Foreign-Source-Income Havens: Profits Abroad--Tax Free Bermuda, the Bahamas, and the Caymans provide natural and obvious no-tax alternatives to the American tax system. The United States taxes all income, regardless of its sources. The no-tax havens tax none of it. There is a third possibility, countries that tax only income generated locally. If one lives and works in one of these places, the income from his work is taxed. However, if he lives there and derives income from abroad, or if he does not personally reside there but his legal "shadow" (a corporation or trust) does, then that foreign income is not locally taxable. This illustrates an important distinction in taxing practices. Tax systems can be compared not only in terms of the types of taxes they impose, the proportions, or rates, they use to determine the amount of tax due, but also in terms of the sources of income that are considered taxable. Countries that impose no taxes on foreign income are not always tax havens. Most Latin American countries tax only local income, but most of them are too politically and economically unstable to be worth even a passing thought. Moreover, governments that exclude foreign-source income from taxation are unlikely to face much political opposition if they decide to tax such income. The populations of such specialized havens are used to taxes. In other words, if there is any guarantee of the continuation of the practice of exempting foreign income from taxation, it lies in a sustained desire of governments to earn revenues from the tax haven industry in other ways. Unfortunately, such policies tend to be as fragile as the governments taking advantage of them. While the continuation of current policy can be reasonably expected in most no-tax havens because of the strong influence of tradition and simple individual self-interest. No such automatic projection of stability can be made in most no-tax-on-foreign-source-income countries, but there are some exceptions. Each of them merits attention because all offer the possibility of creating a local company, the bulk of whose investment is abroad and thus free from local taxation, but that is located in a country that does not possess a tax haven reputation. To be more specific, if one has a Hong Kong corporation, he may very well have some very good business (as opposed to tax) motivation for it: cheap local labor, excellent possibilities for international trade, etc. A Bermudan exempt company, however, instantly suggests tax avoidance to a suspicious mind. Another general advantage of these havens is that their governments usually want foreign investment. In some of these countries, foreign investors get preferential treatment that may mean not only tax advantages, but subsidies, marketing privileges, etc. So let us look at these unusual lands. Panama. Panama deserves first mention here because it is already so widely used by American individuals and corporations as a base for their foreign operations. It is notable for the combination of tax and business advantages it offers despite the recent invasion. A major reason for the popularity of Panama is its location. It is the link between North and South America, and it includes the famous Panama Canal, connecting the Atlantic and the Pacific. Its total land area is 29,700 square miles. The majority of these people (60 percent) live off the land. The capital, Panama City, contains most of the urbanized population and most of the rest live in the other major city, Colon. Colon's significance, economically, derives from its freeport facilities, which we will discuss later. A visitor to Panama is in no danger of freezing. The climate is tropical--hot, with heavy rains (50 inches a year on the Pacific side, 150 on the Atlantic). There is a dry season from mid-December through the end of April. One can reach Panama more easily than virtually any other tax haven. Many airlines serve Panama. If sea travel is preferred, Panama has four excellent ports: Cristobal at the Atlantic end of the Canal, Balboa at the Pacific end, and Puerto Armuelles and Bahias de las Rouge. Telecommunication is extremely efficient because Panama is an international crossroads of trade. There is direct telephone service via satellite and very reliable telex, cable, and airmail. Politically, Panama is a "banana republic." It has, on the surface, a democratic election system that every six years is supposed to produce a turnover in the unicameral legislature, the National Assembly, while the "chief of state," the president, and the vice president are supposed to be elected by the assembly. The chief of state is the chairman of the national cabinet and roughly corresponds to the prime minister in a parliamentary government. On paper, the National Assembly has the job of examining and approving or disapproving legislation drafted by a national legislative commission. In reality, Panama is a typical Latin American dictatorship run by whoever happens to be in charge of the National Guard (army), with all the republican and democratic trappings as mere window dressing. However, the military leaders--even the leftists--never seem to tinker with the tax and corporation laws. There is a kind of economic freedom absolutely unaffected by political turnover. The rulers seem to have the good sense not to slay the goose that lays the golden eggs. Another indication of the considerable independence and stability of economic policy is the structure of the Panamanian civil service and government. We are used to a public bureaucracy in which each department is headed by a political appointee to a ministerial/secretarial position. In Panama a variety of governmental functions are handled by purely bureaucratic agencies with no political honchos. Electricity and hydraulic resources, national telecommunications, tourism, social security, all these functions are handled by a semiautonomous official institute, which is not under any cabinet minister. Spanish is the official language, but English is very widely used. Most professionals and businessmen speak English. A very pleasing feature of Panama is the absolute monetary freedom. The local Balboa is on par with the U.S. dollar and exchanges freely with it. All paper money is American. The lack of exchange controls implies that the government cannot regulate the money supply, and there is no central bank. Add to this banking legislation comparable to that of the Switzerland of old: numbered accounts in the currency the account holder designates and secrecy laws. The central position of Panama in inter-American as well as transoceanic trade means that its professional services--banking, accountancy, legal, brokerage--are of the highest quality and intensely competitive. There are many banks, both local and international. Name any major international banking organization and it has a branch in Panama. There are many Panamanian management companies that can handle local corporate creation and management in all necessary aspects. They play a role analogous to that of Bahamian and other trust companies, and they even offer trust services. (However, in view of the fact that Panama is a civil law country, trusts, though legally possible, are best avoided.) They will handle anything and everything: incorporation, registration of assets, provision of all required nominee officers and directors to cover the various requirements of corporation law, etc. They will even conduct feasibility studies on the advisability of alternative possible investments. Panama taxes locally generated income and exempts from tax all income generated abroad. This policy has existed since the country was founded in 1903, good reason to believe that the policy is too well entrenched to be changed with ease. The income tax on the local income of residents is progressive to 46 percent. If one is in the country less than six months in a year and generates local income, he is not exempted from tax altogether or even allowed to "spread" his income over the whole year. Rather, he pays taxes on a pro rata basis; the ratio of Panamanian residence duration to a full year is the basis for calculation. Thus, Panama is not ideal for an immigrant tax-refugee. (A curious feature of local tax laws is that tax evasion creates liability for fines but not for a prison term.) On the bright side, all income generated by movement of commodities that never pass through Panama (even though they may be invoiced in Panama and managed from a Panamanian office) is completely exempt from taxation. Thus, there are good business reasons--"business motivation"--for setting up a Panama-based corporation. Moreover, if dividends are paid to stockholders residing outside Panama, no withholding tax applies, provided the profit underlying the dividends is all derived from sources external to Panama. Similarly, if