Guide To Effective Offshore Operations

This guide has been prepared by the Zetland Fiduciary Group Limited and is intended for the information of clients or prospective clients. As such, it is designed to provide general information about Effective Offshore Operations. The information set out is not, nor is it intended to be, exhaustive. Such information does not purport to be and is not legal, tax or other professional advice. Our aim has been to provide a broad overview. We will be pleased to offer more comprehensive and specific professional advice to individual clients depending on the situation.

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TABLE OF CONTENTS
INTRODUCTION ........................................................................................................................................ 2 TYPICAL USES OF OFFSHORE COMPANIES ........................................................................................ 3 OWNERSHIP AND MANAGEMENT ISSUES............................................................................................ 6 OFFSHORE TRUSTS................................................................................................................................. 7 COMPANY ORDER CHECKLIST AND DECLARATION ......................................................................... 10 COMMUNICATING WITH ZETLAND ....................................................................................................... 11

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INTRODUCTION
A substantial and growing amount of business is transacted offshore through entities, primarily companies or trusts, established in a number of different countries. Often termed offshore financial centres, these jurisdictions offer reliable and confidential places from which to operate at low cost. Some of the benefits of using offshore jurisdictions for business or investment include: Asset Protection: Many offshore jurisdictions do not allow the enforcement of civil orders from foreign courts including those related to divorce, negligence suits and bankruptcy. In general, offshore assets may be safeguarded. Assets derived from criminal or other illegal activities, of course are a different matter and will almost always be traceable and recoverable by the authorities. Zetland does NOT countenance the use of its services for illegal purposes. Privacy and Confidentiality: There are strong legal privacy and confidentiality protections in most offshore jurisdictions. Most do not have double taxation agreements with other countries that would allow for the automatic interchange of information about offshore activities. Although this situation has been changing in recent years, a certain degree of privacy and confidentiality for legitimate purposes can be achieved. Tax Savings: Most offshore jurisdictions do not impose any type of tax on profits or income earned through corporations or trusts registered in their territory (other than annual government fees which are usually low). The use of appropriate offshore structures can possibly result in tax savings. The correct structuring of such arrangements calls for a detailed examination of the relevant facts and Zetland always encourages clients to seek advice from their local tax advisers before initiating structures. Business: There are often sound business reasons for establishing offshore operations. Using the offices of an intermediary, such as Zetland, allows clients to establish a local presence without the cost of acquiring staff and premises. With the use of the internet for communications and data transfer, a local virtual office may be set up for a clients business at low cost. Investments: The offshore world abounds with a huge variety of investment opportunities that may offer higher returns than those in more regulated markets. Because of the high costs of compliance many offshore investment vehicles are not registered with, for example, the Securities and Exchange Commission in the USA and may not legally be offered to investors there. Clients must always seek professional assistance from licensed advisers regarding investments. Zetland will only deal with clients on the basis that a corporation or trust is established. Personal accounts are not handled on a fiduciary basis. In addition, there must be full disclosure of all relevant facts including the identity of beneficial owners of any structure set up or administered by us.
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Such information is, of course, kept completely confidential. Zetland operates on the know your client principle and the fact that we undertake such due diligence in turn engenders the trust of other professionals such as bankers and lawyers and also government regulatory agencies in many countries around the world. Zetland is also happy to take over administration of structures set up with other professional firms provided our due diligence procedures are met.

