3 About tax havens and structures in tax havens

This chapter describes distinctive features of the legislation in tax havens. The aim is to give an account of the features that contribute to allowing tax havens to facilitate tax evasion and violations of the laws in other states. The main element is secrecy, i.e., severe restrictions on transparency, opaque company and trust structures, and a lack of public registers. The problem is that these structures invite crime, in the form of tax evasion, money laundering, and a series of other crimes.

The distinction between tax havens and other states and jurisdictions is not unequivocal. 1 This chapter deals with the rules and systems that make the establishment of harmful structures possible. Some countries that may be described as classical tax havens exhibit all these harmful structures. Other jurisdictions have only introduced some of these regulations and systems. This chapter refers to tax havens as a homogenous group. This is a simplification in relation to the heterogeneity that actually exists among jurisdictions with harmful structures of these kinds.

3.1 Sources of law and questions of method

The formal basis for the regulation of the activities of companies and trusts 2 in tax havens lies in legislation. Of particular relevance to the interests of the Commission is secrecy legislation and the legislation on companies and trusts, and how these define the rights and obligations of legal entities under the law – including the balancing of interests between the agents who are involved.

In a modern state governed by law, an approach based on legal dogmatics will generally provide a good basis for understanding the purpose of legislation and how the interests involved have been assessed and balanced. The language of the law and its legislative history will answer many questions of interpretation that may be raised in respect of the legislation. At the very least, it will be possible to clarify the nature of any unresolved issues. Where there is doubt, the issues will be decided through case law.

In a number of important areas, the legislation of tax havens has characteristics that differ substantially from the legislation in modern rule-of-law states. In well-regulated rule-of-law states, legislation balances the interests of all those who have a stake in companies with limited liability (owners, creditors, employees, public authorities, etc.). This contrasts with the legislation regarding corporate structures and trusts in tax havens. This legislation is mainly aimed at safeguarding the interests of owners and towards activities in other states. Other stakeholders – apart from owners – are nearly totally excluded from access to information about the entity.

It has not been possible for the Commission to analyze all aspects of corporate legislation in tax havens; it has chosen to focus on aspects that are particularly important for the victims of the damage inflicted by enterprises registered in tax havens.

The normal law source-based method is only partly helpful to understand how legislation in tax havens works in practice. Legislation is often voluminous and without elucidating preparatory material. Case law is also often non-existent, since the interests of owners are mainly safeguarded. Other stakeholders often do not have access to the information needed to file legal claims and secure their rights through the courts.

Important sources for understanding how tax havens work in practice are presentations given by those who facilitate the use of structures in tax havens (offshore promoters, service providers, lawyers, accountants, etc.). Some of the facilitators are located in the tax havens, but a great many work from other countries, and particularly from important financial centres like London, New York, Switzerland, etc. They offer their services on thousands of home pages on the Internet, where they advertise in detail the advantages of registering in tax havens. In spite of certain circumlocutions, like, for instance, the use of the term “privacy”, it is fairly explicitly understood that many facilitators offer to help companies and individuals evade taxes and financial responsibilities. The home pages may be inaccurate and contain errors, but they describe how facilitators believe these systems work in practice, and how the arrangements are carried out for clients.

It is evident from the web pages that the “classic” tax havens are fairly similar in terms of fundamental structures. They compete in the same market, and the competition parameters are minor variations in respect of strict rules of secrecy and a number of exemptions that apply only to companies and trusts active in other states.

3.2 Secrecy legislation

“Secrecy” is often used to describe the obligation to observe the confidentiality incumbent upon employees of various institutions, such as banks, tax administration, etc. This report uses the more comprehensive concept of secrecy frequently used by tax havens to prevent access to information on the ownership and assets of companies and trusts, and regarding the various forms of asset placement particularly adapted to foreign owners.

3.2.1 Confidentiality on activities in other states

Secrecy and confidentiality are different words with largely the same meaning. Privacy is protected in all societies that are considered rule-of-law states. At the same time, privacy can be abused. No one has the right to use private space to conceal or commit abuse, or to inflict damage or injury on other individuals or the public interest. The right to private freedom must therefore be balanced against the right of others to be free from abuse, loss, and damage. The common interests of society must also enter into the equation, since a great number of people are affected.

Outwardly, the authorities of tax havens emphasize that their policy is to give special protection to the private sector, without taking into account the damage that may be caused to others. The rules of secrecy have two main elements. On the one hand, there is no, or very limited, publicly available information on the activities pursued and who is behind them. Furthermore, the possibility of accessing any information that may exist is severely limited by the terms of access, which may be gained only through a legal request.

The secrecy rules in closed jurisdictions differ from corresponding rules in traditional rule-of-law states in two ways. First, secrecy rules are applied primarily to activities that take place in other states, where the owners are domiciled and from which the enterprise is actually operated. This is unusual because most states enact legislation that regulates activity within their area of jurisdiction. Second, the rules hinder the application of normal rules of transparency in the states where the activities or operations actually take place.

Because of the secrecy rules, stakeholders located where the activities take place have, at the outset, very few opportunities to know what actually takes place within the companies, or who owns and operates them – unless the owners themselves choose to provide the outside world accurate information regarding this.

The secrecy rules do not, in fact, involve the exercise of domestic sovereignty, since local interests are not involved. The legislation is formulated so that it encroaches deeply on the sovereignty of other states, because the secrecy has no purpose other than concealing important information on activities taking place in other states.

3.2.2 The absence of publicly available information

In order to make good decisions, a decision maker must have as complete information as possible. Openness and transparency in commercial enterprises are important to ensure that markets function as well as possible. In addition, transparency is crucial for making agents accountable for their actions, and thus for the enforcement of a number of legal precepts.

It is very important to know who owns and operates companies and other economic entities. In order to know what happens in enterprises, it is crucial that they present, and preferably publish, their accounts. Ideally, the accounts should follow a standardized format so that they are easier to interpret, and they should be relatively detailed. It is clearly advantageous if the accounts are controlled by an external auditor. Co-investors, creditors, employees, and a free press, etc., can thereby keep track and analyze the status and operations of companies.

The interests of those who need access must be balanced against the necessity of companies and owners for confidentiality about their activities, particularly regarding business secrets, but also about private matters that third parties have no legitimate need to access. Different countries have chosen to balance these concerns differently.

