct foreign investments into the economy. The numerous island entities were on the verge of extinction and had to become home for the various tax-free companies.

According to the results of the independent research over the past forty years, the budget of the UK has lost more than 30 trillion dollars, which were withdrawn into the tax haven jurisdictions. Taking into account these figures, the enthusiasm of the UK to fight against the capital outflow becomes clear.

Experts say that this year can become a turning point in the fight against the tax haven jurisdictions. Many are inclined to believe that it’s time to return the assets, which were withdrawn from the national economy. At the same time, the experts are convinced that it will be impossible to terminate all the offshore mechanisms and schemes completely, as they are closely intertwined not only with the private business but also with public companies. But still, the hunting for tax haven is announced.

The financial crisis, which has erupted in the United States and smoothly spread to the countries of Europe, has become a basic catalyst, which serves as the accelerator of the international cooperation in the fight against tax havens. The worsening economic situation has become a major impetus for various international organizations, including the Organization for Economic Co-operation and Development (OECD). The activity of such organizations is reflected not only in the implementation of control over the business but also in the development and regulations and the requirements of the financial transparency to the tax haven jurisdictions.

All the work of international organizations is guided and based on the one principle – if there is a possibility to trace the chains of the offshore schemes of business, the return of the hidden taxes is fairly real. Annually, the international organizations report billions of Euros, that they have managed to return to the budgets of the various countries.

International organization and «black offshore zone lists»

The first steps in the international arena in the fight against the tax haven jurisdictions were taken by the Organization for Economic Co-operation and Development. This organization has identified the list of the signs which can identify the unreliable jurisdictions, which are not able to provide adequate supervision over the financial sector. Such countries were put on the special lists, which had got an unofficial name «black zone lists.»

Besides, now there is a so-called «grey zone list,» which is maintained by the Financial Action Task Force on Money Laundering (FATF). The countries from this list are not tax havens in the classic sense of the term. But they also do not support some international standards which are set to fight against the tax havens.

Speaking about the conventional «black zone lists,» it is important to note that every country also has its own list of the offshore jurisdictions.

Alternative players in the international arena

Various organizations, which stand to the principles of the resistance to the outflows and money laundering, appear more and more often in the international arena. Among them, the special attention can be given to such organization as the International Consortium of Investigative Journalists. This organization has lirerally announced the hunt for the clients of the tax haven jurisdictions.

For example, some years ago, the consortium has published an extensive database which contains information about more than hundreds of thousands of the tax haven trusts and companies. This publishing had drawn considerable public attention, as it had revealed to the world the relationships of the wealthy people of our planet: officials, public servants, and prominent politicians.

Later, the international consortium has published the database of one of the offshore banks in Jersey. It was talked about the names of 20 thousands clients of the bank.

Thus, the resistance to the tax haven jurisdictions gains its momentum and is increasing in all the directions. But still, nobody has made any official assertions of the prohibition of the operation of offshore zones for the optimization of the taxable base.

Deoffshorization of the economy

In terms of deoffshorization, the regulatory tool, which is used by countries, has always been aimed at the maximum reduction of the tax burden and the secrecy of information about the business. The reasons for such treatment can be found in recent history. Tax havens were used as a tool for the protection of financial assets, and tax incentives were a pleasant supplement.

In spite of all measures, which were taken by governments, the tax haven areas and companies remain to be a part of any economy. Billions of US dollars are transferred into the various offshore jurisdictions annually. Among the most popular tax havens, there are Switzerland, Cyprus, the UK, and the Netherlands.

Nevertheless, the countries do not wait quietly and take the various preventive measures, among which the adoption of the legislative acts, which regulate the national contract system, can be singled out. This law puts certain restrictions. For example, the companies in tax havens are not allowed to take part in public purchases. Even the disclosure of all the information about the ultimate beneficiaries of the company will not be a guarantee of receiving a government contract.

The extent of deoffshorization can be debated endlessly, and the preventive measures can vary in different forms: from the explicit stimulation to the strictest enforcement of the taxpayers. But still, in order for business not to strive for offshore jurisdictions, it we must understand that it is much better at home. The withdrawal of the financial assets into the tax havens should become costly and pointless for entrepreneurs. Only then one can hope to maintain financial assets. Unfortunately, the countries are unable to provide such conditions for business today, so business is still offered sticks instead of carrots.

How to withstand, or time requirements

Of course, the pleasant time when offshore jurisdictions attracted only entrepreneurs, has long gone. But the tax haven jurisdictions do not stand still. The modern economy enforces the offshore jurisdictions to change and to adapt to the existing standards. A lot of tax haven areas are forced to yield to pressure from the world leaders and now widely implement the transparency requirements to the business schemes.

In addition to the tax haven jurisdictions itself, the banking institutions, which work in tax havens, are also exposed to pressure from the state and are liable to the relatively high taxation. It is not a secret that the offshore banks are the main element in the construction of the tax haven schemes.


Since 2000, the U.S. Government has adopted a number of draft laws in the field of banking. Among them, there is a legislative act on the tax compliance of the accounts in foreign banks and the law on the provision of information about the available accounts in foreign banks.

In other words, the government of the country wants all the banking institutions in the world to provide the necessary information upon the request of the IRS. These requirements apply to the foreign bank accounts which belong to the citizens of the U.S. Access to the financial markets of the U.S. can be blocked for the banks and credit institutions which have refused to provide such information, and all the operations which held via the country will be liable to 30% tax.

A strategy, which was developed by the OECD in 2013, serves as the action plan of resistance to hiding the budget payments. One can say with certainty that this plan is a basic guide for the international resistance to the tax haven jurisdictions.

Strengthening the measures of control and the possible consequences

The system of offshore jurisdictions meets the common laws of marketing. More precisely, the laws, which operate in the common market, are equally applicable here. Namely, the bigger are production costs, the higher is the cost of the provided services. Accordingly, the increase of the requirements to the tax havens jurisdictions affects the proportional increase of requirements to the foreign businesses, which is registered in the jurisdiction.

For example, today, to register the offshore company, it is not enough to submit only a passport, as it was ten years ago. Today, you will be required to submit a huge set of documents, which includes the letters of recommendation from banking institutions, the documents which prove the actual place of residence, a detailed business plan, information about the ultimate beneficiaries, the founders, the shareholders, and the company owners, etc.

In attempts to save the business reputation in the international arena, the regulators of the tax haven areas are guided by the principle – know your client. As a result, the foreign entrepreneurs are forced not only to collect the necessary documents but also to be engaged in their translation, certification, and legalization.

If you are going to create an effective tax havens scheme, you should be prepared for the fact that you will have to work hard. In order to create a really effective and efficient scheme with an appropriate corporate structure, you will have to establish not one offshore company.

In the end, you need a corporate account in a foreign bank, the opening of which also requires a responsible approach. Modern banking institutions also care about their reputation and are wary about the tax havens. First of all, you need to decide on a banking institution, or to be more precise, to find out the list of provided services and current rates.

Do you want to learn more about the tax issues in the various tax havens jurisdictions, about the possibility of registering a company and bank account in a tax haven? Visit the other sections of our website. A “contact us” form allows you to obtain expert professional advice for free.

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