TYPICAL USES OF OFFSHORE COMPANIES

Using an offshore company can provide many advantages. As always, proper tax and legal advice should be taken in ones country of citizenship and residence before the commencement of offshore business. Zetland always considers carefully the circumstances of each client and their business objectives and goals in order to tailor offshore arrangements to their requirements. It should be emphasised that establishing a company offshore is a serious matter that should not be undertaken without careful consideration of the factors involved. The initial and annual costs should be considered and compared to the value that the company will have in the future. In addition, every use of an offshore company depends upon there being real commercial substance behind the entity. In particular: The company is properly constituted with directors in place. The company holds regular meetings of directors and members as laid down in the appropriate legislation and its articles of association. Any transactions conducted are real. Proper books of account and records are kept. Pricing and commercial transactions follow a reasonable arms-length basis and are approximately equivalent to third party relationships. Typical uses of offshore companies are as follows:

Trading Companies An offshore company may either trade on its own account or alternatively be a party to a trading transaction, i.e. receiving a commission in respect of advice and assistance. Hong Kong is a significant centre for reinvoicing whereby goods are imported by a local or offshore company at one price and on-sold at a higher price to the end buyer.

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In most cases, shipment of the goods is directly between the seller and the end buyer with the company merely acting as an intermediary handling documentation. Tax free profits may be built up in this fashion and either held for investment purposes or remitted. Often, such transactions are arranged through back-to-back letters of credit or letters of credit which are transferable from the buyer to the company and onto the seller. Care needs to be taken in structuring such transactions and there may also be effects on the amount of import or customs duties payable in some countries because of the uplift in price taken by the reinvoicing company. Further, the costs of establishing the company and running it must be taken into account. Generally, the savings in taxation substantially outweigh any additional costs involved. Hong Kong is an ideal place to base trading companies since it is a respected jurisdiction, the source principle of taxation applies and communications, banking and shipping arrangements are world class. A typical trading operation through an offshore company in Hong Kong is illustrated below:

Supplier Company in China

Overseas Buying Company

DOCUMENTS

PAYMENT

DOCUMENTS

Offshore Company with a bank account in Hong Kong

The overseas buyer forwards the trade documents to the offshore companys bank in Hong Kong. The offshore company then arranges for the negotiation of the documents with the supplier, who then ships the goods directly to the place instructed by the buyer. In this way surplus amounts could be accumulated in the offshore companys bank account for investment and other purposes. Investment Holding Companies Offshore companies may be used to hold investments and accumulate funds free of tax. Banks in offshore centres pay interest on a gross basis and will generally maintain accounts in any of the major currencies. All offshore financial centres (including Hong Kong) do not assess tax on capital gains. Most high tax countries such as Australia, Japan and Britain do not charge nonresidents with capital gains tax so that investments held by an offshore company will be exempt although dividends remitted from these countries to the offshore company will be subject to

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withholding tax. In situations where significant flows of dividend income are anticipated, it is often possible to mitigate the cost of withholding tax by utilising favourable tax treaties between different jurisdictions. Intellectual Property Companies An offshore company may be involved in purchasing rights to intellectual property such as copyrights, patents or technical know-how and sub-licensing the property. It is also desirable to place such property into an offshore entity if it is likely to become more valuable in the future. Since royalties are generally subject to withholding tax in high tax countries, some degree of planning and use of tax treaties are usually necessary.

Management Companies Offshore companies may be good vehicles to provide management services to a company or group of companies. The scope of services to be provided will depend on the particular business but typical activities include maintaining data servers, undertaking research and development, arranging insurance cover, placement of advertising and processing warranty claims. The advantage of a management company is that in most cases payment for a service will not attract withholding tax. Fund Management Companies For suitable applicants with sufficient capital and expertise, offshore private or professional mutual fund companies may be established in a number of jurisdictions. The vehicles are designed for high net worth individuals or sophisticated investors who have the ability to understand fairly complex financial instruments, are in a position to take on significant risk and are willing to make relatively large investments. Issues related to the various functionaries required to operate a mutual fund company as well as restrictions on marketing need to be considered carefully. Property Owning Companies Offshore companies are often used to hold property. Advantages include the avoidance of capital gains and inheritance taxes and the ability to change ownership of the property by transferring shares in the company rather than the property itself thus avoiding stamp duties, legal fees and publicity. Shipping/Aircraft Owning Companies The use of an offshore company to own or charter vessels or aircraft can lead to substantial tax savings and also lower crewing and compliance costs. Certain countries - notably Panama - have well established maritime registries and are accepted internationally by ship financiers and operators. Insurance Companies