one inherits property owned by a Panamanian corporation (by inheriting the stock) and the assets themselves are outside Panama, no inheritance taxes apply. Even if the assets are in Panama, inheritance taxation is quite liberal when compared to the United States. Inheritance taxes are calculated after the estate is divided between the various heirs. The first $30,000 is exempt from tax (this means that if an estate of $150,000 were divided equally among five heirs, each would inherit $30,000 tax free); close relatives are taxed much less than more distant relatives; and tax rates are only 80 percent of their officially stated ratio because of an automatic 20 percent deduction of tax liability. The fact that overseas operations based in Panama are not taxed, together with easily demonstrated business motivation for Panamanian operations, the free exchange of currencies, and the economically strategic position of the country account for the 35,000 corporations, mostly foreign, that are registered in Panama--more than in any other tax haven. This large corporate presence is, in itself, the strongest guarantee of future preservation of the tax-free foreign-income policy. Any change of this policy would scare off most of the 35,000 companies, terminate the flow of money they feed into the Panamanian economy and the government treasury, and thus would be a vast net loss. The free market situation in the international tax haven industry, following from the existence of many alternative havens all competing for patronage, should keep Panama very much "in line." Panama's principal claim to fame as a haven for foreign companies is based on the shipping industry. Like Liberia, Panama offers special advantages for ship owners who elect to fly its flag as a "flag of convenience." The cost of ship registration in Panama is low. Even if a shipping company regularly imports and exports from and to Panama, none of its income or profits (or the salaries of its crews, for that matter) are subject to any Panamanian tax. Moreover, Panama's maritime labor regulations are liberal. Let us now review Panamanian corporate law. Fortunately, it is based on the Delaware laws of 1927 (without amendments). As the reader may know, Delaware is the best U.S. state in which to incorporate because of its very advantageous corporation laws. In Panama incorporation requires two incorporators, who must execute the articles of incorporation before the Panamanian counterpart of a notary public. These two are usually nominees, employees of a local management company. The articles of incorporation are recorded at the public registry office, and the later costs of maintenance can be reduced to a $100 annual fee to a local legal representative. Nominee "incorporators," though nominally shareholders at the time of incorporation, will sign a deed of transfer returning their stock to their principal(s) after incorporation has been effected. The articles of incorporation must include the usual details: (1) company name, with the standard designation for a corporate entity, (2) a statement, however general, of the objects of the corporation, (3) capitalization, specifying both the total amount of authorized capital (which determines the limit of the company's liabilities) and its division into shares with their respective par values (shares with no par value can be issued, but then the government assumes that each share has the nominal par value of $20 for the purpose of computing the registration tax), (4) specification of the nature of the shares--registered or bearer, common or preferred, voting or nonvoting, (5) names and addresses of at least three directors (usually nominees hired for an annual fee), (6) names and addresses of officers (again, nominees--who can be the same individuals serving as directors), (7) the duration of the corporation, which can be a specified limited period or "forever," (8) name and address of the local legal representative of the corporation, and (9) the domicile of the corporation (e.g., Panama City, Panama). How costly is incorporation? Usually $800 to $1,000. Annual corporate maintenance costs very little, about $100-$200. The low fees stem from the fact that the local legal representative has only to exist; he has no reports to file nor any other work to do. Thus, neither incorporation nor company maintenance is very expensive in Panama. It is certainly much less expensive than the comparative action in Bermuda, the Bahamas, and even the Caymans. And one gets the same tax advantages for income generated outside the country. Moreover, there is further advantage to be enjoyed by Panamanian companies that deal exclusively outside Panama. They need keep no financial records locally, nor do they have to submit any annual financial reports with the local tax authorities. What has to be kept locally is a stock register book for registered stock and a minute book for meetings of stockholders. The latter must be rubricated (for a special fee) by a local judge. It is also bound in such a way that the minutes must be entered manually; typed minutes cannot be filed in. This, though, is just an unimportant nuisance, not a serious consideration. Another nuisance concerns stockholders' meetings. If not physically held in Panama, these have to be officially sanctioned by the Panamanian consul in the country where they are held and then registered in the minute book in Panama. Alternatively, they can be made official by the signature of the corporate secretary, the person whose name is recorded in the mercantile registry as the corporation's secretary. Again, this is merely a curiosity of some slight inconvenience, not a major problem. If, however, a company does local business in Panama, it becomes subject to taxes on its locally generated income. In this case, a general ledger, a general journal, an inventory, and a balance sheet must be maintained. A commercial business license may also be needed. This could be bypassed by handling Panamanian business through a corporation domiciled in, say, the Cayman Islands. The Panamanian withholding tax is lower than the corporate income tax on locally operating companies. In any event, if a Panamanian corporation is not in any way directly involved in domestic business activities in Panama, no annual report of any kind has to be made. Even interest generated locally on local bank deposits is free from any local tax or withholding. Thus, for a sum of about $1,000 for incorporation and $100-$200 a year in maintenance costs, a company can enjoy virtually complete business privacy--no reports, no books, no anything. Another advantage of Panama, apart from its very private corporations, the low costs of annual maintenance, and the free exchange of currencies, is the Colon Free Zone. Located at the Atlantic entrance to Panama and accessible by air and sea from every corner of the Western Hemisphere, it is very active economically, with an annual trade volume of about $950 million. It has attracted international companies from the United States, Japan, and Europe. Its freedom of trade involves complete exemption from duties on merchandise imported into it, packed, labeled and/or assembled in it, and reshipped from it. Moreover, no commercial licenses are needed. How to use the freeport facilities depends on the size of the commercial operations one intends to conduct from them. Land can be leased there, and warehouse or other facilities can be built on it. The usual lease is for twenty years and is renewable. Warehouse space can be leased too. Finally, local warehouses are also available for fees based on the value of the total merchandise stored. Clearly, the leasing of space and construction of warehouses for hire is a lucrative business possibility in the Free Zone. Unfortunately, the freeport, although duty-free, is not totally tax-free. Merchandise that physically passes through the Colon area and is subject to some form of local processing--repacking, labeling, etc.