In the world economic scenario, it is increasingly highlighted that the largest and most important economic operations are carried out between multinational companies (some of the business groups) or companies related to each other, an aspect that justifies from the macroeconomic point of view, the importance of analysis and study of corporate legal figures or phenomena, which are put at the service of entrepreneurs to advance their profit, with various advantageous and disadvantageous characteristics and particularities that depend from the point of view that is observed (entrepreneurs, the state, consumers, the community in general) and that are a reality today.
Reaffirming the above, geopolitical and economic events that occurred during the last two decades of the 20th century, determined an extraordinary boom of multinational companies, which reflected statistics such as the following: a) 26% of the World GDP is in the hands of multinational companies; b) 80% of royalties are paid between related parties; c) 50 multinational companies have assets abroad for USD $79,000 million; d) 90% of the headquarters of multinational companies are in the United States, the European Union and Japan; for its part, the presence of transnational companies in the region (understand Latin America and the Caribbean) grew markedly between 1990 (27% of the sales of the 500 largest companies in the region) and 2000 (41% of those sales), to the point of affirming that “the 50 largest foreign investment companies present in Latin American economies registered sales of more than 110 billion dollars, an amount greater than the Gross Domestic Product of several countries in the region, even some of intermediate size. like Colombia, Chile, Peru and Venezuela”.
This economic reality has been the product, among many other things, of tools or legal figures that allow to serve as a vehicle for productive activities and the development of people’s profit goals, under the classic principle of maximizing economic benefit. or utility, a principle by virtue of which any group of people who intend to carry out an economic activity seeks the most suitable legal tools or vehicles both in legal terms (flexibility and promptness of procedures, limitation of liability, among others) and economic, in the sense that they reduce, reduce or in some cases eliminate, mainly fiscal charges that tax business operations.
Undoubtedly, the objective of maximizing utility today is not only intended through the usual mechanisms, such as quality and/or price of the product or service offered, but also through legal mechanisms that generate, for example, economic scale, transfer of profits in states where the tax burden is lower, among many others.
This time we will focus on approaching the legal figures called Offshore Companies compared to the figure or phenomenon of business groups, which although they are two different figures and have different aspects, characteristics and effects, if they can be related in the development of the world trade, and that requires a close and careful look from the states, to avoid conduct contrary to legal and economic regulations.
In the first measure, the Offshore Company has different definitions, however, common elements in these conceptions allow it to be identified as that “which is constituted under the laws of a certain country to act mainly outside of it. It is worth saying that it is a company where, by definition, the place of “incorporation”, that is, where it fulfills the legal formalities to obtain its legal status, is divided from the place of the “domicile”, in the sense of the place where it has its legal status. effective headquarters (decision-making, contract signing) and/or its main establishment (production and/or marketing processes). Said companies are established in the so-called “corporate paradises”, that is, places in which the constitution procedures are very simple, there is anonymity and guarantees of legal stability. Normally, these countries also imply “tax” havens, due to the null or low taxation (de jure or de facto), and “bank” havens, either because of the ease and secrecy of deposits, transfers and other financial operations or because of the lower requirements to found banks. In general, they present advantages derived from sole proprietorship, bearer shares, capital in foreign currency, flexible administration, rudimentary accounting, little registration publicity and low corporate taxation.
Having said the above, their special peculiarity lies in the fact that offshore companies are companies that are characterized by being registered in a country, normally a tax haven, in which they do not carry out any economic or commercial activity. For this reason they are also called non-resident companies, being controlled by foreign companies or citizens, who carry out their business in other parts of the world and who use the tax haven only as the legal domicile of the company.
Its main utility lies precisely in the advantages offered by the figure -which are located and publicized not mainly in academic texts but in commercial spaces exposed to interested parties in said entities anywhere in the world- within which the following can be highlighted: a) There are no taxes for companies or individuals. b) Anonymity is strictly guaranteed for the beneficiaries of companies and offshore bank accounts. c) Open bank accounts in the name of the Offshore Company. d) The offshore company and bank account can operate worldwide. e) Not being obliged to present annual accounts or audits in the offshore jurisdiction. f) There are no restrictions on the flow of capital and you can carry out any transaction. g) Through offshore companies, the assets may be protected from any legal claim. (Limitation of Liability) h) Offshore companies can be established with bearer shares. i) All matters related to the creation and activity of an offshore company are confidential. j) An offshore company opens access to all types of foreign markets. k) The formation of an offshore company allows you to choose a unique management structure designed in relation to the personal requirements of your business. l) The opportunity to accumulate your business funds and re-invest them all over the world. m) Doing business under an offshore company gives you the ability to create your own tax plan. n) Formation of an offshore company allows you to build an additional front for your domestic business.
