Skip to content 
Offshore Financial Centers -4 Take-aways
1. Reputation
A jurisdiction’s reputation is a critical consideration for businesses and individuals. Historically, the term offshore jurisdiction was associated with secrecy and tax evasion, but this perception has shifted under international pressure from organizations such as the OECD and FATF.
- Compliance: Reputable jurisdictions adopt and comply with international standards for transparency and disclosure. Examples include Singapore and Hong Kong, which combine competitive tax rates with strong regulatory and legal frameworks.
- Avoidance of Blacklists: A strong reputation also means avoiding international blacklists for harmful tax practices. New Zealand, for example, is not viewed as a traditional tax haven and has never appeared on any blacklist.
2. Banking
A reliable banking system is essential to any offshore operation.
- Infrastructure and Stability: Jurisdictions such as Singapore, Hong Kong, and Switzerland are renowned for their economic stability, strict regulatory oversight, and advanced banking systems, offering businesses access to global financial markets.
- Challenges: Despite strong infrastructure, opening an account can be difficult due to strict Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements. In some cases, offshore entities may face heightened scrutiny or blocked transfers if the jurisdiction is perceived as weakly regulated.
3. Secrecy
The role of secrecy in offshore jurisdictions has evolved, shifting toward a focus on privacy rather than concealment.
- Privacy vs. Secrecy: Reputable jurisdictions uphold strong privacy protections for personal and financial data, while still allowing access to legitimate government authorities.
- Transparency: Initiatives like the Common Reporting Standard (CRS) have increased cross-border transparency, requiring financial institutions to automatically share information with tax authorities. A jurisdiction’s approach to financial secrecy is often measured by tools such as the Financial Secrecy Index, which evaluates legal protections and the scope of services offered to non-residents.
4. Asset Protection
Asset protection remains a primary motivation for establishing offshore structures, offering safeguards against legal risks and creditors.
- Legal Separation: Properly structured entities such as trusts or companies create a legal distinction between individuals and their assets, making claims by third parties more difficult.
- Protection from Foreign Claims: Many jurisdictions provide legal frameworks designed to shield assets from foreign judgments or forced heirship rules. For instance, the Cook Islands is recognized for its robust trust laws.
- Vulnerability: Protection is not absolute. Trusts can be challenged if deemed a “sham” or if the settlor fails to properly relinquish control over the assets.
Comparing the New Zealand Foreign Tax Exempt Trust
New Zealand taxes trusts based on the tax residence of the settlor. Accordingly, section CW 54 of the Income Tax Act 2007 provides an exemption for foreign-sourced income derived by resident trustees. The eligibility criteria for this exemption are set out in section HC 26.
Following the Government’s April 2016 Inquiry into Foreign Trust Disclosure Rules, several changes were introduced. The Inquiry was established to review and recommend improvements to disclosure rules and related matters in order to safeguard New Zealand’s reputation. Its recommendations included the introduction of a formal registration process for foreign trusts and enhanced disclosure requirements. The Inquiry also recommended that the Department of Internal Affairs and the New Zealand Police be granted access to this information.
The Global Financial Centres Index (GFCI)
GFCI 37 provides evaluations of future competitiveness and rankings for 119 financial centres worldwide. It serves as a key reference for policymakers and investment decision-makers. The China Development Institute (CDI) in Shenzhen and Z/Yen Partners in London jointly produce the index. It is updated and published every March and September, attracting considerable attention from the global financial community.
For GFCI 37, 133 financial centres were researched, with 119 included in the main index. The rankings are based on 140 instrumental factors, supplied by third-party sources such as the World Bank, the OECD, and the United Nations.
These quantitative measures are combined with qualitative assessments provided through the GFCI online questionnaire. GFCI 37 incorporates 31,314 assessments from 4,946 respondents.
Ranking Offshore Jurisdictions: Criteria and Realities
- Tax Advantages: Reduced tax burdens, including zero corporate income tax and VAT on foreign earnings, helping businesses minimize costs.
- Financial Privacy: Strong privacy laws and corporate frameworks that limit disclosure of company ownership and banking details.
- Regulatory Benefits: A less restrictive regulatory environment compared to many home countries.
- Asset Protection: A stable, neutral setting for holding assets and diversifying wealth across multiple jurisdictions.
- Ease of Business: Fast and flexible incorporation processes with fewer regulatory requirements.
- Caribbean: British Virgin Islands (BVI), Cayman Islands.
- Europe: Jersey, Isle of Man, Guernsey (UK territories), Luxembourg, Switzerland, Liechtenstein, Gibraltar.
The Legal Test for a Sham Trust
- Settlor’s Retained Control: The settlor retains such extensive control over the trust’s assets that their powers amount to effective ownership.
- Treating Assets as Personal Property: The settlor continues to handle trust assets as though they were their own.
- Lack of Trustee Independence: The trustee operates under the influence of the settlor, acting according to the settlor’s wishes rather than in the best interests of the beneficiaries.
- Abuse of Fiduciary Duty: The settlor or trustee exploits their position to misappropriate trust funds for personal use.
