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Offshore Incorporation Trends

Clicks :20342014-08-13 14:28:24 Source: World Wise Consulting Limited

The lingering effects of the financial crisis, which continue to suppress economic dynamism in many parts of the world, have undoubtedly contributed to a dip in offshore company formations in the second half of 2012. However, as some recent studies and statistical reports show, certain jurisdictions are doing much better than others in attracting new investors, suggesting that certain other forces are at play here.

According to legal services consultancy the Appleby Group, the majority of offshore jurisdictions experienced a decline in company incorporation activity in the second half of 2012 compared with the first half. The firm’s “On the Register” report shows that on-going weakened economic conditions continued to impact the overall market during this period, when there were 37,881 new offshore company formations in the jurisdictions covered by the report, a decrease of 3.6 percent from the second half of 2011, and a deeper decrease of 11 percent on the preceding six months in 2012.

Taking the entire year into account, the overall number of new company incorporations for the majority of jurisdictions stayed flat in 2012, which proved to be a year of consolidation following large increases in annual new incorporations between 2009 and 2011. The story is similar for the total number of active companies, with most jurisdictions showing little movement from the previous year as new company formations cancelled out the numbers leaving the registries.

"Continued uncertainty in some markets and the shift in focus from China/Asia to Africa for jurisdictions such as Mauritius and the Seychelles are preventing a speedy return to the numbers of company formations recorded prior to the global economic crisis," Ballands said. "Add to this several major international events during the second half of 2012 including the US Presidential Elections, continued economic uncertainty in the eurozone and the once-in-a-decade change in leadership in China, and it's hard to be surprised at the company registrations barometer struggling to quickly improve," she added, "but we are seeing growth in some markets."

Appleby’s report shows that after a busy first half of the year, jurisdictions including the Isle of Man, Mauritius, the Cayman Islands and the British Virgin Islands (BVI) were approximately 10 percent down in the latter half, although the BVI continues to dominate offshore new company registration activity by volume, maintain a consistent six-fold lead over the Cayman Islands, its nearest rival. On the other hand, the report suggests that the Cayman registry is steadily returning to its pre-recession peak in terms of active companies registered, as is Mauritius.

However, as Ballands observed, recent statistics point to an eastward shift in investor sentiment. Hong Kong, although not technically ‘offshore’, but sharing some similar characteristics with offshore and low tax jurisdictions, saw a 9 percent increase in the total number of active registered companies in the last half of 2012, with the local register there breaking through the one million mark for the first time. And this is certainly no flash in the pan either. Hong Kong registry statistics show that the number of registered companies in this Special Administrative Region of China has grown consistently for a number of years as the jurisdiction is seen as a low-tax platform for investment into China and elsewhere in South East Asia. This trend is supported by more recent statistics, which show that almost 85,000 local companies were newly registered with the Hong Kong Companies Registry in the first half of 2013, an increase of 9.3 percent from the 77,700 in the second half of 2012. As at the end of June 2013, the total number of live local companies registered was 1,100,778, up 56,134 from the figure at end-2012. "The number of newly-registered local companies continued to rise in the first six months of this year, with 16,187 companies incorporated online at our e-Registry," said the Registrar of Companies, Ada Chung. Meanwhile, the total number of non-Hong Kong companies registered reached 9,014 by the end of June 2013, compared to 8,848 at the end of last year.

Singapore, the region’s other major low-tax financial centre, has also seen a remarkable rise in company incorporations this year. According to the Singapore Business Formation Statistics Report, compiled quarterly by Janus Corporate Solutions, there was a 13.2 percent increase in business formations in the second quarter of 2013 compared to the first quarter, and a rise of almost 10.7 percent when compared to the second quarter of 2012. It was found that there were 16,027 businesses established in Singapore in the second quarter of 2013, registering a significant increase compared to the 14,156 businesses set up in the first quarter of the year, and the 14,481 recorded in the second quarter of last year. As in previous quarters, the private limited company continued to be the most common business entity type set up in Singapore with 9,145 formations in the three months from April to June this year. This is followed by sole proprietorships with 5,433. Just over 85 percent of the private limited companies, and nearly one-half of all new businesses formed in the second quarter of 2013, were incorporated as exempt private limited companies, each of which has 20 or fewer individual shareholders (of which at least one holds at least 10 percent of its shares) and have simplified compliance requirements.

