The secret trust: onshore or offshore?
The difference between "onshore" and "offshore" trusts and
corporations is, roughly speaking, that "onshore" means
subject to a big-brother, high-tax jurisdiction that obliges
trusts and corporate management to file a host of disclosure
forms with the local company register (which also handles
trusts). This information essentially then will be public, freely
given out to anyone for the asking. In addition, annual
statements must be made and any profits taxable. In
countries with wealth taxes, the trust or corporation may be
obliged to give a percentage of its capital to the state.
On the other hand, an "offshore" location is a country or
jurisdiction with very lax (or non existing) laws about what
sort of information, if any, a corporation or trust has to file
with the company registar - annual statements, identities of
managers, protectors and trustees, etc. In an offshore
location, this information will usually be much harder to obtain
for external third parties (such as foreign tax authorities). An
"offshore" corporation or trust will be tax-exempt. For a small,
yearly fee payable in lieu of any taxes, an offshore
corporation or trust may conduct just about any business,
anywhere, without any legal requirement to inform the local
tax authorities about this. This is the basic distinction between
a legal entity that is registered "offshore" as opposed to
"onshore". Recap: offshore corporations or trusts pay little or
no taxes and their true ownership and activities can be kept
secret.
Is there anything immoral or illegal about incorporating a
company or trust in an offshore location? In and of itself - no.
Most, if not all countries recognise the authority of other
countries to make their own laws as far as company registers
and taxation is concerned (and car registrations, passport,
insurance, etc. for that matter). Just as it is quite legal to
move to another country in order to save taxes (even though
your own country may not quite like the idea and usually will
attempt to legislate against it), so it is also quite legal to
register a company or form a trust in a jurisdiction that
extorts little or no taxes.
An American Citizen may freely own any number of tax-free
corporations in any number of different countries. There is
nothing illegal about that. The "iffy" part is the "legal"
requirements that he has to face to make a full disclosure of
his interest in foreign assets on his tax return. Remember
most governments think they own their citizens and may
confiscate citizens assets (or send them off to get killed in a
silly war) at will. And then keep in mind that governments can
only exist because their victims, the citizenry, grant to
government their sanction of monsterous laws by abiding by
them, however grudgingly.
But what you should be concerned with is that
aforementioned "veneer of legality" that you need to give you
at least some protection, in case anyone ever makes a
connection between you and a vacation home in Monte Carlo
that is not in evidence on your latest tax return.
One way to do this is to form a Trust which owns the villa, or
other assets. This automatically relieves you of any law (and
certainly very immoral law) requiring you to disclose all your
worldwide assets. You do not own the villa, the trust does.
And neither you nor anyone else owns the trust, since that
would be a contradiction in terms. Of course, the trust has to
be in an offshore location with no legal requirements that the
trust must declare what assets it owns. A trust in, say, the Isle
of Man (in the Irish Sea) may legally own all the stock of IBM
and not be obliged to disclose this to a living soul - not on
the Isle of Man, anyway.
On the face of it, transferring your assets and business
interests outside of your home country to a trust or
foundation may be a cure-all for your tax troubles. You can
own anything you wish through the trust, retaining complete
control over those assets and not be obliged to disclose it to
anyone.
But there are two slight catches. First, that a trust may usually
not engage in or conduct an active business unless through
the (whole or part) ownership of one or more companies
(which, as explained, should also be incorporated offshore).
Second, that you cannot legally arrange to disburse funds
owned by the trust to yourself. It is true that the local
nominees ("straw men") who lend their names to the trust for
use in the company register in exchange for a modest fee
could possibly not care less what you do with the assets
belonging to the trust. Still, the legal requirement - even on
the Isle of Man - remains that the trust cannot legally make
payments of any nature to anyone unless by following the
rules laid down in the trust's charter documents. And local
laws do not allow the incorporation of a (tax-exempt) trust or
foundation with rules that allow it to be blatant as a tax-shelter
by making no requirements of fund applicants.
The way to legally get around these requirements is to create
an offshore corporation - or several. Say, for instance, that
you have quietly transferred a million dollars to the trust's
Swiss bank account by way of a donation. You no longer
need to disclose this particular one million dollars on your
tax return as it no longer legally belongs to you. But you may
still want to get some of it back one day. Then what? What
you do is basically trade with the trust i.e sell something to
the trust. An arm's length transaction with a foreign trust is
quite legal. But if a transaction is not reported, who is going
to measure the arms? The trust may wish to acquire
ownership of, i.e. a newly-incorporated Delaware company
through which to conduct future business in the U.S.. Let us
say that you need a quick, legal $500,000 from the trust, the
bank accounts of which you control with a POA (power of
attorney). You now buy a $200 Delaware corporation from
any broker specializing in selling newly incorporated "fresh"
corporations - and then pledge as security for a loan your
shares in it to the trust for a cool $500,100 in cash.
Truth to tell, you may break one law in some country or other
if you do not disclose the fact that you don't expect to ever
repay the loans and that you are lending yourself your own
money. But generally, there is no income tax due on
borrowed money until and unless the loan is formally
"fugitive". If you need cash for a new car etc, then who is
entitled to say that you "owe" taxes on money on which you
have, presumably, paid 40, 50 or even 60% income tax when
you first made it?