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The establishment of a captive insurance company can result in significant savings on premiums for businesses carrying high levels of risk. Excess risk may be reinsured through the international market at wholesale rates and premiums and investments held tax free. Personal Service Companies Individuals who earn substantial fees such as consultants, writers, sportspeople or entertainers may arrange for an offshore company to be formed and then be paid and have a contract of employment with that company. Income may be accumulated tax free and paid out in the form of consultancy fees or salary in the most tax advantageous time and fashion for the individual. Employment Companies Expatriate workers on contract terms may find it adventageous to have part of salary paid into an offshore company. It is also possible to structure offshore superannuation or provident fund companies with tax or investment advantages. Group Holding Companies It can often be advantageous to set up a holding company in a jurisdiction with no capital gains tax and to hold shares in subsidiaries and to carry out administration and financing functions. Banking Companies International supervision of offshore banking has tightened up considerably to prevent criminal use of the banking system for the purposes of money laundering. Nevertheless, for suitable applicants with sufficient capital, restricted licence banks may be established in a number of jurisdictions. For every use of an offshore company, careful thought and planning is required to ensure that objectives are being met in an efficient and cost effective manner. Zetland is in a position to assist with all such matters and to arrange the services of other professionals as required.

OWNERSHIP AND MANAGEMENT ISSUES

For an offshore company to be effective, it is usually necessary for it to be seen to be operating at arms length from and often independently of the beneficial owner. The beneficial owner must therefore consider the following matters carefully. Who should know about the company? Family members, professional advisers, employees and friends may or may not be appropriate people to inform. How are communications to be effected with the company administrator? Inevitably there will be written correspondence to be received as well as faxes and emails. The owner should decide
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how material is to be handled (especially during periods of absence such as holidays or business trips) and clearly inform the company administrator. Are there to be multiple shareholders in the company? If a company is to have more than one non related shareholder, it is usually desirable to have a shareholders agreement specifying how the company is to be run commercially including how shares are to be disposed of as these matters are never addressed in great detail in the companys articles of association. Zetland can assist in this regard. How are shares to be held? This is an important consideration for estate planning. If shares are held by an individual, then upon death there could be adverse tax consequences in many countries. The use of a trust arrangement for holding shares may avoid this, but each domicile has different rules and considerations. Does the shareholder need to be disclosed publicly? In some jurisdictions, shareholding is a matter of public record. Often the need to disclose a shareholder can be avoided by entering into a trust arrangement with a nominee who acts as shareholder of record but not the beneficial owner. Under such arrangements, the beneficial owner should have the power to take control immediately of the company. Alternatively, an option arrangement can be used. Who should be the directors of the company? In general, the activities of an offshore company are conducted through directors. In many offshore jurisdictions, the identities of directors are not publicly disclosed. However, many acts of the company will require a signature by directors so that their identities will in time become known. An alternative is to appoint nominee directors to act on the wishes of the beneficial owner. Appropriate safeguards can be put in place. Who should control bank accounts in an offshore company? Since bank or brokerage accounts are in the name of the company, any individual may be named as a signatory. The beneficial owner must weigh security and control issues with the need to have efficient practical arrangements. What are the duties and responsibilities of the company administrator? These can range from very limited services to wide ranging control over the company. A company administration agreement clearly setting out the obligations of each party is recommended.

OFFSHORE TRUSTS
A trust is a well-established legal device whereby assets are passed to the control of an independent party for the benefit of named or a class of persons. The person who donates the assets is called the settlor (grantor in USA) and the independent controller of the assets is the trustee and can be a company or an individual. The parties who enjoy the assets (subject to conditions) are the beneficiaries. In many trusts, an independent individual called the protector is also appointed to supervise operations and often has the power to replace the trustees.