--is taxed by the Panamanian government. The tax rates, however, are extremely low. They are based on a 1954 income tax law, under which corporate income tax was but 30 percent on net profit. Add to this a 90 percent "tax discount" applicable in the Colon Free Zone, and the result is a negligible 3 percent tax on net profit from all merchandise that physically passes through Colon not later sold in Panama. (Standard taxes apply to all Free Zone goods resold in Panama.) Summing up, Panama has an impressive array of advantages over its competition: (1) No exchange controls, no federal reserve or central bank, complete monetary freedom. (2) No taxes and no required financial or other annual reports by corporations doing business exclusively outside Panama. (3) Relatively low incorporation and annual maintenance costs, with a rich array of professional services to take care of everything. (4) The possibility of safeguarding privacy with both bearer shares and numbered bank accounts in the currency of the depositor's choice, with tax-free interest. (5) The possibility of dabbling in the shipping industry with minimal governmental costs, costs that are a low function of tonnage and are unrelated to profits. (6) The prospects of doing business through the Colon Free Zone, duty-free and almost tax-free. (7) A tradition of being a tax haven, bolstered by the local presence of many tax haven corporations, creating a virtual knockout argument for any future government tempted to impose taxes on foreign income. (8) The ease of supplying a business justification for a Panamanian corporation should the need arise. Of course, Panama is not perfect. As with the no-tax havens we dealt with in chapter seven, it is not a good location for a holding company holding high-tax country stock. Panama has no double-taxation agreement with any country. However, in a multihaven arrangement of the sort already discussed, Panama could compete with a pure no-tax haven, even the Caymans. Cyprus. Cyprus is an island country in the Eastern Mediterranean. It was formerly a British colony, but since 1960 it has been independent. It is a member of the United Nations, the Council of Europe and the Commonwealth, and has established a relationship with the European Community that will eventually lead to a full customs union (although not to full membership in the Common Market). It maintains politically and economically viable relations with the Arab nations, as well as considerable trade with Eastern European countries. Its ties to Britain and Greece are close. The fact that the northern portion of the island has been occupied by Turkish forces is not thought unfavorable to its tax haven uses. The majority of the Cypriot population is Greek, with a few Turks and other nationalities making up a minority of the population. The national languages are Greek and Turkish, but English is widely used, especially in the legal and business communities. Communications are excellent, and it is a popular tourist destination. As a result of its relationship with Great Britain, Cyprus is a common law country with its companies laws patterned after Britain's. The costs for organizing and maintaining a Cyprus company are based on Cyprus internal costs that are quite low. Cyprus is popular for shipping companies, and there are two ways of using Cyprus for other companies. One is the Cyrus-registered company, which if owned by non-residents and dealing only with foreign business, pays tax at 10 percent of the normal corporate tax rate, which means currently an income tax of 4.25 percent for the company. The other method is the branch office of a foreign company, which pays no Cyprus income tax. The branch cannot use the Cyprus double-taxation agreements, although the Cyprus registered company can, because the latter is a resident of Cyprus. For Cyprus tax purposes, the offshore company may be a holding company, a finance company, an investment company, an insurance company, a management company--many types of companies. Cyprus has tax treaties with the United Kingdom, Denmark, Sweden, Ireland, Norway, Greece, the Federal Republic of Germany, Czechoslovakia, Hungary, Italy, France, the Soviet Union, the German Democratic Republic, Rumania, the United States, Canada, and Bulgaria. Foreign employees of an offshore company, who are employed in Cyprus, pay Cyprus income tax at half of the normal Cyprus tax rates. Both the company and its employees can import duty-free motor vehicles, office equipment, and household effects (other than furniture). Besides commercial shipping companies, Cyprus is popular for registering personal yachts. A Cyprus company is formed to own the yacht. Malta. Malta has a tradition of being fiercely independent and neutral over a period of many centuries. An island strategically located in the western Mediterranean, it has historically been a staging post, trading point, supply center and a military and naval base. Today the former British naval docks are a hub of commercial ship repair and shipbuilding activity, a thriving tourist industry has been developed and Malta has established itself as a profitable manufacturing base with a presence of over 130 international companies. Since 1989 Malta has offered a wide range of tax and financial benefits to banks, insurance companies, insurance managers, fund managers, trading companies, holding and personal investment companies, pension funds, ship owners, and trusts. An autonomous supervisory body, the Malta International Business Authority (MIBA) has been established "to balance the need for confidentiality with safeguards against abuse." Malta is within easy reach of major European and Middle Eastern business centers, and is within the European time zone in line with Frankfurt, Milan, Paris and Zurich. By air Malta is 3 hours from London and Frankfurt, 2 hours from Paris and 1 hour from Rome. There are direct flights to 30 cities including Zurich, Brussels, Amsterdam, Athens, Cairo and Lagos. It has a typically Mediterranean climate, with mild winters and sunny summers. Malta is a sovereign European state with a democratic parliamentary system based on the British model. It is a member of the Commonwealth and its first self-governing constitution dates back to 1921. There is a total absence of cultural, religious, ethnic or racial problems. Malta's judiciary is long-established and independent. Its laws are based on Roman law and the Napoleonic Codes, while more recent fiscal, company and shipping laws are based on English statute law. The island has had an Association Agreement with the European Community since 1971. It has a large network of diplomatic ties, double taxation treaties, and commercial and investment protection agreements. Trading companies are liable to only 5 percent tax. Non-trading companies are totally exempt from income tax. Trusts pay a small fixed annual tax in lieu of a registration fee. Trading companies are expected to have a physical and functional presence on the island. This follows from Malta's determination to establish itself as a reputable international financial and business center. Non-trading companies may opt for non-disclosure of shareholders and directors, registration being possible in the name of local nominees. The law provides for the protection of this privacy in legal proceedings and includes special provisions to facilitate the transfer of shares in a non-trading company after death. Such companies need not have their accounts audited, nor need they file an annual return or a copy of their accounts with the government. Non-trading companies include: -- Corporate and personal holding companies. -- Other companies which limit their activities to the ownership, management and administration of property of any kind, including assets held for the purposes of a pension, provident or similar fund (other fund and financial management operations being regarded as trading activity). -- Shipping companies which own and operate ships registered under any flag. The benefit of tax exemption applies equally to a holding company and to its subsidiaries, each of which may own one or more ships. Malta also offers the possibility to owners of all types of vessels, from pleasure yachts to oil rigs, to register their ships under the Maltese flag. The registration and operation of Maltese ships is regulated by a Merchant Shipping Act which is based mainly on United Kingdom legislation. There are no restrictions as regards trading, sale and mortgaging of Maltese registered ships, or the nationality of the crew. The offshore trust legislation closely follows United Kingdom law and, subject to the provisions of the relative act, allows the settler to determine the governing law of the trust. No tax is chargeable on any dividend or interest paid by a trading company or a non-trading company. In fact, there are no withholding, capital gains or any other taxes. No exchange control restrictions apply to offshore companies and trusts. They may have their accounts in any foreign currency or bank. There is no customs duty on company property or on expatriate employees' personal belongings imported into Malta. Property held by a trust is also exempted from customs duty if imported into Malta. For a regional office, this gives Malta advantages similar to those offered by Greece, Jordan, and Tunisia, with the key difference being that those three countries offer the privilege only to branches of foreign companies, while Malta offers it to a locally incorporated company. No stamp, death or gift taxes are levied in relation to offshore companies or trusts. All rights, privileges and exemptions are guaranteed by law for a minimum