A RESPONSIBLE OFFSHORE CORPORATE REGISTRY Written and presented by: Annie Ng, General Manager International Registries (Far East) Limited Extravaganza Shanghai - The Wealth Management Forum Shanghai, China June 3, 2005 A responsible offshore corporate registry. I. Responds to Clients A. Decentralization One of the common reasons for incorporating a company offshore is to do business internationally without many restrictions, such as foreign exchange controls. As such, it is imperative for an offshore corporate registry to be able to provide instant services, locally, so that clients do not have to deal with the time difference between the actual place of business and the offshore jurisdiction. Time is money. Furthermore, the word “local” means no courier or airmail is required. Clients should be able to obtain documents from an offshore corporate registry within 24 hours and at the most reasonable fee. Clients should no longer need to pay unreasonable courier fees or other miscellaneous fees. In other words, decentralization is one of the important factors for an offshore jurisdiction to be attractive to both the professional and the ultimate beneficiaries. Waiting two weeks for original documents is an obsolete practice by an offshore registry in today’s world. Nowadays, clients can choose to set-up a company in an offshore corporate registry that has offices in major countries such as the USA, the UK, PRC (Shanghai and Hong Kong), Japan, etc… in order to enjoy instant service. B. Advantages of an offshore corporate program The following advantages must be considered when considering which jurisdiction to incorporate a company. 1. Which jurisdictions offer the most privacy? This is one of the most commonly asked questions, and, if you ask individuals in ten different jurisdictions, you will get ten different opinions. A registry should only require the filing of Articles of Incorporation (AI). In addition the registry may issue a Certificate of Incorporation. The Certificate of Incorporation is the registry's official document listing the company's legal name and assigning the corporation number. The first page of the AI states the name of the company and the name and the location of the Registered Agent. This information is required in every jurisdiction. Thereafter, the documents will state that the company can do anything legal under the laws of the jurisdiction, and will explain capitalization, shares, duties of the directors and officers, voting, etc. These documents neither list nor reveal the identity of the beneficial owner of the company. Ownership of the company is usually passed by way of stock certificates (either registered or bearer shares). The initial director is usually elected by the subscribers through a resolution. In other words, if the certificate of incorporation and memorandum of association from jurisdictions are obtained from the registry, the documents will provide no information relating to the ownership of the company. For this reason individuals should not spend thousands of dollars incorporating in jurisdictions simply because someone may have said or it may have been read that a particular jurisdiction provides more privacy than another jurisdiction. Anyone with experience looking into an individual’s affairs either knows or will learn quickly that searching for corporate documents at a registry is a waste of time and energy. Most individuals incorporate a company to put assets into a legal entity and out of a personal name. An offshore company allows an individual to get assets out of a personal name and into a legal entity controlled by that individual. By forming an offshore company and utilizing the benefits it can provide, an individual can more than offset the incorporation costs. Looking for the best privacy does not require spending a fortune during the incorporation process. Many jurisdictions require extra incorporation fees for corporations with bearer shares and the process of maintaining the bearer shares with these jurisdictions is very cumbersome. Some of the restrictions basically defeat the purpose of bearer shares. 2. The second factor to consider is tax issues. International Business Corporations (IBCs) of many offshore jurisdictions are exempt from any corporate profit tax, income tax, withholding tax and asset tax, etc. as long as the profits are generated outside the jurisdiction. However, some of the jurisdictions, due to the influence of the Organization for Economic Cooperation and Development (OECD), impose a minimal corporate tax such as 5%. For this reason, one should consider those jurisdictions that have statutory exemptions from taxation. In other words, the corporate law of the offshore jurisdiction should state in the law itself that offshore companies are exempt from all taxation in that jurisdiction. 3. Flexibility is another major factor to think about when choosing the right jurisdiction to form your investment vehicle. Allowing payment for shares in any currency is a big plus. 4. Again, in today’s global economy, being able to have company documentation in both English and the mother tongue language will certainly make things easy for clients from some countries where English is not a commonly used language. Dual-language filings, for example, the filing of corporate documents in both English and Chinese, are incredibly beneficial for doing business in the PRC. 5. Efficiency. Being able to quickly answer any corporate inquiry is certainly another big plus for an offshore corporate registry. No more waiting for a week or even more to receive a reply from the corporate registry. Clients should be able to receive a reply from a local office within one business day. 6. Stability of the jurisdiction is another big factor to consider. Being able to conduct business anywhere without being penalized due to the political instability of the jurisdiction must be taken into account. 7. The last but not the least important factor to consider is the filing requirements. Does an offshore jurisdiction have cumbersome and numerous filing requirements? If so, one could incur a lot of fees in the future. These fees can be substantial. II. Responds to the Banking Community In fact, incorporating an offshore company is not the difficult part. But trying to obtain a bank account for an offshore company can be a headache. So choosing an offshore jurisdiction that is recognized by many major banks will be beneficial in this respect. A. Know your client (KYC) policy 1. Responsible corporate registries should only incorporate offshore companies through qualified professional intermediaries such as lawyers, accountants, or others experienced in the company formation industry. After fully understanding a client’s background and reasons for incorporating an offshore company, these professionals will be able to design the best business plan to maximize the client’s profitability in a legal manner. 