Tax havens have made rules for companies that are not intended to conduct activity in their jurisdiction, and that are frequently not subject to taxation there. Thus, the local authorities and other local agents have little need for information about them. Those who do need information about these enterprises are the authorities and agents in other countries. Tax havens do not take into account the information needs of third parties, and have established systems that make the storage of information on ownership and activities voluntary for the owners and managers of these enterprises. 3 Even tax havens that otherwise have a well-functioning public administration often lack public registers of companies that provide information on the ownership and accounts of “exempted companies”. For “exempted companies”, the Register of companies will generally include only the date of establishment, the name of the company, its nominal directors, and possibly an overview of owners, etc. This information is aimed at showing the existence of companies. The identity of the real owners can be kept secret. This also goes for the activities of the companies – if the owners so wish.

Trusts are frequently the ultimate owners of one or more subordinate companies. The trusts are not registered in any public register. This means that outsiders do not at the outset have access to any source that indicates which trusts exist, how the trust agreements are worded, or who the real beneficiaries of the trust funds are.

Consequently, a company or trust that is registered in a tax haven, but whose operational activities take place, for instance, in Norway (where the owners live or have commitments), can conceal who is behind it, as well as its activities, income, assets and debt. The same company, registered in Norway, would have been subject to very different requirements regarding access to this information. 4

Although at the outset there is a strict obligation for confidentiality about all business activity, the owners can voluntarily provide any information sought by third parties. Such voluntary information may be complete and accurate and correspond to all legal requirements of the country in which the owners live or have commitments. The owners break the law of their home countries only if the reporting requirements are not followed, or if they selectively present information. However, the structures in tax havens are particularly suitable for distortions for those who wish to conceal information on their income, debt and assets from third parties.

3.2.3 Access through legal requests

In tax havens, access may be given if binding international agreements on the exchange of information have been entered into. Even if there are no binding agreements, access may be given after an individual assessment. This presupposes that the jurisdiction receiving the request has no legal prohibition, and that the request for access satisfies certain requirements. In both cases, a request for access is forwarded in the form of a legal request, which is considered administratively or by the judiciary.

Legal requests for access are a laborious, costly and time-consuming process, whose outcome is uncertain because the possibilities of access are often limited by a series of legal and practical obstacles. The grounds for the request must be stated in a manner that reasonably clearly declares the basis on which access is requested. In practice, important information regarding the circumstances that give rise to the request are needed at the outset, including the identity of persons or companies, account numbers, clearly defined transactions, specific documents, etc. This is often difficult because the request is presented precisely because the necessary information is initially unknown.

Most tax havens have until now not granted access if the basis for the request is common tax evasion, i.e., cases where the taxpayer has given incorrect or incomplete information in tax returns and other statements. Legal requests have normally been granted only in cases involving the use of forged documents or the like. Most instances of tax evasion are, therefore, not among cases on which it is possible to collect information. There are still tax havens that cooperate only in cases of tax fraud, i.e., forged documents.

After pressure from the OECD, a number of tax havens entered into information-exchange agreements with countries that have normal tax rules. The extent to which these agreements will be useful in unclear as it will depend upon, among other things, the number of legal requests, how they are implemented in practice, and what resources are applied to meet the requests.

Even if access is granted, the value of such access may be limited, partly because in many jurisdictions there is no obligation to present and preserve accounts, and partly because the owners may quickly move the company and its documents to a different tax haven. The possibility of holding ownership through straw men (“nominees”) or bearer shares 5 creates additional obstacles in cases where access to information on ownership is sought.

The usefulness of access may also be limited by the requesting state’s lack of qualified personnel to assist in the process, or by rules of notice that result in notice being given to the object of the request before documents and other evidence can be secured. In addition, the objects of the requests for access (the owners) have the option of using the legal system to prevent or obstruct the legal request, which can lead to the use of substantial resources and prolonged legal proceedings. If the company is moved (redomiciled), or the leads point to the use of other tax havens, the negative effects of time-consuming and costly process are further aggravated (cf. Box 3.2 on the Jahre case).

3.2.4 The “know-your-customer” obligation

Normally, foreigners use local agents to establish companies, trusts, or similar entities in tax havens. In many cases, the use of an agent is compulsory. In principle, the company’s agent should have important company information. Information on the identity of the company’s owner at all times is particularly important, assuming that the agent has fulfilled the “know-your-customer” obligation 6 . However, such an obligation can be difficult for an agent to fulfil. If the company is owned by another company in another tax haven, or if the ownership chain ascends through several tiers, the agent must ascertain who is the real owner in the final or top tier – even if the owners are located in other closed jurisdictions. In practice, this demand is often impossible to satisfy because of the secrecy rules that apply in each individual jurisdiction. The problems are exacerbated by frequent changes of ownership in one or more of the higher tiers if the agent has not carried out the necessary “know-your-customer” investigations.

3.3 Further on the special treatment of companies and similar entities in tax havens

The secrecy rules are only one of the elements that contribute to giving the outside world little or no opportunity of gaining access to reliable and necessary information on companies registered in tax havens. The other element is evident from the design and regulation of company and trust structures. Companies in tax havens can be divided into two main groups: 1) local companies, intended to operate within the territorial jurisdiction where the company is registered, and 2) “international companies” intended to operate exclusively, or for the most part, in other states.

The first group is of lesser interest to this report, since it should have only local effects. Any state may freely choose how to balance the relationship between its own citizens, or between the state and citizens.

The other group includes companies that have been given a number of exemptions or “freedoms”. These companies are intended to operate only in other states. Therefore, these exemptions in practice only have positive effects for the owners (who also operate under cover of the secrecy rules), but have only negative effects for the public and private interests in those states where they actually operate. (See the further assessment of the effects of tax havens in chapter 4.) This group of companies has a large degree of freedom to act outwardly through “nominees” or straw men who hold positions as directors (board members) or as “nominee shareholders”. In addition, a number of tax havens allow ownership to be held in the form of bearer shares. This means that whoever physically holds the shares is to be regarded as owner; changes of ownership can be accomplished without formalities and in seconds by the physical transfer of shares from one person to another.