period of 10 years. Malta has double taxation treaties with all the major European countries, the United States, Canada, Australia, and others. There is a readily available supply of qualified professionals in law, accounting, banking and insurance, among other fields. Many have considerable international experience and expertise. It is therefore no surprise that all major international accountancy firms are represented in the country. The work force is highly educated, diligent and adaptable, with standards of performance comparable to those in other European centers, but at measurably lower costs. The university is over 400 years old, and on a pro rata basis there are more graduates than in many European nations. Malta is multi-lingual. Business is universally conducted in English. Italian and French are widely spoken. Maltese is of Semitic origin and akin to Arabic though written in Roman alphabet. Language is not a problem in Malta. There is substantial investment in one of Europe's most advanced telecommunications systems. A full satellite direct dialing system will connect Malta with most parts of the world through a 2,000 port international exchange. Housing standards are high. Quality office space, with all modern facilities, is available at reasonable cost, and first-class hotel accommodation is plentiful. For people who work or do business in Malta, facilities are on a par with any European city. Malta's cultural heritage dates back to some time before 4,000 B.C., and its history has provided it with a varied but solid foundation. The Phoenicians, Carthagenians and the Romans; the Byzantines, Arabs and the Normans; the Knights of St. John; the French and the British; all have played a notable part in Malta's history. This gradual assimilation and cross-fertilization of cultures has created the exuberant and independent Malta of the late twentieth century with a unique cultural identity. The Maltese have preserved their language and special characteristics for which they are well known: their overwhelming hospitality; a trading mentality developed since Phoenician times; diverse linguistic, professional and business skills; and a willingness and determination to provide quality service. These attributes illustrate Malta's highly positive attitude towards business and life. Furthermore, living and working on the island holds many advantages. A European lifestyle at reasonable cost. International cuisine. A superb climate. Good leisure and educational facilities. A low crime rate. Historical and cultural environment. All in all, a friendly and relaxed lifestyle, yet fully equipped to meet the most demanding requirements of international business. And an individual who receives a residence permit to work for an offshore company is not deemed to be a resident of Malta for income tax purposes, thus paying no individual income tax on income received from offshore companies. The same exemption applies to their dependents. The Isle of Man. The Isle of Man, which is about 220 square miles in area, is located in the Irish Sea roughly 30 miles from the mainland of the United Kingdom. During the last several years the island's independent government has sought to promote favorable conditions to those who seek an operational base in a low-cost, low-tax environment, and have turned the island into an important international tax haven. The Isle of Man is a dependency of the British Crown, yet it has never been part of the United Kingdom or its colonies. Its governmental origins date to Viking culture, and its own independent parliament, Tynwald, has existed for more than 1,000 years. While the island is tied closely to the United Kingdom, which insures the island's defense and presides over international affairs, Tynwald is responsible for all aspects of domestic legislation, including taxation. The legal system of the island is similar to that of the U.K., its currency is the pound sterling, and social and economic links with the U.K. are strong. The island maintains a special status within the European Economic Community. It is excluded from the effects of the Treaty of Rome, other than those relating to the free trade of agriculture and industrial products within the EEC. The island receives no revenue from the EEC, and it does not contribute to EEC funds. Most importantly, the island enjoys free trade with the EEC, thereby enjoying the advantages of membership while retaining the freedom to develop as a low-tax area. The island offers an excellent communications network, modern facilities, and a work force that is energetic and skilled. It boasts the only freeport in Europe, and is the home to over 30,000 companies, the largest contributor to the island's gross national product being the financial sector. Additionally, the island has the physical space and the infrastructure necessary to facilitate development of both service and manufacturing industries. The government maintains a policy of encouraging 10,000 new residents before the end of the century, making the islands the only low-tax financial center in Europe that actively encourages new residents. Moreover, the government is accessible in regards to new projects. Decision-making is efficient, and work permits are easily and quickly available. The government supports the development of the island's financial sector with much enthusiasm, yet maintains strict control over the sector through a Financial Supervision Commission and Insurance Commission that licenses banks, investment advisors and insurance companies. Such control assures the island integrity as an offshore financial center. More than 50 licensed banks, including many international banks, are present on the island. Their services are comprehensive, discreet and confidential, comparing favorably with the banking sectors of Switzerland and Liechtenstein. In addition to banking, high-caliber legal, accounting, insurance and other financial services are available on the island. Along with these many advantages, the Isle of Man offers an attractive tax structure. The major features are well worth noting: -- A flat income tax rate of 20 percent. -- No capital gains tax. -- No estate or inheritance taxes. -- Tax-free holidays for industry. -- Offshore tax is generally exempt. -- Value added tax at 15 percent. Income tax is charged on all income arising on the island, and on worldwide income of island residents, companies, and trusts, subject to certain exemptions (as noted above and which will be discussed in more detail). Residency for individuals is determined by the time spent on the island in a particular fiscal year, typically April to April. (Non-resident individuals are subject to a tax at a flat rate of 20 percent of all income arising on the island which may be collected by withholding at source. This does not apply, however, to income from approved financial institutions on the island, or dividends from exempt companies, exempt insurance companies and registration companies.) For companies, whether incorporated on the island or not, residency is determined by the place of central management and control. For trusts, residency is established where the trust is managed. Although resident companies pay income tax, they receive significant relief for capital expenditures on facilities and machinery. In addition, the following companies do not pay income tax: -- Registration Companies, which are companies that are incorporated but are not resident on the island. An annual registration duty of 450 pounds is payable. -- Exempt Insurance Companies, which are resident on the island but whose income is earned offshore. -- Exempt Companies, which are companies that are resident on the island in shipping, investment holding and commodity-dealing (and potentially other activities such as trademark, licensing and royalty). Such companies may qualify to be exempt from income tax on their offshore income. An annual fee of 250 pounds is required to obtain exempt status. -- Trading Companies. Certain companies in the service or manufacturing sectors may be eligible for a tax-free holiday as an alternative to grants and incentives which typically are available for a period of five years. In addition: -- Income from an island trust operated under laws similar to the trust laws of the U.K. will not be taxed if the beneficiaries are non-resident, and all of the income, except for certain income from approved financial institutions, is earned offshore. Isle of Man resident and non-resident companies can engage in any activity worldwide, but exempt companies can only be used for insurance, shipping, property investment, investment holding, commodity dealing or the holding of patents, royalties, copyrights, licenses and trademarks. Certain activities including banking, insurance and investment advice require a government license. There