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A trust is established by a trust deed setting out in detail the terms and conditions under which the trust will operate and according to which the trustee must act. The trustee is further required by law to act prudently in the best interests of the beneficiaries and to derive no private advantage from the trust. A properly established and managed offshore trust can have many benefits including the following: Asset protection: Since the trust assets no longer form part of the assets of the settlor, they cannot be attached in bankruptcy, divorce or legal proceedings. However a trust cannot be used as a device to defraud creditors at the time it is established. Tax planning: The assets in an offshore trust will generally earn income and capital gains free of tax. Intergenerational transfer: Assets held in a trust will not be subject to probate procedures and, in many countries which have forced heirship legislation, this may be avoided. Confidentiality: An offshore trust established in a suitable jurisdiction should afford almost complete confidentiality. Preserving family assets: A trust may provide a mechanism for maintaining capital assets and allowing only income to be distributed to beneficiaries (although trusts generally cannot have an unlimited life). While offshore trusts are relatively easy to establish (and are generally more expensive than companies), there are often significant tax and other consequences for the settlor to consider since most high-taxation countries have extensive legislation on the subject. Many settlors do not like the idea of having to cede control of assets to a third party and there are a number of safeguards which can be incorporated into a trust structure. The settlor may issue a detailed letter of wishes upon establishing a trust which the trustees will generally follow. A protector or joint trustees may be appointed. The trust may own shares in a company of which the settlor is a director and controls on a day to day basis. A privately held trust company may also established to act as trustee. The choice of jurisdiction for an offshore trust is also important. Zetland recommends offshore jurisdictions that have satisfactory trust legislation and generally follow the English common law system. Zetland can assist in establishing trusts for clients and acting as a trustee or protector to work in conjunction with a clients professional advisers to determine the optimum solution. Another vehicle which may be considered by clients primarily as a holding structure for assets is the Liechtenstein or Panama foundation which combines attributes of both a company and a trust. Foundations are subject to confidentiality regulations. Foundations are typically more

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expensive to establish and administer than offshore trusts, please refer to Zetlands Guide to Foundations for further detail.

Summary Of Offshore Jurisdictions

Zetland maintains information on the current regulations in most of the offshore centres and has links with reputable and reliable agents throughout the world. In most cases, companies incorporated in an offshore jurisdiction may be administered from Hong Kong, usually by having nominee directors resident in Hong Kong. However, some jurisdictions such as Bermuda require resident directors in addition to non-residents. Bank accounts may also be opened in Hong Kong or elsewhere on behalf of non-resident companies under Zetland administration. In recent years, competition between offshore jurisdictions has become more intense. We provide a summary of the key features of some popular domiciles on request for Zetlands Information Sheets. Details of other exotic hybrids such as Limited Liability or No Share Capital companies are available on request. Zetland maintains stocks of Hong Kong, BVI, Belize, St. Lucia, Seychelles and Mauritius shelf companies that may be activated immediately by clients. Pacific Area In the Pacific Area, Hong Kong is the leading jurisdiction. The Malaysian Government has established Labuan as a low-tax offshore base and this is becoming an attractive option although it is rather cumbersome to use. The Cook Islands and Samoa have generally good legislation in place. The Cook Islands is a leading asset protection trust jurisdiction. Singapore companies can be useful because of the tax treaty network there. Indian Ocean Mauritius and Seychelles are the leading jurisdictions. Each has a network of double tax treaties (including China) that can be accessed when setting up offshore structures. Caribbean The most popular jurisdiction remains the British Virgin Islands where the companies can be established quickly and there is relatively little compliance required. The Cayman Islands and Bermuda also remain popular, particularly for banks or financial institutions and many of Hong Kongs larger companies are domiciled in Bermuda. Anguilla and St. Lucia are making efforts to capture more offshore business and have become attractive jurisdictions. Belize also offers a user friendly, relatively inexpensive corporate structure and has some innovative trust legislation. Europe

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The British offshore jurisdictions of Isle of Man, Channel Islands and Gibraltar remain popular although costs can be high and regulation and compliance is increasingly burdensome. The jurisdictions of Ireland and Luxembourg tend to be among the tax saving jurisdictions. Liechtenstein foundations do offer some unique advantages.