3.3.1 IBC or “exempted companies” – the system of exemptions

Tax havens have rules for particular types of companies often referred to by the collective term as “offshore companies”. Offshore in this context does not refer to physical location, but indicates that these are companies that are registered in the jurisdiction in question, but do not have activity there. In the legislation of tax havens, these types of companies are called “International business company”, “Exempted company”, or “Global business company”, etc. These are companies that can operate legally only, or for the most part, in other states, and, as a rule, do not own or rent property locally.

International companies enjoy a number of freedoms or exemptions from obligations that are normally incumbent on limited liability companies. The most important exemptions or “freedoms” are listed and commented upon below.

3.3.2 Exemption from the obligation to pay taxes and duties

All sovereign states are free to decide which costs should be paid for by the government and how government expenditure should be financed – through levying taxes and duties (the sovereignty principle). Tax policies will also be influenced by global competition for mobile capital. Outwardly, the main competition parameter that tax havens offer is tax-exemption for companies and individuals. Hence the name “tax haven”. Some tax havens have no, or very low, corporate income tax and no wealth tax. Others have relatively normal tax rates for their own citizens and companies with real production within the territory of the jurisdiction. Common to tax havens is that there is very low, or no, tax on international companies and on the capital income of foreigners.

The “tax exemptions” utilized by tax havens raise two fundamentally different problems relating to principles of tax law.

One derives from the secrecy rules, which make it possible to conceal the identity and activities of individuals who are liable for taxation in the state in which they live or belong. The information that can be concealed touches on one or several of the following elements relevant to the tax obligations: identity, place of residence, citizenship, source (the location of the source of income; income from work, profits from shares, etc.), location (real estate, etc.), the timing of income or costs, or family ties (inheritance tax).

At the outset, one cannot avoid tax liability by establishing a company abroad and registering assets and income there. According to the principal of global income – to which most states adhere – foreign assets and any returns on these assets must be reported and taxed in one form or another. Individuals domiciled, for instance, in Norway are consequently liable for tax to Norway for income derived from foreign sources, unless the income is exempt based on a tax agreement between Norway and the foreign state in which the income is derived. Registering companies in tax havens does not give grounds for tax exemption in the owner’s home county, but the lack of transparency in tax havens makes it easier to evade taxes by establishing companies there.

It is entirely legal for a citizen to own a company based in a tax haven, but accurate information regarding assets, income and debts must be given to the authorities of the country in which the owner is domiciled or has potential tax obligations. In the context of taxation, the owners are therefore obliged to provide information on tax haven-based assets in tax returns and related documents.

The second problem related to tax legislation touches on the use or abuse of tax agreements. A number of tax havens have entered into bilateral tax agreements with countries that are not tax havens. Transactions that result in income for companies registered in tax havens, which falls within such agreements, is not illegally concealed from either the source state or in the state of residence because the tax agreements authorise the exemption of this income in one or both of the states that are parties to the agreement. This is conditioned, however, on the provision of accurate and complete information regarding the transaction.

An important question is whether the conditions for exemption are fulfilled. Particular problems are raised by the concept of domicile and ownership in tax agreements, specifically, when the company in question is a holding company with no activity or is a shell company located between the source state and the state where the owner is domiciled. A condition for the exemption is that the company is domiciled in the tax haven in question, which is typically understood in such agreements in to mean that the company is the final owner of the income, asset, or debt at issue. Artificial pass-through solutions do not normally qualify for such exemptions.

It is characteristic of the “activities” of companies and trusts in tax havens that that there is little or no activity there. This is a consequence of the conditions for establishing “exempted companies”. Exempted companies are exempted from a number of obligations on the condition that all activity of any importance takes place in other jurisdictions, where assets are actually located, and where the owners are domiciled. 7 Without access to correct information on underlying realities, it is difficult to ascertain the asset values of companies, and what activity actually takes place. Access to this information is often hampered by secrecy rules, in a broad sense.

3.3.3 Exemption from the obligation to prepare accounts

Companies with limited liability are independent legal objects with their own rights and obligations – independent of those of their owners. The right to establish limited liability companies is not without disadvantages, because the owners control the company, while this form of organization gives the owners protection against the company’s creditors. This gives substantial possibilities for abuse.

In order to reduce the dangers of abuse, limited liability companies typically have a statutory obligation to maintain accounting records. A company’s accounts should give a complete, systematic and periodical overview of its status and operations. It is important to have access to correct and reliable accounts for the benefit of third parties, especially when other means of scrutinizing the company’s finances are not available. This is particularly true for creditors, actors in the securities markets, employees, tax authorities, etc.

Accounts are important for the company’s employees, and more generally for society and economic life. Accounts are also important for the owners because the accounts give an overview of the company’s status and operations, in particular, for minority owners who do not have access to the corporate records as majority owners do.

To reduce the risk that accounts can be manipulated, it is useful to have them verified through an independent audit, and to provide the opportunity to review past accounting records. For this reason, it is also important that the accounting records and the material on which they are based are properly preserved.

“International” companies in tax havens are not normally required to prepare accounts. 8 Consequently, there is no requirement for auditing accounts. If there are statutory obligations to prepare accounts, they are loosely worded. More detailed rules on application of accounting legislation as we know it from the accounting and bookkeeping legislation in Norway, and most other developed rule-of-law states, rarely exists in tax havens – certainly not to a sufficient degree, or with the necessary controls and effective enforcement.

At the outset, the considerations that supply the rationale for the requirement for audited accounts should apply all over the world. Nonetheless, the reason that tax havens exempt companies from the obligation to prepare accounts seem reasonably obvious, cf. the discussion above. The obligation to present accounts involves a considerable amount of work for the legislative and administrative authorities responsible for preparing the rules for accounting and documentation, and for follow-up, monitoring and control.

Tax havens apparently do not take into consideration the effect that “exempted companies” have on other countries, and since these companies have no liabilities to agents in the tax havens, these jurisdictions have no need for requiring “international” companies to present accounts. Since the companies pay little or no tax, local authorities have no need for the calculating taxable income which can be derived from correct financial accounts. In addition, no local creditors, investors or other private or public interests are affected by the operations of these companies.