is no requirement for disclosure of beneficial ownership of companies to the government and shelf companies are available. A company's share capital can be expressed in any currency and one can have various classes of share capital with differing rights. Exempt and non-resident companies are not required to file their accounts with the government nor are they subjected to any withholding taxes. They pay a nominal fixed Exemption Fee or Duty each year. No exchange control exists in the island, and bank accounts can be maintained in any currency, funds being freely transferable internationally. Non-residents are not subject to tax on interest earned on deposits in licensed banks. No information regarding the returns of such persons are forwarded to the government so total privacy in banking matters is assured. The island has no double tax treaties other than a 1955 treaty with the U.K. which only applies to resident companies or individuals. Under an agreement with the U.K., the island undertakes to impose value added taxes and customs duties (with a number of minor exceptions) as in the U.K. Investors should be aware that the Isle of Man offers several investment vehicles, each providing its own advantages and opportunities: Exempt Insurance Companies. The purpose of the Exempt Insurance Companies Act of 1981 was to encourage the development of the offshore insurance sector. Under the act, an insurance company may apply to be exempt from income tax on its profits earned offshore (or with other exempt insurance companies on the island) and on any dividends paid to non-resident shareholders, making the island attractive for captive insurance companies, reinsurance companies, and life assurance and pension companies. To obtain exempt status, several conditions must be satisfied: -- The company should have a sufficient cash paid-up capital. -- A solvency margin of at least 15 percent of the premiums should be maintained. This margin should be written in the previous financial year. -- The company's reinsurance support must be sufficient. -- The audited annual accounts and the quarterly management accounts should be submitted to the Financial Supervision Commission. -- A quorum of directors should be resident. Trusts. The trust law of the island is based on similar legislation of the U.K. Trusts resident on the island that have non-resident beneficiaries will not pay island income tax on non-island income; there is no tax charge on any capital gains made by the trust. Thus it is possible to accumulate wealth without worry of taxes when later distributing assets to one's beneficiaries. Exempt Companies. Companies involved in holding, investment, shipping, commodity dealing, patents, trademarks, licenses and royalties, may apply for exemption of island income tax. To qualify for exempt status, the company secretary and at least one director should be island residents. Further, no individual resident on the island should have any interest in the company. An annual fee of 250 pounds is required. If granted exempt status, a company's offshore income and dividends will be exempt from island income tax. Shipping Companies. Ships may be registered with the Isle of Man Harbour Board. They will be subject to strict international safety codes and will fly the British merchant flag. Ships must be owned or managed by persons or companies resident on the island or some other U.K. dominion, but companies that qualify for exempt status (see above) do not pay income tax on their offshore income. To qualify for exempt status, ships concerned must satisfy an additional condition, which is that they do not operate from, or use, ports on the island regularly. Non-Resident Companies. A company may be incorporated on the island, but remain non-resident. As such it will be exempt from income tax, though it will have to pay an annual non-resident duty. There is no requirement that non resident companies file annual accounts or disclose the company's owners. Thus, a non-resident company could be used for protecting assets owned by an individual resident in another country. This may be desirable in several possible circumstances, for example, when assets are held in a politically unstable country, or when one wishes to protect assets from capital taxes imposed in the country in which they are situated. Non-resident companies may serve as trading entities with day-to-day administration taking place on the island, as long as central management and control of the company is stationed elsewhere. Trading Companies. Various companies in the manufacturing and service sectors enjoy advantages because of the island's relationship with the EEC, existence of a freeport, low costs and tax structure, and generous range of grants and incentives offered by the island's government. Banks. Banks have benefited from the general growth of the financial sector. As the island's government continues to encourage foreign investment, it is likely that the growth of the financial sector will continue, adding to the opportunities for banks. Operation of a bank on the Isle of Man requires a license issued by the Financial Supervision Commission. Licenses are granted only after specific conditions are met, including: -- The bank should have a sufficient cash paid-up share capital. -- To facilitate the accumulation of reserves, a sound distribution policy should be developed and maintained. -- Annual accounts and quarterly reports should be submitted to the Financial Supervision Commission for review. Bearer Shares. Under provisions of The Companies Act of 1986, companies of the island may issue Bearer Shares. Without question, the Isle of Man offers a variety of advantages for investors. The island possesses political stability, a modern infrastructure, good communications, a special relationship with the EEC, established laws favorable to investors, and low direct taxes. Jersey. The Island of Jersey is located in the English Channel off the northwest coast of France. Having an area of roughly 45 square miles, it is the largest of the Channel Islands, and has a population of 75,000. St. Helier is the center of the island's business activity. Jersey, along with the other Channel Islands, is a possession of the English Crown, distinct however from colonial or overseas dependencies. The constitutional relationship between Jersey and the United Kingdom, therefore, is unique--the U.K. manages the island's external affairs, while the island government legislates domestic matters, including taxes and revenue. The island has long been politically and economically stable. The political system is a conservative one; political parties do not exist and all elected officials are independents. Issues of controversy or social conflict are absent, and the island enjoys much respectability among the international community. Although Jersey's economic policy over the years has focused on improving the lives of the island's populace, that policy has also made the island attractive to investors. The standard rate of income tax has remained unchanged at 20 percent since 1940. The currency of the island is the pound sterling, and while the States of Jersey issue their own currency notes, these are legal tender only within the island and are easily converted to sterling as necessary. The island also maintains a special status with the EEC, being exempt from many of the aspects of the Treaty of Rome. While the island is bound by the customs provisions of the Treaty, it retains its fiscal autonomy and constitutional rights. Although French was the official language of Jersey until 1963, English is now used throughout the island. Most legislation that was passed before 1940 is in French, and French is still used exclusively for real estate transfers. However, English translations are available for the more important of the French laws and most legal firms employ staff who are fluent in French. While there is no legislation on bank secrecy or secrecy of information, it is possible, through the use of a numbered account, to restrict the identification of an account holder to senior bank officers. It is felt that a legal duty exists to maintain secrecy, which arises out of the implied contract between professional advisors, for example, between banks and their clients. Only through law or by order of the Royal Court is information subject to disclosure. Exchange of information is provided for by two double tax agreements, one with the U.K. and one with Guernsey. Investors who wish to form a company in Jersey enjoy several advantages. A company incorporated and controlled in Jersey pays income tax at a 20 percent rate. Although the formation of a company, for Jersey income tax purposes, requires a declaration of the beneficial ownership of shares, nominee shareholders are not disclosed to the Company