1. DEVELOPMENT OF THE OFFSHORE INDUSTRY
A number of small countries have implemented a number of tax incentives to encourage foreign companies and businessmen to incorporate companies in their jurisdiction with the purpose of carrying out their commercial activities worldwide. The primary reason for doing so was to boost the local economy in the following ways:
- Increased state revenue from duties paid to the Company Registry Department, and revenue stamps
- Increasing employment of local professionals and staff who provide services to the offshore companies
- Increasing income from business trips and tourism
- Currency deposits to the country's banking institutions leading to higher liquidity, profitability and activity for the country's banking system
1.1. Case Study - The development of Cyprus as a financial and business centre
Cyprus decided to attract offshore enterprises to boost the economy in the wake of the disastrous Turkish invasion in 1974. Rushing the legislation through Parliament, establishing the tax incentives and preferential treatment for offshore companies in Cyprus, it managed to attract 83 offshore establishments in 1976. There are now some 32,000 offshore companies in Cyprus and the Central Bank registers approximately 350 new ones every month. With the entry of Cyprus in the European Union a reorganization of the current tax system took place in order to go along with the European Community legislation and instructions. The new changes allow to the Cyprus International Business Companies to clarified and accepted as prestige European Union corporations and at the same time have the privileges of the low taxation in comparison with other European countries.
Offshore services are one of the fastest growing sectors of the Cypriot economy. According to government figures in 1995 it brought US$ 355,3 million in foreign exchange, around 4% of the GDP of the island.A breakdown of new registra¬tions during the past three years showed that 25 % came from the European Union, 60 % from other European States, 7 % from the USA, 6 % from Asia and the remaining 2 % from Africa and Australia.
The vast majority of the offshore companies do not maintain physical offices or staff in Cyprus and are managed by their lawyers or accountants on the island, taking advantage of the local tax incentives. A survey carried out by the Cypriot Offshore Enterprises Association revealed that 78 % said their reason for choosing Cyprus. The survey revealed that nine out of ten companies would choose Cyprus again if they had to make the decision over again.
IBC incorporated until the 31 of December 2001 (as per Central Bank Of Cyprus annousment ) have right to choose the tax rate - 4.25 % or 10%. If they choose the tax rate 4.25 % they will be taxed with that rate until the 31 of December 2005 but for all it they will be not have the exemption of taxes in accordance with the new legislation.
The factors and advantages that developed Cyprus into a successful offshore centre include the following:
- The tax and other incentives;
- The network of double tax treaties that Cyprus maintains with other countries;
- The Cypriot "British modelled" legal system and corporate law;
- A strong banking system and very strong commercial banks;
- Abundance of Cypriot professionals and graduates, the vast majority being educated and trained in Western Europe or the USA;
- Continuous support, promotion and progressive legislation from the government;
- The English language being widely known and used as the business language;
- Modern infrastructure and telecommunications;
- Minimal level of crime;
- The convenient geographical location of the island.
1.2. Basic conditions to qualify for the tax incentives
- The offshore company must belong to non-residents of the country in which it will be registered.
- The company must neither earn any income nor carry out any commercial activity within the offshore jurisdiction where it has been registered.
Example 1 – With the new legislation, owner of IBC may be Cyprus residents. The citizens of Cyprus, living in island, don’t have any tax exemptions of Cyprus IBC. On the contrary, the local companies are taxed with the usual rate – 10% on the profit. However the citizens of other countries, non residents of Cyprus and EU, may establish in Cyprus offshore company and have the advantages of offshore tax rate – 0% on the got profit.
Example 2 - no commercial activity in the jurisdiction - An English non resident company's profits earned from activities outside Great Britain are not liable for tax in the United Kingdom. The part of the income that is earned from activities in connection with the United Kingdom will be taxed at the normal English tax rate.
Example 3 - no commercial activity in the jurisdiction - An importer of automobiles from the USA wished to form a Delaware company to be utilised as a middleman for his purchases. However, this was not advisable since the client's middleman company (an American company) would buy the cars from another American Company and export it to a foreign country, therefore the profits would be considered as raised in the USA and therefore taxed at the normal American tax rates. This would defeat the initial purpose of the client to minimize taxation.
The term "offshore" is not a legal term but simply a description used for convenience by professionals to describe corporate entities which are wholly owned by non residents and derive their income from activities outside the jurisdiction. From the legal point of view these companies do not differ in any way from the companies registered and owned by the local residents of that particular jurisdiction.