The Seychelles and the Dawn of the Offshore Era

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The Seychelles and the Dawn of the Offshore Era

The Seychelles, like many other so-called tax havens are rushing to introduce amendments to existing legislation to be excluded from the list of non-cooperative countries that the EU has created to distinguish EU-based companies when trading with Seychelles companies by imposing additional taxes on payments toward the Seychelle counterparts of the EU companies. The EU has adopted France’s approach toward the Seychelles which France has labelled as a non-cooperative country.

The OECD is also keeping an eye on Seychelles and has recently downgraded the island from being largely compliant to only partially compliant.

In response, the Seychelles government has rushed to amend the current legislation to bring it in line with the demand of OECD and the EU. In particular, the new legislation was introduced namely the Anti-Money Laundering and Countering the Financing of Terrorism Act 2020 and the Beneficial Ownership (BO) Act 2020.

The Seychelles authority is committing to the exchange of information on the beneficial owners Seychelles companies.

Another major change that the Seychelles government that is considered is related to the existing legislation namely the Limited Partnership Act, the Foundations Act, the International Business Companies Act and the newly proposed Trust Bill. One of the proposed changes is to keep accounts of Seychelles companies local, with the option to potentially make them publicly available. The option to have accounts of Seychelles companies audited by local auditors might be on the offering as well. Due to the small pool of local accountants, the cost and duration of audits will inevitably increase substantially.

Several years ago, filing agents in almost all tax haven jurisdictions requested for clients to confirm that the tax haven company retain records of their accounts. However, no accounts were requested to be submitted.

There is one more question to be answered: what depth of details should be kept in the Seychelles records? Anyone who is familiar with accounting could point to the set of accounts such as: Trial Balance, General Ledger, Individual Ledgers, and unaudited financial statements with sufficient disclosure under IFRS. Besides, would Seychelles companies be required to keep all supporting documentation like individual invoices, accounting vouchers, bank statements and other supporting documentation? If so, in what format etc. There are more questions than answers at this moment.

Having introduced the requirements for compliance, financial and tax reporting, the Seychelles government would bring an end to its offshore company and trust industry as Seychelles International Business Companies would have no competitive advantages such as low cost of incorporation and maintenance (especially if the substance requirements like having a real office and staff on the ground are introduced), and zero tax on corporate income. OECD countries won’t tolerate tax advantages and lose much-needed funding to support the straggling economies; finding a way to economically discourage owners of Seychelles companies to use them in international trade.

The era of relative prosperity with tax havens is coming to an end unless the local governments come up with some smart replacements of so-called International Business Companies which were so popular in part due to the low cost of incorporation, no requirements to file accounts and zero percent taxes on corporation profit. With the tourism industries around the world hit hard by the COVID-19 pandemic, it would be difficult to see how the tax haven economies would sustain and weather the perfect storm.

Are there any suitable replacements to the Seychelles?

As the exodus from tax havens starts, several viable options are available to the owners of tax haven companies. Two of them are obvious – to abandon the tax haven company by transferring all assets to a low tax jurisdiction or follow the re-domiciliation procedure by moving the tax haven company to the low tax jurisdiction.

The latter will depend on the legislation of receiving and leaving the jurisdiction. For example, Cyprus allows for a simple and straight forward re-domiciliation while Singapore has imposed some conditions on the re-domiciliation process. The former approach could be completed via assets sales/purchase agreement or by the contribution of the assets of the tax haven company in the share capital of the company set up in the low tax jurisdiction, and later buying the shares of the low tax jurisdiction company say for USD $1, creating a loss in the tax haven company, and leaving it to eventually go into liquidation.

Low tax jurisdictions like Singapore, Hong Kong, Cyprus, and others are actively offering themselves as solid tax haven replacements.

When counting the cost of running an international business through an offshore company the following is to be taken into account:

  1. Cost of incorporation.
  2. Possible use of nominee services and cost of it.
  3. Whether a local director is required which is the case in Singapore.
  4. The substance requirements in the jurisdiction.
  5. Whether the jurisdiction allows corporate directors or not.
  6. Whether an annual audit is required. For example, the UK and Singapore have an exemption from audit for small companies. This reduces the cost and simplifies the annual compliance
  7. What is the attitude of the banks to this or that jurisdiction? And Is there any requirements for the business for the bank to be at the same jurisdiction as the company? There is no point owning an offshore company without a bank account.
  8. Who will be preparing annual accounts? How much will it cost?
  9. Cost of Tax return preparation and filing.
  10. Cost of Annual Return preparation and filing.
  11. Cost of making changes to the company structure, i.e. change of director, shareholder, etc.
  12. Are there any stamp duties on the sales of shares?
  13. The tax system of the jurisdiction – corporate tax rate (also tax reliefs and benefits which are available for the local companies in the particular jurisdiction), capital gain tax rate, indirect tax rate, etc.

Eltoma Corporate Services is providing legal, accounting, and tax services for clients for over 10 years. We specialise in the jurisdictions of Singapore, Hong Kong, Cyprus and the UK where we have licences, office and locally qualified professionals.