Registry, and the name of the beneficial owner will not appear in any search. To form a company in Jersey, the following is required: -- Approval of a company name. (Although this is normally available in 24 hours, it is advisable to submit at least three alternatives to insure a speedy process.) -- A minimum of three shareholders are required whose names will appear on the Annual Return, which is filed each January. Each shareholder must hold three shares. To shield the identity of the beneficial owner, nominees may be utilized. -- While no provision regulates the offices of director and secretary, it is usual to provide at least two directors. -- The company's registered office must be maintained on the island. Further, the statutory books of the company must be kept at the registered office and be open to public inspection. Although the annual general meeting must be held in Jersey, it can be handled by proxy, provided the company maintains secretarial services on the island. -- Each January the company must file an Annual Return. -- While there is no need to appoint auditors, a company's articles typically provide for such appointments. Auditors do not have to be residents of the island. -- If a company must pay Jersey income tax, the accounts must be certified by an accountant approved by the Comptroller of Income Tax. Amendments to the Income Tax Law, effective from 1989, add to Jersey's appeal as a possible tax haven. One of the most significant provisions of these amendments is the creation of the "exempt company." An exempt company is treated as non-resident and thus gains considerable tax advantages. An amendment to Article 123 of the Income Tax Law provides that from January 1, 1989, all companies incorporated on the island are to be regarded as resident. The place where a company holds its board meetings no longer has any relevance in the determination of the company's residence for tax purposes. As long as a company manages and controls its business on the island (i.e. if board meetings are held on the island), it is considered resident even if it was incorporated outside the island. One may assume that it follows that such companies must pay full income tax on their incomes, however, Article 123A allows for companies that meet certain conditions to be treated as non-resident. Such designated companies are exempt companies. The conditions for the granting of exempt status follow: -- Application for exempt status, along with the payment of the exempt company tax, which is 500 pounds, must be made within the necessary time period, not later than March 31 in the year of assessment. (A company incorporated in the year of assessment must make its application within three months of incorporation and annually thereafter. A foreign company that becomes resident in Jersey must make its application within three months of becoming resident and annually thereafter.) -- No Jersey resident has any interest in the company. (An exception here is a collective investment company, which, provided it is in corporate form, is entitled to become an exempt company upon payment of the tax of 500 pounds. Jersey residents may have a beneficial interest in such companies.) -- Satisfactory disclosure of beneficial ownership must be made to the Commercial Relations Department. -- No unpaid corporation tax or income tax is outstanding from assessments of previous years. -- If the company is an income tax company at the time of application, it must not have been an exempt company for any prior year of assessment. (Thus, a company is prohibited from switching to exempt status more than once in its lifetime, although the Comptroller has discretion in such matters.) While no Jersey resident may hold any beneficial interest in a company applying for exempt status, unless the company is a collective investment fund, he or she may be a shareholder in, or a debenture holder of, a company that has a beneficial interest in an exempt company. To satisfy the Comptroller that he does not hold a beneficial interest in an exempt company, a resident will be required to file an annual statement. In turn, the company will have to make known to the Commercial Relations Department its beneficial owners. Should a Jersey resident acquire a beneficial interest in an exempt company, the company is obligated to inform the Comptroller. The exempt company enjoys various tax advantages. Because it is treated as non-resident, it is exempt from income tax on the profits of trade on the island, provided the trade is not conducted through an established place of business such as a building site, branch or factory. For example, the agents of an exempt company can meet on the island and conclude contracts without having to pay income tax on the profits. However, if the company produces or processes the goods detailed in that contract on the island, the profits attributable to that activity would be chargeable to Jersey income tax. Clerical functions, such as invoicing, in the Comptroller's view are not a part of the carrying on of trade and are not chargeable to income tax. In addition, being non-resident means that a company pays no Jersey income tax on income derived outside the island. It pays no income tax on interest obtained from Jersey bank deposits, nor is required to deduct income tax from payments of interest or dividends (except in regards to collective investment funds). Furthermore, the company need not make a return of income (except of Jersey income other than bank deposit interest), and it is not required to file accounts (except in respect of trade carried on through an established place of business). The tax law is favorable to non-resident directors of exempt companies as well. Directors are not liable to Jersey income tax for fees they receive from the company. The Island of Jersey offers major tax advantages for investors, particularly those who establish companies and obtain exempt status. Guernsey. The second largest of the Channel Islands, Guernsey is located in the English Channel off the northwest coast of France. St. Peter Port is the center of business activity on the island, which is approximately 25 square miles in area and has a population of 57,000. Like the island of Jersey, Guernsey is a possession of the English Crown, but it retains its own government and legal system. Guernsey has the right to legislate on matters of domestic concern and taxation. Also, much like Jersey, the island enjoys a special relationship with the EEC. Guernsey is bound by the customs aspects of the Treaty of Rome, which essentially provides a shield against imports, yet it retains its constitutional rights and fiscal autonomy. For example, Guernsey retains the right to levy value added tax. Until the early 20th century, French was the language used in commercial and legal matters, however, English has replaced it and now is the official language of the island. Until recently, real estate transactions were required to be in French, and all legal firms maintain staff who are fluent in French. Translations of important laws and statutes written in French are available. Guernsey has been stable economically and politically for hundreds of years. It has no political parties and the members of Guernsey's States of Deliberation, which is the island's legislative branch of government, are independents. Over the years the States has promoted policies that interfere with local enterprise as little as possible, resulting in a climate that is relatively free of control. Although British currency is used in Guernsey, English and local money circulates. In addition, Jersey currency circulates in Guernsey (and Guernsey money circulates in Jersey), and even French money is sometimes accepted and exchanged informally. Along with a favorable tax structure, Guernsey offers other advantages to investors. Although no local legislation governs secrecy of information, English common law encourages banks and their personnel to maintain secrecy. There is also privilege against disclosure. A company can be incorporated in Guernsey within seven working days. Detailed information is necessary, and "shelf" companies are not available. However, nominees can be used to preserve the identity of the beneficial owner. The company's registered office must be maintained within Guernsey, and notice of the registered office must be lodged at the company's registry within one month of incorporation. One can select any name for a proposed company, provided it does not include reference or allusions to the Crown, and is not in conflict with an existing company. A minimum of seven shareholders are required, each holding one share, and the shareholders may be nominees. Guernsey law provides no statute regarding the officers of a company. Thus, a sole director might also be the beneficial owner of the shares