COMPANY ORDER CHECKLIST AND DECLARATION

All clients requesting Zetland to form a company must complete our Company Order Checklist and Declaration. The beneficial owner(s) must complete and sign the Beneficial Owners Declaration. In case of more than one beneficial owner, separate declarations are required from each person. In addition to the Company Order Checklist, passport copies of all directors, shareholders and beneficial owners must be provided. Details of the beneficial owners will be known to Zetland (and the registered agent in some jurisdictions) and the bank or brokerage firm to open an account. The administration of the company will be subject to our Terms and Conditions of Business. Zetland will provide bank introductory services to clients only after the Company Order Checklist, Beneficial Owners Declaration, relevant bank application form and the supporting documents i.e., passport copies, bank references, utility bills and any other information as may be required by the banks to open the account, are furnished.

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COMMUNICATING WITH ZETLAND

www.zetland.biz Email : intray@zetland.biz
SHANGHAI Zetland Corporate Services Shanghai Representative Office Suite 13F Shanghai Ind'l Investment Bldg. 18 Cao Xi Bei Rd, Shanghai 200030 China Tel + 86 21 64272930 Fax + 86 21 6468 6478 Email: shanghai@zetland.biz NEW ZEALAND Zetland Fiduciaries (New Zealand)
Limited

HONG KONG Zetland Corporate Services Limited 6/F ING Tower 308 Des Voeux Road Central Hong Kong Tel +852 3552 9085 Fax +852 2140 6833 Email: hongkong@zetland.biz

SINGAPORE Zetland Corporate Services Pte Limited 9 Temasek Boulevard #18-04 Suntec City, Tower 2 Singapore 038989 Tel +65 6557 2071 Fax +65 6557 0617 Email: singapore@zetland.biz

LONDON Zetland Services (UK) Limited 25 Upper Brook Street London W1K 7QD United Kingdom Tel: +44 20 3411 9053 Fax: +44 20 3411 9072 Email: london@zetland.biz

BELIZE Zetland Corporate Services (Belize) PO Box 2020 No. 21 Regent Street 2/Floor, Office A Belize City, Belize Tel +501 227 1036 Fax +501 227 1044 Email: belize@zetland.biz SEYCHELLES Zetland Corporate Services (Seychelles) Limited Le Rocher, Mahe Seychelles Tel: +248 345 040 Fax: +248 345 520 Email: seychelles@zetland.biz

Level 4, Affco House 12-26 Swanson Street Auckland 1010, New Zealand Tel + 64 9 401 7315 Fax + 64 9 401 7317 Email: newzealand@zetland.biz DUBAI Zetland Representative Elfina Financial Investment Consultancy 203 Atrium Centre, Bank Street Bur Dubai PO Box 29706, Dubai UAE Tel: +971 4 355 1587 Fax: +971 4 355 1606 Email: dubai@zetland.biz

TOKYO Zetland Corporate Services Japan Limited #501 Rinou Bldg, 2-10-3, Kojimachi Chiyoda-Ku Tokyo 102-0083 Japan Tel: +813 4530 0322 Fax: +813 6673 4213 Email: japan@zetland.biz ZETLAND EXTRANET
It is now possible for clients to have access to copies of all their important company documents at any time, through Zetlands extranet. The documents can be downloaded after logging in and providing the appropriate user name and password. For more information about the extranet, please send an email with your name and contact details to intray@zetland.biz

The Zetland Guides (available from our website or on request) Asset Protection Belize Companies & Trusts Doing Business in China Foundations Guide to Panama Hong Kong Companies Guide to Seychelles QROPS
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International Banking Investment Holding Structures New Zealand Foreign Trusts Offshore Operations Singapore Companies & Trusts Trusts UK Limited Liability Partnerships (LLPs) HK Visa
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