Of course, the advantages indicated can be varied or modified depending on the state where the Offshore company is constituted, in any case, some of its common advantages are specified in:
- Quick, simple and cheap constitution. In most jurisdictions a company can be incorporated in less than 48 hours and with a minimum of documentation. A copy of the passport and proof of address are usually sufficient. The cost of incorporation does not usually exceed $1,000.
- There are normally no limitations on the nationality of shareholders and directors. It is often possible to form a company with a single person who performs all the functions.
- Simple and inexpensive administration. The tax exemption means that the company does not have to carry out tax settlement procedures (such as VAT). In most tax havens, the presentation of annual accounts is also not required, which avoids costly accounting and auditing processes. In this way, the company can keep its own accounting or record its activities in the way it deems appropriate.
- Strict confidentiality. In offshore jurisdictions, the personal data of shareholders and owners of companies does not appear in any public registry. The use of representatives such as the nominee director (fiduciary director) or the nominee shareholder (fiduciary shareholder) is allowed and also bearer shares, called bearer shares, are accepted in many places. This achieves an even higher level of privacy protection.
- Absence of thin capitalization rules (thin capitalization) which makes it possible to start a company without spending the capital.
- Favorable regulation for certain business operations related to capital, such as financial assistance to third parties, or the merger of companies.
- Investment freedom. In many countries there are rigid financial regulations aimed at the protection of investors, which make it difficult or impossible to participate in certain businesses, securities or investment funds. Offshore companies are not subject to this type of regulation, which opens up a whole world of global investment opportunities, which otherwise would not be accessed.
- Possibility of re-domiciliation or of re-domiciling the company to another jurisdiction, without stopping the activity of the company.
It should be clarified that the most common form of offshore company is the so-called IBC (International Business Company). This type of company exists in practically all offshore jurisdictions, although in some under other names. From a legal point of view, it usually takes the form of a limited liability company or a joint-stock company (corporation). Countries such as Anguilla, Bahamas, Belize, Dominica, Nevis, Saint Vincent and Seychelles have special legislation on the matter, which is similar to the legislation of Corporations in Panama Corporation and of companies not resident in Gibraltar.
In summary, offshore companies, given the advantages and characteristics they have for people and entrepreneurs, fulfill different functions and benefits, mainly tax, which is why they are often used to develop tax planning schemes, as well as their use in commercial management and economic to facilitate the commercial exchanges of goods and services, as well as a means of protecting assets, without forgetting its usefulness for the development of modern business structures and wealth planning, to which we will refer later.
Notwithstanding the foregoing, there are other drawbacks or disadvantages (from the employer’s point of view) and risks or negative aspects (from the state, third parties, the community in general) that succinctly allude to this. In certain countries, anti-paradise measures have been put in place that prevents companies based in tax havens from participating in certain investments or businesses and apply a tax transparency regime to them, that is, their profits are attributed directly to shareholders, even even if it is decided not to distribute dividends. In the case of using directors or fiduciary shareholders, some documentary procedures can also be complicated. Banks, in particular, will want to determine who the beneficial owner is.) of the company, for which they will require documentation to prove it.
In the same sense, it has been recognized as the main disadvantages, those related to financing, since having these characteristics to obtain bank or private financing, in principle it is difficult due to the patrimonial guarantee and information available to investors, which does not generate security sufficient legal and economic.
On the other hand, limitations established by states, in operations with offshore companies, as they are linked to tax havens, do not allow the development of certain economic or activities or impose additional charges. Finally, the perception problem is increasingly common, in the sense that it is assumed that these companies have non-holy or even illicit purposes, so it can be a barrier to contract with certain companies, people or entities in the world.
Compared to the states, offshore companies represent a mainly fiscal problem of no small amount. From them, acts have been developed from pure and simple tax fraud to aggressive tax planning. For example, have been used accounts offshore, offshore trust companies or shell companies offshorein offshore financial centers or in other countries to hide taxable assets or income, as well as credit cards issued in offshore jurisdictions to gain access to hidden assets; certain companies have formed offshore front companies to shift profits abroad, often using fictitious invoices or overcharging (or undercharging) in transactions between affiliated entities, and some multinational companies (including financial institutions) have used more sophisticated transnational systems and/or investment structures that abuse tax treaties, transfer pricing manipulation to artificially shift their income to low-tax jurisdictions and expenses to high-tax jurisdictions, which go beyond legitimate tax minimization systems.