as well as be the secretary. Details regarding the directors appear in the Annual Return that is filed every January, but here again nominees may be used. All persons who have agreed to be directors of a company must be lodged with the Company's Registry within three months of incorporation. The Annual Return must be filed each January and requires a filing fee of 100 pounds. Failure to file the Annual Return will result in the company being taken off the register. Along with the Annual Return, it is also required that each year a company swear a Declaration as to its residence. Guernsey tax laws are favorable to companies. A company that has its place of business and that carries out a major amount of its trade on the island pays local income tax at a rate of 20 percent on its profits. Companies may obtain non-resident status. A non-resident company is managed, controlled, and conducts its trade outside of Guernsey. Such companies are subject to corporation tax at the rate of 500 pounds per year, which is due each January. The corporation tax is payable in advance, the first payment being made at incorporation. The payment is then levied pro rata during the year of incorporation from the date of incorporation to December 31st. Although perhaps not as well known as many of the other offshore havens, Guernsey offers significant advantages for investors, including stability, a comparatively free economic climate, and favorable tax laws for companies. Gibraltar. Gibraltar, at the tip of southern Spain, is slightly less than 2+ square miles in area. Its population numbers about 30,000 and is composed of people of Italian, Genoese, Maltese, English, and Spanish descent. In addition, there is a small but important Jewish population, some Indian traders, and a significant group of Moroccan workers. Gibraltar has been a colony of the British Crown since 1704, being formally ceded by Spain in 1713 in the Treaty of Utrecht. While its official language is English, most Gibraltarians are bilingual, speaking both English and Spanish. Gibraltar's Constitution gives legislative powers to the Governor, who is the representative of the Queen, and the House of Assembly. Although Gibraltar enjoys a substantial amount of self-government, it is a dependent territory and the formal assent of the Governor or the Crown is required for all legislation. The Governor is responsible for the conduct of foreign affairs, security and defense; ministers, who must answer to the House of Assembly, manage domestic concerns. The bedrock for legislation is English law. On to this base, laws relating to local circumstances are built. Although Spain lays claim to Gibraltar, the British government insures the political stability of the jurisdiction. In the preamble to the Gibraltar Constitution Order, Britain has pledged that Gibraltar will remain part of the Crown until and unless an Act of Parliament provides otherwise. Moreover, it is stated that the Crown will never permit Gibraltar to pass under the sovereignty of another state without the democratically expressed wishes of the people of Gibraltar. In February of 1985 the border between Spain and Gibraltar was reopened, and the British and Spanish governments have agreed that there will be talks on sovereignty. However, the British have emphasized that the wishes of the people of Gibraltar are of greatest concern. Gibraltar is part of the EEC, having joined with the U.K. under the provisions relating to dependent territories. By concession it is excluded from the common external tariff, the common agricultural policy and the requirement to levy value added tax. Gibraltar possesses the support systems needed by modern companies. With a new telephone system having come into operation in March, 1990, the jurisdiction boasts excellent telecommunications. Its postal facilities are good, and it has daily air service to Europe and the rest of the world. Its banking facilities are likewise good, and are expected to improve as Gibraltar continues to attract international banks. While Gibraltar issues its own currency, money of the United Kingdom is also considered to be legal tender. Gibraltar is rapidly growing as an offshore center. Although it is a low-cost jurisdiction, it is a relatively high tax one. Its standard income tax rate for individuals is 30 percent with the tax rising to a maximum of 50 percent, while its income tax rate for resident companies is 35 percent. Still, Gibraltar offers three types of companies that provide important tax advantages. The non-resident company is a company that is incorporated in Gibraltar but is centrally managed and controlled by directors who reside outside the jurisdiction. If such a company does not derive its income from within Gibraltar, it will be outside the scope of Gibraltarian income tax. Unlike other jurisdictions which charge an annual company registration tax or non-resident company duty, Gibraltar does not apply flat rate fees against non resident companies. A Gibraltar company may apply for exempt status in regard to Gibraltarian income tax. This is done after incorporation, and takes between 10 and 14 days, depending on the company and the details of the application. Once obtained, the company receives an Exemption Certificate that is valid for 25 years and which grants a full exemption from income tax and estate duty in Gibraltar. In return, the exempt company pays a flat annual duty. Along with requiring information about the beneficial owners, including a written reference from a professional and a statement on the proposed activities of the company, the authorities require that specific conditions be met before exempt status is granted: -- The company conducts trade and business in Gibraltar only with other exempt companies. (Exceptions are sometimes possible with the prior consent of the local authorities.) -- There are no changes in beneficial ownership, shareholders, or objectives for which the company was formed, unless the approval of Gibraltar authorities is obtained. -- The register of members is maintained in Gibraltar. -- No Gibraltarian or resident of Gibraltar holds any interest in any of the company's shares. -- The annual tax is paid in two equal installments by March 31st and September 30th of each year. Exempt status is available to both resident companies, for which the annual fee is 225 pounds, and to non-resident companies, for which the fee is 200 pounds. The advantage for a resident company to obtain exempt status is that it is presumed not be resident elsewhere. Qualifying companies were created in the Income Tax (Amendment) Ordinance 1983 for situations where the authorities of a foreign country require proof that a percentage of tax on profits has already been paid in Gibraltar. The tax rates for Gibraltar are 2 percent for income not remitted to Gibraltar and 17 percent for income remitted to Gibraltar. The conditions for obtaining a Certificate are essentially the same as for Exempt Company with the following: 1) a one-time only fee of 250 pounds is required; 2) a minimum paid-up share capital of 1,000 pounds; and 3) a deposit of 1,000 pounds must be lodged with the Government of Gibraltar as a guarantee toward future taxes. Gibraltar is also attractive for company formation. A company must have a minimum of two shareholders and two directors, but the directors do not need to be shareholders. Although the details regarding shareholders and directors are listed on the public record, nominee services may be used to preserve the identity of beneficial owners. An Annual General Meeting of the Shareholders must be held in Gibraltar each year, however, other general meetings can be held outside Gibraltar. The accounts of the company must be submitted to the Annual General Meeting, however, these accounts are not filed at the Registry and are not available to the public. While no legal requirements exist for a company's accounts to be audited, an application for exempt status must be accompanied by a reference as to "residency" from an auditor registered under the Gibraltar Auditors Registration Ordinance. A Gibraltar company must maintain its registered office in Gibraltar, from which the company can transact business with non-resident or similar companies. The statutory records of the company must also be maintained in Gibraltar, typically at the Registered Office. An Annual Return must be filed every January. As Gibraltar is a common law jurisdiction and its courts follow the decisions of the English Courts, it is a favorable jurisdiction for the purpose of creating offshore trusts. In most cases, trusts do not have to be registered, an exception being charitable trusts. Where the beneficiary of the Gibraltarian trust is non-resident and the income is derived from outside Gibraltar, no Gibraltarian tax is payable in respect of