Who do companies register as off-shore entities?

Issue I, 2008, February-March. Mariam Antia, Lawyer MKD

AmCham hits the beach to find out the pros – and cons – of being an off-shore business. This is the eleventh column in a series dedicated to answering all of your questions about anything Georgian – from business law to driving practices. Send your inquires to us.

A quick look at the countries of origin for some of the top investors from 2007 is a little startling: Gibraltar? The British Virgin Islands? More and more companies are taking advantage of the exotic (and not so much) tax havens around the world; Georgia’s foreign investors included.

According to Mariam Antia, a lawyer at Mgaloblishvili, Kipiani, Dzidziguri (MKD) Law Firm, investment from an off-shore company is nothing unusual.

In an email interview with AmCham, she noted that off-shore investors are a “significant part” of foreign investors. “For most of transactions, they constitute the so-called SPV (special purposes vehicles) for purposes of carrying out investment projects overseas,” Antia wrote.

The benefits of being an off-shore company are two-fold, according to her. First are the attractive tax benefits although the extra layer of confidentiality concerning the company’s ownership also plays a role.

Technically, Antia explained, Georgian law does not contain a “specific” definition of an off-shore registered company. Within the tax code, the legislation refers to them as “country with favorable taxation” which basically means any country that has a tax rate 1/3 lower than Georgian taxes. In addition, a country is considered to have “favorable taxation” if its laws on confidentiality shield information about the company’s beneficiary or income.

There is one caveat, Antia noted: under Georgian tax laws, a Georgian resident can be taxed for income he or she receives from a company registered in a “country with favorable taxation” if he or she owns – directly or indirectly – more than 10% of the company’s shares.

Danger of Double Taxation
However Antia cautioned that for investment purposes, a company needs to take special note of possible double taxation. Although the country the company is registered at may have “favorable” taxation, she explained, there is a danger the company might be unprotected against double taxation.

“Generally, DTTs are designated to eliminate the double taxation of income or gains arising in one state and paid to the residents of another (contracting) state… [I]f a foreign investor plans to invest in Georgia and receive income such as dividends or interest, the investing vehicle needs to be incorporated in the jurisdiction, with which Georgia has the most favourable taxation regime under the applicable DTT,” she wrote. “Otherwise, the investor may well be subject to taxation in Georgia, as well as in the country of incorporation.”

Limitations of Confidentiality
While registering as an off-shore company can provide investors with an extra layer of confidentiality, the benefits might be outweighed by anti money-laundering laws, Antia noted.

There is constant work being done internationally to improve transparency and anti-money laundering legislation. The Organization for Economic Co-operation and Development (OECD) works with off-shore jurisdictions to insure they comply with up-to-date international norms.

However Antia added that there are Georgian laws in place that allow some disclosure of beneficiary information from an off-shore company. The law on facilitating the prevention of illicit income allows monitoring bodies to identify anyone who is involved in transactions “subject to monitoring” and double check their identity according to a “trustworthy and independent source.

For instance, she pointed out that banks require valid identification prior to allowing a client to open any sort of account.

Disadvantages to Registering Off-shore
According to Antia, in order to facilitate the country’s anti-money laundering legislation, Georgia established “zones of caution,” which are countries or territories that are believed to have “weak” control mechanisms in place to detect money laundering or other forms of illegally obtained income.

Antia explained that by law if a company is involved in a transfer of funds with a zone of caution – or if the company is registered or residing in one – its transactions can be considered “suspicious” and be monitored.

“[N]otwithstanding the assumption on suspicious nature of the transaction and the value of the transaction, the monitoring bodies do not suspend the transaction, unless the identification of the person is impossible,” she added. 



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