In the legislation of tax havens, the accounting rules are described in different ways. Generally, they are, as mentioned above, rather loosely worded. Formally, the exemption applicable to keeping accounts is frequently expressed as a discretionary right of the company’s directors to assess the need for presenting accounts (as “directors think fit to keep . . . [and] . . . considers necessary in order to reflect the financial position of the company”). 9

There are also examples that certain types of companies have an obligation to prepare accounts, but the obligation is limited, and there is normally no obligation to publish the account statements. 10 Some jurisdictions also distinguish between “private” and “public” companies, or between categories of companies with differing accounting obligations. 11 “Public” companies must – where they exist – prepare and publish accounts, but there is often no accounting law to determine how accounts should be worked out. In some cases, there is reference to a few roundly worded general principles of accounting, and in others to the International Accounting Standards (IAS). The IAS are very comprehensive, and are not easily enforced without more precise rules on implementation. Sanctions for violating the rules are either very mild or completely non-existent in tax havens.

It is unclear whether accounting rules are enforced, and if they are, how they are enforced. This is the case partly because rules worded in the ways described above are difficult to enforce, and partly because local authorities generally have no interest in controlling and enforcing very extensive and complex rules since local interests are not involved. In the Cayman Islands, for example, the accounting rules state that, “directors shall cause proper books of accounts”. This applies to “all sums of money received and expended by the company, and the matters in respect of which the receipt and expenditure takes place; and … all sales and purchases of goods by the company and the assets and liabilities of the company.” 12 Requirements relating to the assessment of values, for example, write-offs or depreciation, are not mentioned unless it is understood that these requirements lie within the expression “proper books”.

The company legislation of Jersey states that the accounts should give a “true and fair view”. What this implies is unclear; for instance, whether the wording refers to requirements in accordance with US GAAP, which also use this expression. When there is no obligation to conduct an audit, it will be up to chance as to whether the local financial authorities check that accounts are kept in accordance with certain standards.

The “Articles of Association” (AoA) of an “exempted company” may, for instance, describe the requirements for the company’s presentation of accounts like this:

“The company shall keep such accounts and records as the directors consider necessary or desirable in order to reflect the financial position of the Company.

The Company shall keep minutes of all meetings of directors, members, committees of directors, committees of officers and committees of members, and copies of all resolutions consented to by directors, members, committees of directors, committees of officers and committees of members.

The books, records and minutes required by (the paragraphs above) shall be kept by the Registered Office of the Company or at such place as the directors may determine, and shall be open to the inspection of the directors at all times .”

The directors shall from time to time determine whether and to what extent and at what times and places and under what conditions or regulations the books, records and minutes of the Company or any of them shall be open to the inspection of members not being directors, and no member (not being a director) shall have any right of inspecting any book, record, minute or document of the Company except as conferred by Law or authorised by resolution of the directors”. (Emphasis added)

In practice, it is up to the owners to decide whether accounts should be kept, and if they do, whether and how they should be preserved. The interests of third parties (here: the users of the accounts) are absent. That accounts may be kept if the management finds it necessary is, strictly speaking, not necessary to regulate. The opposite situation – a prohibition against keeping accounts – is hardly thinkable.

It is also somewhat unusual to include in the provisions that give directors the right to access and inspect the books. Theoretically, it is possible that the company’s owners or its “Registered officer” refuses access and deprives management of the possibility of inspection. However, this would apply to decisions that the management not only has the right to scrutinize, but have actually made. Because of its position, the management will arrange for the preparation of accounts and minutes of what they have decided.

In companies where “management” is only a formality, such rules may be practical, but then to give the formal management access to the decisions that have actually been made.

It is alien to Norwegian legal culture to allow the management of a company to decide whether or not to keep accounting records. The obligation to keep accounting records is imposed in the interests of third parties who, in the case of limited liability companies, have a reasonable claim to information on the status and operation of the company to which they are connected. The company’s owners have the possibility of deciding for themselves how to supervise and control the company. Tax havens take a different view when it comes to considering the need for protection of those who refer only to the company. Both formally and in practice, third parties have been deprived of any possibility for access.

In most countries, companies pay taxes on their profits. Company accounts are the basis for the calculation of income and assets. In most tax havens, “exempted companies” are exempt from paying taxes and other duties. The charges levied on the companies are not calculated on the basis of profits, and so there is no need to rely on the company accounts in order to calculate the correct charge. Although there is no statutory obligation to keep accounting records, it is obviously not forbidden to prepare accounts. The company and its management can have an interest in presenting accounts to the outside world and third parties in other jurisdictions.

There is no guarantee that accounts presented by companies registered in tax havens accurately reflect reality. Sometimes they include fictitious financial constructions created by the company’s owners, but are nonetheless signed by the company’s “directors”. This does not include companies that are registered in tax havens but whose stocks are listed on the stock exchanges of other states. In such cases, accounts will be kept according to the requirements of the stock exchange on which they are listed, or in accordance of the rules of the country in which the stock exchange is located.

3.3.4 Exemption from the obligation to audit

Inasmuch as there is no obligation to keep accounts, there is also no obligation to audit, even when management decides that accounts should be prepared. 13

Nonetheless, there are examples that auditing is mentioned in company laws, though in some cases without any clear meaning. The Cayman Islands Companies Law (2004 Revision), Section 101, states:

“The accounts relating to the company’s affairs shall be audited in such manner as may be determined from time to time by the company in general meeting or, failing any such determination, by the directors.” (Emphasis added).

The rules are difficult to understand. There is no obligation, but a freedom to audit the accounts, and the rules on the role of the auditor seem to be very limited. An owner in the company may be chosen as auditor, but a member of its management may not.

It is difficult to see that the provision contains any form of sensible commitment in which the outside world could have confidence. The owners or their representatives decide whether accounts should be audited. Little or nothing is said on who should carry out the audit, and on how it should, in such a case, be carried out. There are no sanctions for violations of the rules, which is natural since they have no binding content.

In well-organized rule-of-law states, the obligation to audit is imposed to guarantee third parties an independent verification of the accounting records. Given the strong and unchecked influence that the owners of an “exempted company” have on the decisions that are made, the provisions that allow an owner-controlled audit seem rather meaningless.

The company’s application of the auditing rules in the “Articles of Association” may for instance be worded as follows:

“The directors may by resolution call for the accounts of the company to be examined by an auditor or auditors to be appointed by them at such remuneration as may from time to time be agreed.

The auditor may be a member of the company , but no director or officer shall be eligible during his continuance in office”. (Emphasis added).

