Setting up offshore banks

Setting up an offshore bank in a tax free haven requires much research and planning. Many factors have to be considered when deciding upon the location of an offshore bank.

Taxation
Offshore banks require to be set up in a tax-free place that has a low tax rate or provides concessions on tax rates to an offshore bank. A location that does not impose interest withholding taxes is preferred by clients of the offshore bank and thus will also be attractive to the offshore bank as interest withholding taxes are often part of its funding costs. The absence of a dividend withholding tax is also an important factor for the shareholders of the offshore bank. Taxes other than income taxes must also be considered.  Stamp duty on loan or mortgage documents, receipt taxes and stamp duty on securities transfers can be significant cost factors.

Legislation
The legislation of each all countries regulates banking activities within their jurisdictions, which also extends to the external activities of these banks in some cases. Ideal would be a location where legislation controls banking operations within the domestic sphere and provides a more lenient banking rules for activities conducted with non-residents.  Many offshore banking centers have a dual licensing system with full licenses for domestic banking operations and restricted licenses for offshore banks that conduct their banking activities with non-resident entities.

The banking legislation should ideally provide for low capitalization without statutory minimum capital and reserve requirements, loan raising without mandatory debt-equity ratios, unrestricted lending activities, complete foreign ownership of offshore banks, cash management without minimum liquidity rules, free from excessive reporting obligations, and also non-disclosure of client activities.

The corporate legislation is also a significant factor and should complement the banking laws. Ideally the corporate law should be consistent with the law adopted in jurisdictions where the banking or corporate group operates. Special factors, such as anonymity of ownership, corporate secrecy provisions, transfer of corporate domicile and minimal reporting requirements may be attractive for some offshore banks.

Exchange controls
The flexibility of the banking policies require to be accordingly complemented by free movement of funds.  The offshore bank must be able to move its funds freely through the international banking network and the offshore banking center should be able to provide direct access to that network.

Other criteria
Various other factors should be considered in selecting a location suitable for offshore banking Political and economic stability.

Banking activities
Generally, an offshore bank can carry out all the usual banking operations of an ordinary onshore bank and these banking activities are dictated by the granted banking license. Usually the bank will be able to undertake these common offshore banking operations, like  

• Availability of banking and professional expertise & access to telecommunications.
• Deposit taking
• Syndicated loans or Eurocurrency under writings Corporate loan raising
• Intra-group lending
• Foreign currency management
• Provision of confirming finance
• Lease finance
• Debt factoring

However, in some jurisdictions an offshore banking license is issued on a special condition that the bank may accept deposits from only a limited circle of clients.  Usually these are the bank's share-holders or persons mentioned in the bank's charter or license.  Such a license is defined as "limited".   In this case the bank may have a limited number of clients.

Foundation documents of an offshore bank usually provide for trust operations.   The bank functions as a trustee and manages the clients' securities portfolios.   Investment portfolios may include not only financial resources but also precious metals and other assets.  Clients are serviced on a trust contract basis. The following structures are often used: combinations of an offshore bank and an offshore investment fund, or offshore bank and an insurance company.  Business activities of commercial banks are becoming more and more international and trust operations constitute a large part of these activities. 

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