OFFSHORE FINANCIAL CENTER

An Offshore financial center ( OFC ) , although not precisely defined, is usually a low-tax, lightly regulated jurisdiction which specialises in providing the corporate and commercial infrastructure to facilitate the use of that jurisdiction for the formation of offshore companies and for the investment of offshore funds. Offshore financial centres are often (but not always) current or former British Colonies or Crown Dependencies, and often refer to themselves as offshore jurisdictions. The term offshore financial centre is a neologism coined in the 1980s.[1] The term is fluid to a certain extent, and it has been remarked more than once that whether a financial centre is characterised as "offshore" is really a question of degree.

OFFSHORE COMPANY

An Offshore company is a company which does not conduct substantial business in its country of incorporation. They are sometimes known as non-resident companies.

Company having a Share Capital - these companies issue shares. Once the initial cost of a share (capital and premium) has been paid, the shareholders have no further obligation to the company. The shares may, subject to the rules of the company, be sold or transferred, and the shareholders have the right to enjoy the profits of the company or any proceeds of a liquidation.
Company Limited by Guarantee - the members of the company agree to pay up to a maximum limit an event that the company becomes insolvent. They may acquire certain rights against the company, such as the rights to a dividend and the specific rights will be set out in the rules of the company. Membership may terminate on death, and guarantee companies have been used for not for profit organizations. There are also sophisticated estate planning schemes which make use of guarantee companies.
Protected Cell Companies - some jurisdictions permit cellular companies, where particular assets and liabilities are segregated into "cells", in such a way that the assets of one cell cannot be used to satisfy the liabilities of another. Cell companies are particularly used for umbrella mutual funds or unit linked insurance bonds.

SEGREGATED PORTFOLIO COMPANY

A Segregated portfolio company ( SPC ) , sometimes referred to as a protected cell company, is a company which segregates the assets and liabilities of different classes (or sometimes series) of shares from each other and from the general assets of the SPC.

Segregated portfolio assets comprise assets representing share capital, retained earnings, capital reserves, share premiums and all other assets attributable to or held within the segregated portfolio.

INTERNATIONAL BUSINESS COMPANY

An international business company or international business corporation (IBC) is an offshore company formed under the laws of some jurisdictions as a tax-free company which is not permitted to engage in business within the jurisdiction it is incorporated in. Offshore Financial Centres which have allowed the formation of IBCs include Antigua, Anguilla, the British Virgin Islands, the Bahamas, Gibraltar and Nevis.

IBC versus offshore LLC

A United States Limited Liability Company (LLC) is not a regular tax-free company if the business is operating in the U.S., for full tax-free advantages the LLC has to be registered in an Offshore Financial Centre. An LLC that is a U.S. registered company does not issue shares, therefore does not have shareholders. Its owners are known as members. While an IBC cannot conduct business in the country of incorporation, there is no such restriction on an LLC. The similarity is where a U.S. registered LLC is owned and operated outside of the United States by U.S. non-resident aliens and have more than one member; there is no tax liability on its members. LLC's must file annual accounts. Its members are individually liable to tax on their share of the profits if earned within the U.S. or if a member is a U.S. citizen or resident.
For U.S. citizens or residents, an offshore LLC provides a better vehicle than an IBC due to improved U.S. tax compliance.

MERGER

The traditional method of merging companies is for one company to acquire the assets of a subsidiary on its liquidation. This sometimes creates contractual difficulties, and requires third parties to accede to the transfer of obligations from the liquidated company. Some jurisdictions have tackled this issue by permitting companies to merge, forming a new combined entity, which represents a continuation of the businesses of each former company.

RELOCATION OF COMPANIES

Some jurisdictions permit companies to redomicile. They may do this to take advantage of particular features of the new jurisdiction, such as merger legislation, or tax treaties with other countries. The law in both the old and new jurisdictions must permit redomiciliation. The business of the company is deemed to continue without interruption on redomiciliation.

TAX EVASION

An illegal practice whereby an individual intentionally avoids paying their true tax liability. Anyone caught evading taxes is generally subject to criminal charges and substantial penalties.
There is a difference between tax minimization and tax evasion. All citizens have the right to reduce the amount of taxes they pay as long as it is by legal means.

 

TAX AVOIDANCE

Minimizing tax burden through legal means such as tax-free municipal bonds, tax shelters, IRA accounts, and trusts.

 

TAX SHELTER

An investment selected mainly because it provides favorable tax treatment.
The IRS watches tax shelters carefully. If an investment is made for the sole purpose of avoiding or evading taxes, you could be forced to pay tax (or even penalties).

 

INCOME SHIFTING

A strategy of moving a person's income from a high income bracket or tax rate to a lower one.
One popular form of income shifting is applying some of a person's income to their child.

 

TAX HAVEN

A country that offers individuals and businesses little or no tax liability.
There are several countries in the Caribbean that are considered tax havens.

 

TAX SHIELD

The reduction in income taxes that results from taking an allowable deduction from taxable income.
For example, because interest on debt is a tax-deductible expense, taking on debt can act as a tax shield.

 

INCOME TAX

A tax on any money earned during a fiscal year, usually filed on a yearly basis. All businesses except partnerships must file an annual income tax return. Partnerships file an information return.
Essentially a direct tax on any income, this includes capital gains, wages, etc.

 

CAPITAL GAIN

An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year), and must be claimed on income taxes.
Long-term capital gains are usually taxed at a lower rate than regular income. This is done to encourage entrepreneurship and investment in the economy.

 

CONDUIT THEORY

A theory stating that an investment firm passing all capital gains, interest, and dividends onto their customers/shareholders shouldn't be levied at the corporate level like most regular companies are.
Basically the firm passes income (without taxing themselves) directly to the investors who are then taxed as individuals. This theory means investors are taxed once on the same income, whereas in regular companies investors are taxed twice. Both when the company reports income and when dividends are received. An example is a REIT or mutual fund company.

 

INTERNAL REVENUE SERVICE - IRS

A United States government agency that is responsible for the collection and enforcement of income tax.
Sometimes referred to as the taxman.

 

LAFFER CURVE

Invented by Arthur Laffer, this curve shows the relationship between tax rates and tax revenue collected by governments. The chart below shows the Laffer Curve:
The curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T*) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100% (the far right of the curve), then all people would choose not to work because everything they earned would go to the government.
Governments would like to be at point T*, because it is the point at which the government collects maximum amount of tax revenue while people continue to work hard.

 

SURTAX

An additional tax on income paid by an individual or corporation.
For example, during the Vietnam War U.S. Congress levied a surtax on income to finance the war effort. This added to the animosity towards the war.

 

CORPORATE TAX

A levy placed on the profit of a firm different rates are used for different levels of profits.
Corporate taxes are usually levied by all levels of government (ie. State and Country)

 

TRICKLE DOWN THEORY

An economic theory which states that investing money in companies and giving them tax breaks is the best way to stimulate the economy.
Proponents of this theory believe that when government helps companies, they will produce more and thereby hire more people and raise salaries. The people, in turn, will have more money to spend in the economy.

 

SUPPLY-SIDE THEORY

An economic theory holding that bolstering an economy's ability to supply more goods is the most effective way to stimulate economic growth.
Supply-side theorists advocate income tax reduction because it increases private investment in corporations, facilities, and equipment.

 

RING FENCE

 

Ring fence means the isolation of an amount of money from any outside risk. The term seems to have been originated in England in the 1980s. The term is often found in business language, but can also refer to medical terminology, e.g. for isolation of a patient in a hospital.