3.3.5 Exemption from the obligation to register and publish ownership (register of shareholders)

In a variety of contexts, the parties to an agreement or a transaction may need to know the real identity and economic position of the opposite party. Furthermore, the legality of an action often depends upon who is behind the transaction. For instance, the parties to an agreement to buy or sell frequently require information on the economic position of the opposite party. If the opposite party is a company, it is necessary to know who manages and owns the company. Where are management and owners located? In what jurisdiction do they belong? Furthermore, investors of equity capital and loan capital need to know who their potential co-owners or debtors are. In trading of securities, the parties must be identifiable in order to determine whether insider trading is taking place. A register of shareholders or owners therefore contains particularly important information.

In well-regulated states, considerations like those described above have led to the obligation to maintain a reliably up-to-date register of shareholders, which is accessible for related public and private interests.

The same considerations should apply in tax havens, but there shareholder information is subject to strict confidentiality, and the obligation to keep a register of shareholders can be somewhat haphazard in “international” companies. In tax havens, it is nearly always the case that owners can be represented by straw men in the company register if such a register exists. The identity of the real owner is subject to strict secrecy rules. In cases where it is allowed to use lawyers as straw men, the lawyer’s obligation of professional confidentiality will frequently be invoked if someone wants to know who is behind the company, even though having the position of straw man in order to conceal actual ownership goes far beyond any defensible justification for lawyers’ obligation of professional confidentiality.

Another factor is that in the company laws of tax havens the obligation to identify owners can be unclear and veiled. The British Virgin Islands Business Companies Act 2004, states in article 41 (1) that, “a company shall keep a register of members containing, as appropriate for the company …” In addition, the specific data that may be contained in the register is listed: names of owners (members), forms of shares, classes of shares, ways of identification, changes in ownership, etc. Violating this provision may result in a fine of USD 1000.

What constitutes adequate (“appropriate”) information from the company is unclear. The decision is made by the management, which represents the owners. This also applies to the obligation to preserve the register of shareholders, and how current ownership should be notarised and preserved. If a (albeit very limited) sanction is attached to the violation, the register should reasonably be available for scrutiny in the jurisdiction where the fine may be levied. In general, control is insignificant, and with a great number of companies in each jurisdiction, effective control would not be possible.

The same law in the British Virgin Islands states that the shareholder register must be “in such form as the directors may approve” 14 . However, this presumably refers only to the form. Whether the register is kept in paper or electronic form is less significant if electronic storage gives the necessary notoriety. If electronic storage is chosen, it must be done in a way that gives readable and reliable evidence.

Even when shareholder registers are kept, the information on ownership is confidential, and may be divulged to third parties only through a legal request. In reality, this presupposes that the third parties know the details of ownership at the outset, or have information that clearly indicates the identity of the real owners. If this is not the case, there is no basis for making a legal request.

“International” companies with concealed ownership registered in tax havens are unattractive as counterparties to independent parties. If ownership is unknown or unclear, transactions carry great risks. Such companies are therefore best suited to entering into agreements with parties that are closely related to them, where they share interests in the agreement. In such cases, however, there is a great risk of abuse through the transfer of assets and debt to the detriment of third parties. This is particularly the case when funds are transferred across international borders, and between onshore and offshore companies.

3.3.6 Exemption from the obligation to preserve accounting documentation etc.

The obligation of companies to present accounts is closely related to the obligation to preserve such accounts. The accounts must be preserved to provide information on what takes place within the company. If a jurisdiction does not oblige companies to prepare accounts, it is hardly appropriate to oblige them to preserve such accounts.

In tax havens there is generally no obligation to preserve accounts or other documentation (records). The members of the company’s board may decide whether and to what extent accounts should be preserved. 15 If accounts or minutes from board meetings are kept, and there is a desire to preserve them, the preservation may take place anywhere in the world – as the owner wishes.

Most companies have no separate local management, but others require a locally domiciled individual in the management of the company. As a rule, a local employee of a “service provider”, or a ”Company Registrar” or ”Registered Agent” is used to do the practical work of completing formal company documents that are necessary in connection with collecting fees at the company’s establishment and to maintain its annual registration. The agent may also hold– if the client wishes – the position of “nominee” or “trustee” within the company.

Although the company has no obligation to preserve, the “Company Registrar” or “Registered Agent” has an obligation to preserve those documents he has contributed to preparing. This will typically be minutes from board meetings in which he has taken part.

In any case, it will be in the interest of the local representative to be able to document the instructions he has received from the client, and what action he has actually taken, in the event that there is a dispute regarding the management of the company’s funds. Paradoxically, this can be important for local representatives so they can demonstrate that they have not taken any action at all, or that they have only acted on instructions from the owner. This is important in case of challenges or possible lawsuits filed by third parties.

3.3.7 Annual returns

Most tax havens require that every year an “exempted company” prepare an “annual return” to be sent to the company’s agent or local representative (i.e., not to a public company register). 16 In some cases, there is also a requirement that the annual return be sent to the Companies Registry , without containing information of great importance about the company.

The annual return is normally an attestation that consists of a simple form with limited information about the purpose of the company, the identity of board members (who may be straw men), shareholders (who may also be straw men), any changes in the memorandum of association, an attestation that activity takes place only outside the territory of the jurisdiction where the company is registered, etc. 17 In some jurisdictions the annual returns should also contain information that bearer shares are deposited with a “custodian”. 18

3.3.8 Exemption from the obligation to hold board meetings locally

In most cases, the question of where board meetings are held is a purely practical one. The choice is made based on the whereabouts of the board members, and where there is access to the necessary facilities. In most cases, there is no doubt where companies belong. For companies without activities, this may be different. In certain instances, the place where board meetings are held may be of importance in determining the jurisdiction to which the company belongs, in a legal sense. This question has great legal importance in most countries. According to the principle of global income, both companies and physical persons who are liable for taxes (for instance to Norway) will as a rule will be liable for taxes (to Norway) for all income, no matter where it is earned. 19

According to the Tax law § 2-2, sub-section 1, for instance, joint stock companies are liable for taxes to Norway “provided they are domiciled in the realm”. This means that the place where the company was founded (registered) is not necessarily decisive to determining where the company is regarded as “domiciled”, but the place from where it is managed. An important consideration in the assessment is where the management of the company on the board level takes place.