In addition to the above, offshore companies have been identified as an instrument that allows money laundering or laundering, specifically in what is called the blackout stage. The objective of this stage is to hide the criminal origin of the goods or rights. Money can be transferred and divided many times between bank accounts, countries, individuals and/or companies. It can also be withdrawn in cash and deposited into accounts at other banks. It is common to use bank accounts from countries with strict bank secrecy laws and to use offshore companies as bank account holders.
The foregoing has urged the states to develop norms that allow mitigating the main problems of this figure related to the aforementioned aspects (taxation, money laundering) within which concepts such as offshore companies and business groups are integrated.
In the Colombian context, it is clear how through the establishment of business structures with unity of purpose and direction (however, we clarify these operations can be developed not only through the existence of declared or undeclared business groups but also in cases of control situation or economic relationship according to the Tax Statute) and where it is counted or is part of the same offshore companies, it will be possible for the participants of the said scheme, who develop operations among themselves, in order to hide assets or income susceptible to taxes, among others.
In this sense, in Colombia, in addition to the regulations regarding the obligations regarding Business Groups contained mainly in Law 222 of 1995, the Commercial Code, Laws 550 of 1999, 1116 of 2006 as appropriate, as well as Decree 1746 of 2011, there is the entire Transfer Pricing tax regime regulated mainly in Laws 788/2002, 863/2003 and 1607 2012, on which it is necessary to refer to a specific aspect that undoubtedly affects operations with offshore companies. Law 1607 2012 addressed the figure of tax havens, on which Article 117 of the aforementioned law modified Article 260-7 to the Tax Statute.
Said regulation for the control of operations with tax havens, in which offshore companies with some economic link with Colombian companies and/or being part of a business group undoubtedly act, was inoperative for almost 10 years (since law 863/2003 which initially introduced the provision) until the recent issuance of Decree 2193 of October 7, 2013, which establishes the list of countries, jurisdictions, domains, associated states or territories that are considered tax-havens.
It is of such relevance for the present text, that from said recent norm, the legal presumption described in the second paragraph of ARTICLE 260-7 of the Tax Statute, relative to that the operations between residents or domiciled in Colombia and residents or domiciled in Income tax havens will be considered operations between related parties or related parties in which the prices and amounts of the consideration are not agreed upon in accordance with those used by independent parties in comparable operations.; as well as the effective obligation regarding the supporting documentation and the presentation of the informative return to those who have carried out operations with companies related to tax havens, even if their gross assets on the last day of the year or taxable period or their gross income for the respective year are lower than the limits required by law on the matter, which undoubtedly constitutes an additional element to be valued by employers when undertaking links or developing business schemes or groups with offshore companies, usually located in Tax Havens.
Now, as noted above, business schemes through offshore companies, is a vehicle that is also used for issues related to estate or estate planning for business individuals and families. It is worth mentioning that in Colombia, for example, simplified stock companies constitute an ideal type of company for the conformation of modern business and planning structures in which it is common to find instruments such as the trust , private interest foundations and off-company companies shore.
The complexity of the succession processes of many families has led to the use of schemes that combine several of these figures. For many entrepreneurs, a single type of company is not enough, but they go simultaneously to several kinds of corporate organizations and contracts to articulate their wealth planning schemes.
While it is true, economic freedom, free private initiative, free association, freedom of companies, among others, are principles and rights in our constitutional order that undoubtedly protect the legitimate use of figures such as offshore companies, the formation of business groups, among others, there is a notable responsibility of the states in the control and surveillance of the actors in the national and international market in the development of novel schemes that are nourished by these tools, not all of them with the most legitimate in general terms.
The discussion in this matter, of course, should not focus on simply prohibitive or restrictive measures, by way of regulation, that makes business relationships costly, tedious and inflexible in an increasingly open economic world, as it would be a setback, anachronism and if involution is wanted, however, there arises a main duty of the states through their legislative and executive bodies to carry out actions aimed at limiting or mitigating the negative, harmful or unwanted aspects that can be generated with the improper use of the aforementioned figures.
It is clear that there can be no regulation and control entities of such perfection that they prevent the development of any commercial practice contrary to the legal system of a nation or nations, or contrary to what is desirable in terms of commercial and business good faith, but what It is necessary, is that said entities function with such specialty and agility as the markets and their actors so that they can repel react and act to counteract harmful effects of improperly managed figures, allowing to avoid such dire situations of fraud to the state, the treasury, to the community in general, such as the unfortunate case of one of the largest stockbrokers in the country, where several of the aspects evidenced in this writing were related.
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