Offshore Banking History of Tax Havens’ Evolution

The concepts of offshore banking and tax havens are often misinterpreted. Information about them usually comes up in the news unveiling the global wealth stashes of modern elites. Thus, the general public unbiased knowledge of the offshore banking history and tax havens’ evolution is very limited. 

However, offshore business opportunities are gaining a significant role within the context of the global economic recession and everyone’s 360-degree search for recovery options. No wonder that our readers send us requests for specific details, analysis, and advantages of different jurisdictions. 

This article discusses many topical questions and provides useful insights.

Definitions and the Genesis of the Offshore Status

The exact date of tax havens’ origin is not known. However, most experts agree that they appeared along with the first duties and taxes introduced in Ancient Rome. 

The term ‘offshore’ means ‘abroad’ for non-resident clients banking or dealing in the territory of a foreign country.  

A ‘haven’ is a ‘hub, though many associate it with the misspelled word ‘heaven’. 

OFCs

There is also a less vague phrase – ‘an Offshore Financial Centre’ (OFC) – used to define a city, area, or country that provides a lot of tax incentives, loyal import and export duties, and other perks to international investors and nonresident clients of financial institutions to attract business, capital, and technologies, and help the domestic economy through fundamental reforms. This term was coined in the 1970-es. In 2000, the IMF defined the following 4 attributes of OFCs:

• Primary orientation towards non-residents
• Favorable regulatory environment
• Low or zero-taxation scheme
• Disproportion between the size of the financial sector and domestic financing needs.

‘OFCs’, ‘tax havens’, ‘offshore jurisdictions’, ‘international financial centers’, ‘pass through economies’ – are the expressions used mostly interchangeably by the IFC and most scholars. 

However, there are serious disagreements between the OECD and EU policies when they define some jurisdiction as a tax haven. 

Offshore Jurisdictions

The term ‘an Offshore Jurisdiction’ normally refers to a country that creates the most favorable conditions for nonresidents in terms of tax allowances and other possible incentives, including the minimum interference into business affairs of corporate and private clients of financial institutions, and the maximum confidentiality.

Offshore tax havens specialize in financial and business services for non-residents of the country, offering a wider range of opportunities:

• zero or reduced corporate tax
• capital protection 
• banking secrecy and private data confidentiality
• offshore accounts that can be opened by citizens of any country for private and commercial purposes
• internationalization of the business entity’s scope and its penetration to international markets.

Foreign entrepreneurs in such jurisdictions are attracted by a more liberal financial environment than in their country of residence. However, they are subject to the established rules of information exchange and have to comply with them.

Offshore tax havens act absolutely legally and have nothing to do with the misconceptions often promoted by some mass media. A tax haven, a hub, an offshore financial center, or a jurisdiction is just a country or an area, which provides more favorable tax conditions than other countries.

Tax Havens

Offshore jurisdictions have a long history of providing financial benefits to individuals and entities from other countries. The main purpose of this status acquired by such areas is to attract capital to the domestic economy and generate a positive impact on the overall performance of the local and international business.

The Rise and Evolution of Tax Havens

The first evidence of tax zones refers to Ancient Rome, 2nd century BC. At that time Rome decided to become the unsurpassed leader in trade, having changed the main destination of old trading routes – instead of the island state of Rhodes at a crossroads between Europe, the Middle East, and Africa, all merchants were directed to a tax-free port on the island of Delos. Despite the fact that the trade tax in Rhodes was low –  only 2%, the Delos tax immunity regime was more attractive, which contributed to the decline of the Rhodian trade and put an end to Athens’ commercial prosperity era.

In the XV century, the development of offshore business continued.  Merchants sold goods from Europe in Flanders, bypassing England, due to lower taxes and lack of any restrictions for traders.

In the XVIII century, a similar situation developed in Latin America, which was chosen by North American traders because they were reluctant to pay import taxes.

In 1713 Switzerland was the first country to adopt a law on banking secrecy, confidentiality, and anonymity of beneficiaries. The banking industry of this state is known as a tax haven for citizens of many countries – loans to the French government in the 18th century, capital inflows from Germany, Russia, South America, and other countries during the First and Second World Wars.

In 1814, after the Napoleonic Wars, the Congress of Vienna was held. Among its agreements, there was recognition of Switzerland’s neutrality by foreign powers. The country’s sovereignty plus low taxes was the next step in consolidation of the status of offshore jurisdiction as a reliable sector for financial transactions and asset custody.

In the 1900s, after the end of the Great War, many states in Europe sharply increased their tax rates to recover the damaged economies. However, Switzerland maintained its neutrality and tried to avoid such expenses on infrastructure modernization. This policy resulted in affordable taxes and a considerable inflow of foreign investments.

The term ‘tax haven’ originally referred to personal income taxation of citizens and was used from 1920 to 1950 as an indication of jurisdictions where you can retire and reduce the tax burden. After 1950, most countries began using tax havens for coping with global and corporate liabilities. This strategy was directly dependent on the mutually beneficial double tax treaties between countries. As a rule, a smaller country had low taxes, while bigger countries had higher rates. As an example, in 1960 Britain established a maximum tax of 90%, thus encouraging the development of its dependent territories, which later became small independent nations with advanced financial sectors. Naturally, businessmen chose smaller states where they could enjoy moderate taxes.

In the 1960s, British legislation was adopted, granting the right to use trusts. This provided the British banks with the freedom to conduct unregulated transactions with foreign persons. Even after the collapse of the British Empire, many of its former affiliates used this approach in their domestic economies, maintaining safe havens for foreign investors.

Law on a complete exemption from income tax was adopted in Panama in the 20th century. Later, additional benefits were added to the offshore regime in other countries, including citizenship for investment and favorable customs duties. Simultaneously with Panama, new offshore jurisdictions started to shape in Luxembourg and the Antilles.

Since the 1970s, the world has seen tightening tax regimes and modernization of the profit tax and VAT rates, as well as expanding globalization and internationalization of trade, which propelled the development of the world economy. Many businessmen extended their markets, launched their manufacturing facilities in other countries, and states began to actively develop offshore zones in their territories, thus attracting foreign capital.

To develop corporate instruments since the 1980s, many countries have revised the objectives of their legislation, thereby relieving investors from the local tax burden. Thus, there appeared the so-called ‘liberated companies’ and ‘international commercial corporations’. 

However, offshore zones attracted not only reputable businesses and families but, unfortunately, they have also been actively explored by criminals and money launders who performed assets withdrawal via offshores to secure bank accounts. Naturally, regulatory authorities could not tolerate such cases. So, a new era began for offshore jurisdictions – they had to comply with new regulations and become more transparent. 

Offshore Industry (2020)

At present, the offshore industry has embraced almost all countries of the world, but it does not provide any longer the 100% confidentiality which used to be available at the birth of tax havens. Modern offshore zones are established not only by countries but also by some parts and even cities. For example, the U.S. states of Florida, Texas are such jurisdictions. Some, like Turkey, call themselves free economic zones (FEZs) – another synonym for offshores.

When selecting an offshore country for starting a business, diversifying assets or entering the international market, one should consider established links and agreements between the countries. Many more factors need to be analyzed for sound decision-making. Our main advice is to follow the recommendations of experienced experts.

InternationalWealth offers fee-based services of different types:

• opening  of offshore accounts 
• second citizenship
• movement to another country 
• company incorporation 
• acquisition of an offshore business (shelf companies)
• accounting, legal, consulting services, etc.

The list of countries where you can get all these and other services can be learned by contacting us at the email address mentioned at the top of this page.