In tax agreements, too, the place where board meetings are held is attributed importance. A condition for companies to benefit from exemptions in accordance with tax agreements is that they are regarded as “resident”, in the sense of the tax agreement, in one of the states that is party to the agreement (cf. the OECD’s model agreement, article 4). The place where the companies are effectively managed on the board level is given importance in this assessment. To the extent that companies based in tax havens should be regarded as “resident”, the effective management of the company must be regarded as being in the tax haven in question.

It is unusual for company legislation to regulate where board meetings should be held. The company itself should decide this based on practical considerations. However, if board meetings are not held locally, this may have consequences for where the company will be regarded as domiciled, in terms both of company and tax law. Enterprises that are established in countries other than tax havens normally have an operational connection. The choice of where to establish a business is based on where one wishes to operate.

The legislation of tax havens differs from that of other countries in that it establishes that it is not necessary to hold board meetings within the territory of the jurisdiction. 20 This means that where an “international” company holds its board meetings is of no local legal importance for the tax havens.

Even though there is no requirement for local board meetings, the owners may, of course, choose to hold meetings there, even if it is often expensive and unpractical. The exemption for where a company holds its board meetings illustrates – in combination with the other exemptions treated above – that establishment in a tax haven is mainly a business of formal registration. 21

In this connection, secrecy rules are important, because, among other things, the outside world does not have information on who owns the companies, where the board meetings take place, and from where the companies are actually managed. In promoting tax haven-based companies to the outside world, it is therefore useful to make explicit in the law that it is not necessary to hold board meetings locally – also given the costs involved. A requirement that board meetings should be held locally – for instance in a distant tax haven – would in many cases constitute a substantial barrier to the establishment of companies.

Tax haven-based companies are based on assumptions that are difficult to reconcile with the requirements for local ties demanded by the tax agreements. The absence of real activity and ties make it difficult to explain why “exempted companies” registered in tax havens should be regarded as domiciled in the tax haven in the sense of the tax agreement, apart from mere formalities. The condition for granting such companies exemptions is that they have no local activity. When there is not even a requirement that board meetings be held locally, or that there be local members of the boards, the local ties are, in practice, almost non-existent. As a rule, they are used only as a hiding place or for pass-through of funds of enterprises that operate in other jurisdictions, where the owners are also domiciled and reside.

3.3.9 The right to redomicile the company

For a variety of reasons, owners may wish to move a company and its activities to another jurisdiction (migration). In most cases, the decision to move is based on business considerations. The lack of profitability, weak markets, high costs, restructuring needs, political instability, etc. may make it necessary for management to take action – for instance by moving. Such considerations rarely apply to “exempted companies”, where there is no significant local activity.

If a company is to be liquidated in a jurisdiction, the interests of the company’s creditors and other third parties require that this be done in an orderly fashion. Among other things, the liquidation and move must be made public, and the interested parties must be invited to present their claims. Moving and/or liquidation should not be a simple way of discarding established commitments.

The legislation of tax havens is divergent in this respect, too. Many tax havens allow “exempted companies” to be moved to another jurisdiction without any liquidation procedures of importance. This is referred to as “redomiciliation” or ”company relocation”. Most tax havens permit companies and other entities to move very quickly, with few effective procedures to guarantee the fulfilment of the company’s (actual and latent) commitments. The company is formally transferred to another jurisdiction and deleted from the company register in the jurisdiction from which it moves.

The company’s date of foundation, partnership agreement, bylaws, etc., are generally not changed by redomiciliation. Furthermore, the company as an independent legal object does not change identity, but it is domiciled in a different jurisdiction and subject to other authorities and courts. This may be particularly detrimental to interested third parties who are excluded at the outset from access to information about the company’s activities and ownership.

On redomiciliation, the company’s documents are transferred – to the extent that such documents exist – to the new jurisdiction. The move does not, however, imply that all information about the company is removed from the original jurisdiction. The company’s local registered agent or company agent will normally keep the documentation in his possession. Of particular importance is the information on the identity of the company’s “beneficial owner”, if “know-your-customer” requirements are followed.

In order to contest possible claims for compensation, etc., from a client, it is in the interest of the agent to know exactly which services he performed on behalf of that client. This also applies to banks, if the client moves accounts to another bank. Consequently, the extent of the information that remains depends upon, among other things, whether and to what extent the agent is informed about the company and its activities, and to what extent he has performed additional services for the client, for instance, by taking on the function of “nominee” or “director”.

The consequences of the right to redomiciliation, and the ability to do so quickly, can be very great and inflict significant loss and damage on third parties. It contributes to reducing or obstructing the possibility for access and legal action from third parties or the authorities of other states.

When a company moves, those who want access to the company must relate to a new jurisdiction and to new legislation. A new legal request must be made in the jurisdiction to which the company moved, with new, and often time-consuming procedures. If the company is restructured in connection with the move, and is split into several legal objects located in different jurisdictions, the real possibilities for access are undermined even further. This is also the case if several companies in an ownership chain are moved to different jurisdictions.

It is significantly more time-consuming to gain access through legal requests (frequently several years) than to move the company to a different jurisdiction, which often also allows moving. Moving the company can therefore be an effective way to obstruct the claims of creditors, criminal liabilities, or the repatriation of illegally appropriated funds.

The right to redomiciliation must be seen in relation to the concept “exempted”. Tax havens do not control the status and operations of companies. Their operations do not affect local interests, which are limited to collecting fees and those activities that flow from the various formal procedures that are connected to the company’s activities. It is the wishes and needs of owners that are considered. For the authorities, the move can be beneficial. In many cases, they are rid of a client who is sought or under legal action from private interests or authorities in other states.

An “exempted company” may also be liquidated or dissolved in ways other than moving, or in combination with a real (as opposed to formal) move. The company may be established for a limited time period (Limited Duration Companies), so it is dissolved at a pre-defined point, determined by time or by an event. Examples of event-determined automatic dissolution or moving may be creditor action, payment difficulties, divorce, etc.

A company may also be liquidated or laps by omitting to pay the annual dues or fees to local directors or the company registrar/company agent. The fees are the income source of the tax havens for registration, and deregistration will follow from the non-fulfilment of the obligation to pay such fees. From the client’s point of view, this is often not a threat, but an effective way of liquidating the company.