2. Business limitation on IBCs. An offshore jurisdiction should place only minimal restrictions (such as prohibiting banking or insurance companies) on the types of business that its IBCs can conduct under the law. Overly burdensome restrictions simply create more work and potential expenses for the IBCs, including extra legal and other compliance costs. B. Reputation and Familiarity 1. Choosing an offshore jurisdiction that has the most modern corporate legislation, which is commonly accepted by major commercial centers, is very important. Many offshore jurisdictions have not updated their company law in a decade or more. If the corporate legislation is up-to-date, then it will be more familiar to the banking and legal communities around the world. 2. Furthermore, choosing a jurisdiction with a reputable maritime registry is definitely a plus as well. These companies will be used to obtain multi-million dollar financing. So, if banks have no problem lending money to finance ships using the offshore company, they should certainly have no problem opening bank accounts. C. Documentation With more and more bank requirements, one must choose a jurisdiction that is flexible and willing to accommodate requests from clients in order to satisfy banking requirements to expedite the process of opening an account. III. Responds to Wall Street Another important test as to the viability and usefulness of an offshore company registry is whether or not there are companies from that jurisdiction that trade publicly on major stock exchanges. There is probably no stricter test of the laws of a jurisdiction than the scrutiny that a company must endure when trying to “go public.” A. Importance of Going Public a. Raise revenue/possible windfall Perhaps the single biggest reason why companies wish to go public is the opportunity to raise substantial revenue through the public offering of shares in the company. There is really no other method in which a company can suddenly raise millions of dollars so quickly. Such cash windfalls can be used for a variety of purposes, such as expanding operations, purchasing better technology and equipment or even simply allowing the founders of the company to make more revenue. b. Public perception Becoming a publicly traded company immediately creates more interest in the company and raises its profile throughout the media and the business world. It allows a company to be respected as a serious player in its industry. It also allows companies to have much broader name recognition. Name recognition and branding is one of the most important goals of successful companies today and publicly traded companies have a substantial advantage over privately held companies in this regard. c. Shareholder involvement Of course, one of the major disadvantages in going public is the loss of total control of the company. However, there are ways in which the founders of the company can maintain some control. Attorneys, bankers and other professionals should be able to assist beneficial owners with these issues and a good corporate registry should have a network of contacts that can assist companies in the complicated process of becoming a publicly traded company. B. Need Modern Corporate Statute In order for an offshore or any foreign company to become listed on a major stock exchange, the stock exchange itself must respect the laws of that foreign jurisdiction. An offshore corporate jurisdiction must have a modern, up-to-date corporate law that reflects the advances in corporate jurisprudence over the years. The offshore jurisdiction’s corporate law should be based on the law of a highly respected onshore corporate jurisdiction and should specifically incorporate the case law of that onshore jurisdiction so that the companies and their shareholders and management are afforded the fullest degree of legal protection. C. Good Reputation Additionally, the offshore corporate registry must possess a good reputation throughout the world’s financial and legal community. The jurisdiction should not be on a money laundering blacklist, which would make it difficult for companies formed in that jurisdiction to operate freely throughout the world. D. Modern Lines of Business Finally, the offshore company registry should offer a choice of corporate entities so that a client can choose the entity which is most suitable for his/her purposes. a. IBC Naturally, the jurisdiction must offer corporations, sometimes referred to as IBCs, which still remain the most common entity structure around the world. Most jurisdictions offer some form of an IBC. However, the jurisdiction should not require the disclosure of the names of the shareholders or management of the IBCs. b. Limited Partnership Limited partnerships (LPs) are another attractive option. LPs allow individuals or other companies to be limited partners, meaning that they will share in the profits of the LP, but are not involved in the management of the LP itself. The LP is actually managed by the general partner. The LP law in a jurisdiction should allow the general partner to be a corporation and should not require the disclosure of the names of the limited partners. This allows for high levels of confidentiality and for the possibility of using the LP to go public as well, assuming the LP law of the jurisdiction is modern enough to do so. Although no single choice will influence the selection of an offshore jurisdiction…factors such as confidentiality, legislation, expense, political stability, reputation and service all have the potential to impact an IBC’s capacity to conduct business, open a bank account, hold real estate, and go public around the world. Also, business limitations facing offshore jurisdictions such as outside pressures from international organizations and heightened scrutiny from the international banking community will dictate the ultimate success or failure of an offshore jurisdiction.