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Wednesday 30, May 2018 by Jessica Combes

The pros and cons of offshore incorporation


Kenneth Morgan, Head of Business Development and Marketing at BVI Finance discusses the business and banking benefits of setting up offshore with Banker Middle East

More Middle East businesses are choosing to locate themselves offshore for a number of reasons, including the ability to quickly and efficiently set up a business, manage the assets within said businesses, and settle any disputes that may come from various parties. An added benefit is that offshore structures work well alongside Shari’ah financial law thanks to the flexibility, fairness, and treatment of money they offer Islamic finance practitioners. In fact, there are now more than 12,000 business companies registered in the British Virgin Islands (BVI) alone that are based in the Middle East and North Africa (MENA) region.

Offshore centres are some of the largest jurisdictions in the world for incorporations, making them some of the most flexible business options. This is partly because offshore incorporations are cost effective and fit with the growing trend of Middle East businesses seeking out cost-cutting alternatives when it comes to banking— offshore government incorporation fees and annual renewal fees are significantly lower than doing so onshore in the Middle East. This is particularly true if owners of the business are expatriates, as it allows them to avoid costly licencing and sponsor fees.

However, offshore companies operating in the Middle East must still be compliant with local laws and regulations. Incorporating offshore also allows for different types of incorporations. A Middle East firm based offshore can be a limited or unlimited company, a restricted purpose company, or can be a company consisting of segregated portfolios. This is important given both Islamic and conventional funds share common objectives, such as pooling investors, preserving capital, and optimising returns, but Islamic funds adopt certain conventions in order to adhere to the requirements of Shari’ah law. The flexibility required for this is inherently built into the structure of offshore financial vehicles.

Some jurisdictions in the Middle East have restrictions, such as who can own shares, the number and classes of shares that can be issued and the type of activities that can be carried out. As a result, offshore centres are often vital for cross-border transactions involving Middle East groups with offshore vehicles used as joint venture channels. Incorporating businesses and assets offshore also offers organisations the ability to pool financial resources.

There are often significant opportunities for investing in the infrastructure of developing countries, for example there has been a growing appetite for Islamic finance emerging across various African nations. But, in these nations, business law is still in its infancy and the judicial system can be lacking when dealing with complicated corporate matters. Creating an offshore corporation to manage finances across borders between the Middle East and other, less experienced regions offers access to a neutral jurisdiction, an up-to-date statutory and regulatory framework and sophisticated courts.

Many offshore jurisdictions base their legal systems on English common law, making them trusted destinations for businesses worldwide. These protections and benefits afforded to companies registered in these jurisdictions create an attractive environment for those operating on an international level. According to the World Bank, it takes on average 437 days to enforce a contract in the UK or one of its overseas territories, while it takes 638 days in the MENA region. The World Bank estimates that businesses can recover more than 85 cents on the dollar from insolvencies in the UK and its overseas territories, whilst debtors only receive around 25 cents on average in the MENA region. S

hari’ah financial philosophy is based upon the fundamental principles of openness, transparency, the promotion of fairness and the treatment of money not as an asset to be accumulated. Many offshore financial centres have been shown to be more compliant in terms of transparency and sharing of information than many onshore jurisdictions. The likes of the BVI, Cayman Islands and Bermuda are more compliant than almost all OECD countries with regards to meeting the requirements of the Financial Action Task Force.

However, it is important to acknowledge the difference between legitimate tax planning and illegal activities such as evading tax and hiding profits. So long as there are different tax rates in different countries, offshore financial centres will serve as neutral conduits for the flow of money. Indeed, international trade is facilitated by tax-neutral entities which serve to aggregate assets and capital. For individuals and families in the Middle East looking to move and manage assets offshore there are clear business benefits.

Shari’ah scholars often require parties to a transaction to deal at arm’s length, and trust structures can be useful in this instance. Cayman STAR trusts or BVI VISTA trusts are commonly used here as they afford sufficient flexibility for such transactions. These structures remove the duty of trustees to monitor and intervene in the management of a company held in trust and therefore allow the client to retain effective control of the company having divested himself of its ownership. This allows effective succession planning without having to cede control of the assets, which is particularly useful for the management of heirlooms and long-established family businesses. Private Trust Companies are also available to further enhance family control of succession issues. These allow senior family members to be more involved in the management of family trusts than they would be using a traditional professional corporate trustee.

In all, using the facilities of offshore jurisdictions can offer Middle East based business owners and operators myriad of cost-saving and financial benefits. More Middle East start-ups in particular are choosing to base their new businesses on offshore jurisdictions to reap the benefits of how business can be formed, managed and financed.

Careem Inc., the Dubai-based ride-sharing platform, is a prime example of start-up entrepreneurs successfully securing investment via a British Virgin Islands incorporated investment vehicle. Established in 2012 as a website-based service for corporate car bookings, the business was recently valued at $1 billion and is widely recognised as the “Uber of the Arab world”.

The inherent set up of many offshore financial vehicles lends them to Shari’ah laws, as well as streamlining the incorporation process and removing often cumbersome regulatory burdens for business owners. As entrepreneurship in the Middle East continues to thrive in coming years, offshore financial centres will prove instrumental in supporting this growth and enabling even more businesses to succeed on an international level.