3.3.10 Further on the special treatment of companies and similar entities in tax havens

Companies in tax havens may, in principle, have any name. Some tax havens do not allow names that can lead to confusion with royalty, particular financial activities, etc., or names that are deemed inappropriate for other reasons. 22

As a rule, however, company names may be registered with suffixes or abbreviations in various languages (AS, Ltd, GmBH, Oy, Società per Azioni, AG, AB or the like). 23 At the same time, certain laws include extremely detailed rules on the form of abbreviations, or on which abbreviations should be used in particular situations. 24

All countries have the freedom to determine which letters of the alphabet a company suffix may or should contain, but the alternatives are probably not arbitrarily chosen. They correspond to suffixes used at the establishment of companies in other states. It is unclear what legitimate reasons justify why companies may, for instance in the British Virgin Islands or the Seychelles, be established with the Norwegian abbreviation for joint stock company, AS, as designation/suffix.

Trading partners and authorities in other states are often sceptical of carrying out transactions with companies registered in tax havens. This is caused, among other reasons, by the secrecy rules and the problems of gaining access to information on what takes place in the companies and who is behind them. Suffixes that conceal where the company is registered may, in such cases, draw attention away from the name of the company, and thus also to the company itself and to transactions with the company.

The consequence is that the company’s name (logo) does not give information on where it is actually registered. On the contrary, an impression is created that the company is registered in a “respectable” country with normal company regulations. This is apt to create confusion – particularly in cases, where Norwegian-registered and tax haven-registered companies have exactly the same name. There are examples of this.

Apart from having confusing names, the companies may also operate with “virtual addresses”, usually in respectable onshore states. Outwardly, the jurisdiction in which the company is actually registered is effectively concealed. At the same time, the owners can claim that they are not acting illegally, since this is permitted by the local legislation. However, it contributes to misleading both contract partners and public authorities by encouraging them to believe that the company is registered in a jurisdiction different from the one in which it is actually registered.

3.3.11 The Commission’s observations

The Commission would like to emphasize that it is entirely legal to establish enterprises in tax havens, and that there may be legitimate reasons for doing so. Those who establish companies in tax havens, but live in other states, must only comply with all legal or contractual requirements for disclosure where they live or have commitments.

At the same time, the secrecy rules – in a broad sense – ensure that the use of companies registered in tax havens provides great opportunities to act anonymously and to conceal the companies’ income, debt and assets. On a number of points, the Commission has difficulty understanding the legitimate reasons that tax havens legislate exemptions for companies that are intended to operate only in other states, while the companies – their ownership and activities – are subject to strict obligations of secrecy. The legitimate reasons for using the services offered by tax havens demand neither rigorous rules of secrecy nor an extensive system of exemptions.

The Commission would stress that the lack of transparency is a major factor of uncertainty in the legislation of tax havens, and inflicts great damage on public and private interests in other states. Experience has shown – for instance through a series of criminal proceedings, public inquiries, etc. – that the structures allowed by tax havens have been instrumental in several serious forms of crime. This is particularly unacceptable because companies are only supposed to conduct activity in states where their owners are domiciled, where their activities take place, and from where the companies are actually managed.

Although the owners may, generally, refer to the legality of the arrangements in the jurisdiction in which the company is registered, the harmful effects occur in other states where the activity actually takes place. Particularly vulnerable are developing countries, which have only limited resources to pursue those who conceal funds in tax havens. There are a number of examples of dictators and heads of state in developing countries who have concealed large amounts of illegally appropriated funds in tax havens.

The Commission is aware that the secrecy rules are justified by referring to the need to protect wealthy individuals against extortion and the like. It is difficult to attach weight to such a justification. Wealth invites extortion because it is visible, and this concern cannot in any way compensate for the many and serious harmful effects brought about by the secrecy rules.

In the commission’s opinion, some exemptions are particularly harmful. For example, the absence of informative registers of companies and accounts, the practice of rigorous rules of secrecy, the exemption from obligations to prepare and preserve accounts, and the right of rapid redomiciliation. In sum, such rules and arrangements make it very difficult – often impossible – to gain access to reliable information on the activities of companies and the identity of the real owners. This gives reason to question the seriousness and trustworthiness of substantial parts of the activity that takes place in tax havens. Conditions of near-exemption from all taxes contribute, in combination with the factors mentioned above, to inflicting great damage, particularly on developing countries (cf. chapters 5 and 6).

The Commission would further point out that the tax exemptions, which the tax havens present as a legitimate competition parameter, are, in reality, often exemptions on funds that should have been taxed in other states. It is not acceptable that companies be given resident status in relation to tax authorities in a jurisdiction where the company has no real activity. In the Commission’s view, this is not an exercise of sovereignty, but an unacceptable infringement on the sovereignty of other states.

The Commission realizes that some tax havens have established certain regulations that oblige certain companies to prepare financial accounts, that establish limited tax liability, and that implement certain measures to counter money laundering (among other things the “know-your-customer” requirement). The cases studied by the Commission leave doubt as to whether some of these tax havens actually implement these regulations through supervision and controls that demand corporate compliance.

“International” companies in tax havens that have no obligation to preserve accounting records, or that can preserve their accounts wherever they choose, to the extent that they choose to keep accounts, are, in the Commission’s opinion, unsuitable as counterparties in business since the transaction risks are great. 25 Such companies are therefore best suited to enter into agreements with closely related parties that know what actually transpires in the company, and to hold assets and debts that are located in, and subject to the legal conditions of other states. In both cases, there is a considerable danger of abuse.

The Commission would point out that the secrecy rules and the company/trust structures, considered together and separately, are extremely harmful to the global economy, particularly for developing countries. Effective countermeasures presuppose considerable changes both in structures and in secrecy rules.

It is difficult for the Commission to see legitimate reasons for any state to establish these types of exemptions, subject to secrecy, for companies whose activities exclusively, or primarily, involve the citizens and legal conditions of other states. A well-functioning global market depends on loyalty between states. In the opinion of the Commission, no state should profit from arrangements that inflict damage on other states and which ensure that a company’s activity is concealed from public and private interests.

3.4 Trusts – What is a trust?

A trust is a collection of assets where the formal and legal owner of the assets (the “trustees” or managers) have agreed to undertake to manage the assets for the benefit of those who, according to the basis for establishment (the foundation agreement or the trust agreement/trust deed), are designated as beneficiaries of the trust ( beneficial owners ). It is commonly said that the trustees formally hold the ownership of the collection of assets on trust and for the benefit of the beneficiaries.