Sneaking under the radar almost is Labuan, an offshore territory within Malaysia created in 1990, which has also seen keen interest from investors in recent years. In October 2013, the Labuan International Business and Financial Centre (IBFC) reported the achievement of a major milestone with the formation of the 10,000th company during the third quarter of this year. As of August 31, 2013, a total of 10,003 companies had a presence in Labuan IBFC comprising 641 licensed entities and 9,362 normal Labuan companies, of which 4,660 are operating. Interestingly, more than 70 percent of the Labuan companies originated from the Asian region -- Labuan has become the offshore platform of choice for investing into and out of South Korea. Nonetheless, the jurisdiction has also witnessed sustainable interest from investors in Europe and America, as well as the Middle Eastern region, according to the Labuan Financial Services Authority (FSA).

New company registrations in Dubai’s growing list of free zones have also risen consistently despite the gloomy economic backdrop globally. The Dubai International Financial Centre (DIFC) reported recently that its active registered companies grew 7 percent in the first half of 2013. By the end of June 2013, a net total of 979 registered companies with a combined workforce of 15,000 were operating within DIFC's financial ecosystem, little more than a decade since its launch in 2004. "Interest from North America and Europe continues to increase as Western multinationals look to diversify their operations and expand towards the East," a DIFC press release said. "DIFC has also witnessed sustained interest from Middle Eastern and Asian firms looking to increase their exposure to opportunities arising in Africa and the West. Today, the geographical diversity of the Center's total number of regulated companies reaffirms DIFC's growing status as a global financial center catering to the region. Approximately 36 percent of regulated companies come from Europe, 27 percent from the Middle East, 16 percent from North America, 11 percent from Asia, and 10 percent from the rest of the world." With confidence in itself high, the DIFC announced plans in October 2013 to add AED15bn (USD4.1bn) worth of new buildings to accommodate high occupancy demand. "The latest plan is in line with DIFC's long-term growth strategy and reflects the growing demand for space, from both existing and potential clients, who wish to expand their operations in the Center,” the DIFC stated.

While these figures point to the rise of Asian low-tax and offshore financial centers, some believe that recent incorporation trends reflect a ‘flight to quality’ in response to the renewed crackdown by the OECD and other multilateral groups and governments against tax avoidance, which has left the smaller offshore territories trailing in the major jurisdictions’ wake.

According to recent research presented at the Royal Geographic Society's international conference, smaller offshore territories have borne the brunt of proposals designed to help governments recover the tax they are owed because they are perceived as less reputable, and are therefore seen as riskier places to incorporate a company. Dr. Daniel Haberly told the conference that multinationals have "shifted money around" in response to the changing situation. Businesses, he observed are increasingly favoring jurisdictions such as Switzerland, Luxembourg, and Ireland, at the expense of those like St Vincent and the Grenadines, Nauru, and, in an assertion that contradicts Appleby’s findings, the Seychelles.

The Labuan FSA certainly believes that strengthening its legislative and regulatory framework to bring the jurisdiction more into line with international standards is helping to fuel growth there. And FSA intends to continue to enhance this framework as it positions Labuan IBFC "as a mid-shore jurisdiction with a robust regulatory framework and the flexibility and competitiveness of an international financial centre." The Authority will also continue to pursue greater cross-border supervision cooperation network with other regulators.  "The OECD Center's continued endorsement is important for Labuan IBFC in its ambition to be the International Financial and Business Center for the Asia Pacific,” said Danial Mah Abdullah, Deputy Director General of Labuan FSA, following a recent meeting with the OECD Center for Tax Policy.

Then again, the Isle of Man is seen as one of the most cooperative and reputable jurisdictions out there, onshore and offshore, yet Appleby’s report points to quite a sharp fall in incorporations in the last half of 2012. By contrast, Bermuda, which was recently placed on the French “blacklist” of uncooperative jurisdictions, and has been constantly attacked in the United States Congress as an uncooperative tax haven sucking corporate profits tax revenues out of the America, saw one of the strongest rises in company formations last year. On top this confusing picture, Appleby predicts that 2013 will be a “watershed” year for offshore company formations, and the stage looks set, as Ballands put it for “a universal return to pre-2009 activity levels across the offshore jurisdictions."

So, it is difficult to isolate any one factor as having the most impact on the overall picture of incorporations in offshore and low-tax jurisdictions. Economics is clearly having an influence, with some territories taking longer to fully recover from the crisis than others. The lure of emerging economies in Asia and the Middle East is also drawing Western investors towards Hong Kong, Singapore, Dubai and other tax-efficient launch pads for investment in these regions. But then the unrelenting drive for more transparency and information exchange is undoubtedly influencing where multinationals choose to form holding and trading companies too, and will be interesting to see how the OECD’s BEPS project affects things. However, as Appelby's report shows, at the moment, overall offshore company formations are holding up well.


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