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‘Panama papers’ or the setbacks of the popularity of offshore companies Understand the legal setup in the background The news of “Panama papers” …

This is the political-media scandal that has revealed the popularity of offshore companies with the leak of more than 11.5 million confidential documents from the Panamanian law firm Mossack – Fonseca. This scandal has detailed information on more than 214,000 offshore companies as well as the names of the shareholders of these companies. But above all, what is an offshore company? The mechanism of offshore societies is complex, nebulous, not to say mysterious. There is no such thing as a legal definition of such a society. In the literal sense, it is a society “far from the bank” or “far from the shore”. In the legal context, we will think more of a society “screen” or “without residence” or more technically “extraterritorialized”. In reality, it is a company created in a country in which the partners or actual shareholders are not resident and which is directed outside the country of official registration.

The legal reality of offshore companies …
Societies are fictitious persons who exist only from the point of view of the law. To speak of residence of society is therefore a fiction. The concept of a registered office is precisely that of a State of attachment whose law governs all that society does. The offshore company is thus a form of society screen, which has all the characteristics of a real company (registered), but whose appearance does not correspond to reality (real paper on one place but hiding another invisible). There are significant suspicions about the legality of these companies, including their role in money laundering, tax evasion and other cross-border economic crimes.

As we say in everyday language, “everything that is not forbidden is allowed”. In this sense, the creation of an offshore company is not illegal in itself; it is the use that is made of it that can be! An offshore company may be established and the profits derived from the activities of that company in the country of establishment and in its country of actual residence to be promoted. On the other hand, and this is often seen in the vast majority of cases, offshore companies are erected for fraudulent purposes. This explains that as soon as we create, we presume that we have something to hide.

The assembly in practice …
An offshore company is headquartered in state A, Panama in this case, but operates in state B, Nigeria for example. The company is therefore a resident of State A, from a legal and administrative point of view, but its real activity, or its real estate, is located in State B. In order to make it more complex and leakproof , use the services of a nominee who, at the level of the non-cooperative state, acts secretly on behalf of the shareholder. The nominee makes it possible to make the links between the shareholder and the company more opaque.

The benefits of offshore companies
Offshore companies are often used in countries where taxation is advantageous. One of the first legitimate objectives to create an offshore company is to look for this tax facility through complex assembly. The setting up of an offshore company allows to set up opaque screens according to the number of intermediate offshore companies. The host State, if it wants to encourage the establishment of offshore companies, will very little impose companies domiciling on its territory. This is the case of Luxembourg or Seychelles, Singapore, Hong Kong, etc. which are famous legal tax havens.

The creation of an offshore company does not necessarily mean the existence of a total tax exemption because the States sometimes have other processes to seek and tax companies not registered on their soil but actually operating there. The advantage here is that it will be more difficult for the State to identify a distribution of dividends to a given taxpayer if it is impossible to know if the taxpayer is a member of the company, and if the distribution is in addition in a Foreign state that does not collaborate.

The second set of objectives often holds research abroad of a legal form that is not found in a given legal area. This advantage is less possible within the States of the Organization for Harmonization in Africa of Business Law (OHADA), where the law of commercial companies is standardized compared to the law of the European Union (EU). In a comparative approach to EU regulation and that of OHADA, the latter, while not prohibiting offshore companies, would lend itself less to these arrangements. Indeed, in EU law, national laws may propose more or less efficient organizations, with more or less control of the partners over the actions of the managers, a higher or lower social capital required, and so on. right now.

Is mounting legal?
But the question one might ask oneself is whether it is lawful to avoid obligations specific to one’s place of residence by seeking another more permissive legal form elsewhere? In principle yes, even if morally one could demonstrate the immorality of the act especially between investors all of the same country of residence. But if investors come from several countries, even immorality is relative to the legal compliance of the assembly that optimizes the profitability of the project.

Example: I am Beninese, I have an investment to make with a Nigerian. If the case is to be held in Benin but the law of Ghana is more tax efficient and offers more flexibility in the organization of powers and functioning than the rights of Benin and Nigeria, nothing prevents me from registering my company in Ghana. This choice can also be made just to decide between us in case of disagreement on the choice of applicable law. It would not be a fraud.

A third set of objectives relates to the introduction of a complexity in the legal arrangement (organization scheme of the society or the heritage); complexity coupled with the confidentiality that allows to lose the social administration (health, hygiene and safety, social welfare, etc.) and tax on the functioning of your structure. And if the chance is that this installation is housed in a country like Panama that is very opaque, then very little information would circulate on the structure and so it would be better able to hide its shareholders, its activities, its income, etc. .

Example: You have Mr. X who owes you money. Even if you know that he has many assets held by one or more companies, when these companies are offshore, legally nothing attaches to them and therefore to these assets. You can never practice seizure on these assets officially and prosper. If you want to establish the link with the offshore companies, you must make representations to the authority of incorporation of the company. And precisely if this authority is in Panama for example, you will be unable to have information on the owners of the company and Mr. X will escape your lawsuits as simply. He has just protected his property through the offshore company.

This is how the establishment of an offshore company in non-cooperative states, can make a legal activity as illegal undetectable: it will be impossible to establish the link between the partner (shareholder) and society. The partner (shareholder) can thus enjoy a good of the company, but you will not know that he controls the company. The company pays him money, but on an account abroad, and you do not even know that there are such transfers and such links between the company and the shareholder.

Possible solutions to fight illegal offshore companies
As a general rule, the State of incorporation of the company keeps a register of the companies which have been constituted on its territory and have established their registered office there. So in principle, if the records of all states were available, a shareholder could not create a company and hide his identity. Rather than requiring States to collect the registers, it would be useful for these registers to be interrelated.

Indeed, one example is OHADA, which has set up a trade and personal credit register (RCCM) at local, national and regional level within the seventeen (17) Member States. It would therefore be appropriate for harmonization conventions to be concluded between States for the establishment of transnational registers outside the OHADA area. The European Union would thus gain in terms of registration of companies to harmonize its registers to avoid seeking legislation that allows to hide their owners or drastically reduce taxes. The proposal would only be effective, however, if non-cooperative States agree to harmonize their registers. The purpose is not to prohibit offshore companies but rather to be able to trace those who engage in illicit activities such as money laundering, tax evasion, etc.

D & Partners expertise
We can create an offshore company, but we must know how to stay within the limits of legality and not simply create and postpone certain disastrous consequences for its structure (reintegration, recovery, etc.). Legal or tax optimization can not be improvised and can be thought of as soon as the business idea is developed. D & PARTNERS and its pool of legal experts, lawyers, accountants and tax experts stand ready to accompany you! Contact us here: OUR SOLUTIONS, YOUR SUCCESS!

Dr. Karel Osiris DOGUE (LL.D. Montreal),
D & Partners Consultant