the trust income. Although its tax rates are high compared to many offshore havens, Gibraltar still offers several important advantages to investors, particularly in its favorable treatment of non-resident and tax exempt companies. Hong Kong. The British Crown Colony of Hong Kong is quite similar to Panama in many respects. It taxes only locally generated income. Its tax rates are extremely low by U.S. and even Panamanian standards. Its haven status is subsidiary to its role as an international business center, strategically located as "the gateway to the Orient" and as a station between the West and the vast markets of the speedily developing East. Hong Kong is a unique situation since the British have to hand it back to China in 1997. In theory, Hong Kong is to continue to have a free enterprise system for 50 years after that date. The residents of Hong Kong obviously don't have much belief in that, as they have been seeking second citizenships and moving their holding companies to places like Bermuda. Of course, there could be changes in China before that which would affect the outcome. Despite all these problems, Hong Kong is still an attractive base for trading companies. This is particularly so if one keeps in mind, and follows, the Chinese trading mentality of taking home the days' trading profits rather than investing in long-term assets. Yes, the Chinese do think long term, but that is very different from their trading mentality in Hong Kong. Hong Kong also enjoys incredibly cheap labor, for it lies on the southeast coast of Communist China, bordering on the province of Kwangtung. The population of Hong Kong is extremely dense, probably the most crowded in the world. Ninety-five percent are Chinese. This population makes for an extremely competitive and varied labor market, and no such Eastern ills as unions and their like are conceivable. In other words, quite apart from tax considerations, there are very good business reasons for setting up shop in Hong Kong. The crown colony's prominence as a trade and manufacturing center means that there are superb transportation and communication facilities. Major airlines connect Hong Kong by frequent flights to every major city in the world. Ships are also available to anywhere, and the British civil service tradition, coupled with the pressures of demand, makes its airmail, telex, and international telephone and cable services highly efficient, regular, and reliable. The same superlatives apply to professional services of all kinds, and the fees for these services are kept very reasonable by vigorous competition. English and Chinese are the official languages, and all official documentation is printed in both. Language presents no difficulty at all for a westerner. The Hong Kong economy is very free enterprise oriented. There are no exchange controls, and the Hong Kong dollar circulates freely with all world currencies in a completely unregulated money market. The economically wide open nature of Hong Kong is a product of the political order. As a British crown colony, it has very limited independence. The governor, appointed by the Queen, nominates the two councils of government: The Executive Council (cabinet) and the Legislative Council. Unlike the crown colonies discussed earlier, there are no elections here. The cabinet members and the legislators are "opinion leaders" of the Chinese community. Almost to a man, they are economically conservative. No socialist scheme would find significant support in the government. Even if the government were inclined to socialism, there are solid practical reasons why it would not go far along the collectivist road. For example, the huge refugee population means that any form of government welfare would immediately destroy the colony, and thus such welfarism is inconceivable. The two councils, moreover, have very limited power vis _ vis the governor. He nominates all their members, and so controls them indirectly. He also has the power to act against the majority opinions of the Executive Council, in which case his only responsibility is to the British secretary of state for foreign and commonwealth affairs. He even has direct legislative powers, and there is a long tradition of staunchly conservative governors in Hong Kong. The legal system is based on British common law, modified by local law. The court system is British in structure. Hong Kong has preserved the nineteenth century spirit of free enterprise to an extent that is surprising in this day and age. Taxes are progressive, but these taxes apply only to locally generated income. There are no taxes on capital, gifts, or capital gains, and death duties, which apply to assets physically located in Hong Kong, are imposed in progressive brackets up to a maximum of 15 percent. There is no tax on dividends of local corporations. The official reason for this is that if the source of profit is local business, then the company has already been taxed on its profits and there is no justification for taxing the stockholders. As for foreign-source income, the idea of taxing this is unthinkable. A corollary of the happy lack of dividend taxes is no withholding tax on dividends. One can receive the profits of a Hong Kong corporation, dealing outside Hong Kong, in, say, Costa Rica without any Hong Kong tax liability of any kind. Apart from the above taxes, government revenue in Hong Kong derives from duties on "luxury" commodities such as tobacco and alcohol, minor fees on imports and exports, and stamp duties. The latter apply to transfers of shares, promissory notes and bills of exchange, and mortgages and debentures. Now, what about incorporation and trust formation in Hong Kong? As usual, articles of incorporation and association are required, and they must include the standard information. All these requirements are pure formalities, because nominees can be used for everything. In view of the labor situation in Hong Kong, $100 (U.S.) a year will cover a nominee director who is at the same time a registered shareholder as well as a company officer. There is no scarcity of law and trust firms to handle all the details. Annual maintenance of a corporation involves annual auditing, signed by a chartered accountant, submitted to all shareholders, with a copy to the government. This is required because of the taxation of local income; all corporations must be audited to make certain that no such profits are concealed. A local representative can take care of the audit, keep the company seal, display the company name on a sign in his office, and do whatever else is necessary. What are the costs? The government charges are very low. The initial expenses of incorporation, articles of association, and stock certificates, and the various uses of nominees can total as little as $500 (U.S.). Annual maintenance can be as low as $500. Bargains, to say the least. Incorporation takes up to four weeks to accomplish. It can be done with complete privacy through nominee shareholders, for there is no legal requirement that ultimate beneficiary owners be disclosed. The Hong Kong common law tradition also allows for trusts. The costs run about $500 for trust formation and $250 a year to keep things running. A Hong Kong trust pays no taxes on overseas investments and can enjoy the advantages of the free currency market. A popular Hong Kong combination is coupling a trust with holding companies. This may allow that the benefits to beneficiaries be deferred much beyond the legal period of allowed perpetuity for the trust, thus permitting a much greater growth of the initial investment. The way this works is to have the trust own the stock of holding companies. When the trust fully matures, the beneficiaries will receive the stock of the holding companies rather than money. The holding companies themselves may be so set up as to pay dividends only after many more additional years, using all the extra time to enhance growth by completely tax-free reinvestment of profits. Another beneficial aspect of Hong Kong trusts is that there are no stamp duties on the transfer of investments if they are outside Hong Kong, which makes a trustholding company arrangement free of stamp duty to the trust beneficiaries. Finally, as in the Bahamas, the local trust law allows for a "Cuba clause," which means that a Hong Kong trust can be used with no worries about the political future of the colony, or what will happen after 1997. Just as Panama came out with flying colors as compared with even the Caymans, so Hong Kong, in certain ways, comes out with respect to Panama. There is business justification unlimited, at lower local tax and corporation costs and with similar privacy. On the other hand, the exclusion of bearer shares, the need for annual auditing, and the short time left until Chinese control in 1997 are negative factors.