A limited liability company is different from a trust in important ways. The owners of a company control the company as beneficial owners. They have full control of the company through the company’s bodies – on behalf of themselves. They have the company at their disposal for their own benefit, in accordance with the provisions of the applicable company law. For instance, they may sell or liquidate the company, and take out salaries, loans or dividends, to the extent that the finances of the company allows.

As legal instruments, trusts specifically distinguish between formal ownership “legal (title) ownership”, which is held by one or more managers (”trustees”), and those who are entitled to benefit from its assets (“equitable ownership”, “beneficial ownership” or “interests”). The managers exercise ownership not on their own behalf, but “on trust” – in accordance with the trust agreement– on behalf of the beneficiary. Those entitled to the funds of the trust are normally (but not always) different from those who have formal legal control over the assets.

In the rational behind trusts, the concepts of trust and obligation are crucial elements. The relationship between trustees and beneficiaries is built on four elements:

1. it is fair and equitable

2. it gives the beneficiaries the rights to the assets

3. the trustees have obligations

4. the obligations are, by their nature, a relationship of trust

Compared to Norwegian legal entities, the trust structure is unfamiliar and somewhat difficult to understand. In particular, the relationship between legal and beneficial ownership seems alien and illogical, if the aim is to create clear and predictable lines of representation between actors in the trust, and in relation to third parties.

3.4.1 Legal characteristics of trusts

The beneficiaries may be identical to the founders of the trust, the settlors, or they may be individuals the settlors desire to favour. The trust may be funded by the settlor when the trust is established, or by subsequent transfers. Once the trust is established, funds may also be transferred and/or provided by others.

If the settlors wish, a “protector” or “enforcer” may be appointed as an intermediary between the trustees and the beneficiaries. These are particularly trusted individuals who are charged with controlling whether the trustees act in accordance with the trust agreement and in the interest of the beneficiaries.

Even if the trustees formally own the funds of the trust, the funds do not form part of their personal wealth. They are not liable for taxes on the funds, nor can the funds be targeted by their creditors, or by their estate, if the trustees go personally bankrupt.

If the trust is properly constructed, the trust funds should not form part of the wealth of the beneficiaries before they formally receive distributions in accordance with the trust agreement and whatever stipulations were made at the establishment of the trust. They will be liable for taxes only on funds that they receive, which may also be targeted by their creditors.

This has importance in several contexts. The prospect of future distributions do not typically form part of the beneficiary’s estate, provided the beneficiary does not control the trust. During the period after the valid transferral of funds to the trust, but before the funds are properly distributed to the beneficiaries, the trust funds live their own life with independent rights and obligations. Nonetheless, a trust is not an independent legal object, in contrast to, for instance, a Norwegian “stiftelse” (foundation), which owns itself. 26

The form of ownership held by trustees is similar to that of an owner, but limited by the contents of the trust agreement. They should, in the administration of the trust’s funds “ … have all the same powers as a natural person acting as the beneficial owner of such property ”. 27 Depending upon the power granted to the trustee in the trust agreement, trustees may buy and sell the trust’s property, mortgage it or provide surety, take loans on behalf of the trust or lend the trust’s funds, and decide matters relating to distributions, etc. The trust agreement may, for instance, stipulate that the trustees must obtain the consent of others (for example a protector or enforcer), before they exercise their authority in general or in specific areas. 28

Outwardly, ownership of the trust funds is formalized in the name of the trustee in property registers (real property), in shareholder registers (shares), in respect of banks (bank accounts), etc. 29 Since the trust does not own itself, it can normally not be party to a law suit. 30 The trustees are the legal owners and may sue or be sued on behalf of the trust. This is the natural consequence of being granted legal ownership rights to the funds. If the trustees do not fulfil their responsibilities under the trust agreement, they are in breach of their obligations to the beneficiaries.

Even though the trustees act as the formal owners of the trust funds, they do not further their own interests, but act in the interests of the beneficiaries. The trustee shall “ … exercise the trustee’s powers only in the interests of the beneficiaries and in accordance with the terms of the trust ”. 31

If the trustees file a lawsuit, the beneficiaries bear the risk of the suit, i.e., all the positive and negative consequences that may result. The beneficiaries also bear all commercial and market risks for any changes in the value of the trust brought about by changes in the economy or bad investment decisions made by the trustees. The trustees cannot authorize distributions to themselves, unless it is stipulated in the trust agreement, or they themselves become the beneficiaries.

Trusts are conditioned on the premise that beneficiaries in no way, directly or indirectly, control the disbursement of assets, i.e., that they neither directly nor indirectly influence whether, when and how much of the funds are distributed. In cases of abuse, this condition will not hold. Underlying realities, however, often show that the beneficiaries have actual control and authority in respect of the trust funds, even if formal documents shown to the outside world state otherwise.

If the settlor or a contributor to the trust is also a beneficiary, (be it together with his family) the trust must be regarded as self-imposed limitation on the disposal of the assets that are owned by him or his family. In this case, the trust funds will often be viewed as forming part of the beneficiary’s property and estate, even though the trustees may have broad discretionary rights of disposal.

3.4.2 Use and abuse of trusts

Over time, trusts have become widely used in countries not founded on Anglo-Saxon legal traditions. 32 Trusts may be used for many legal and useful purposes. However, abuses have sprung from the opportunities that present themselves. The formal distinction between trustees and beneficiaries is based on the premise that the beneficiaries do not control the trustees. If the beneficiaries control the trustees, either directly or indirectly, the beneficiary is regarded as the owner of the trust funds. This determination is fact specific and is made on a case-by-case basis.

Secrecy rules inevitably hamper the possibility of exposing the underlying realities. Those who have legal claims against beneficiaries are not generally aware of the trust funds or have any possibility to access information relating to the real circumstances of control. The means to access this information are obstructed by the secrecy rules of tax havens.

The settlors may have good and legitimate reasons for creating a trust, i.e., designating funds to be managed by trusted individuals without the influence of the settlor or beneficiaries and in the interests of the beneficiaries. The trust structure, among other things, ensures that the beneficiaries receive access to, and a fair share of, the trust funds through the management of an independent and impartial manager. It can prevent conflicts between the beneficiaries (heirs, for example) about management and distribution. It creates clarity and order. If the obligations for reporting imposed by each state are fulfilled, the exercise of disposal through trusts is unproblematic.

In cases of abuse, it is generally important to keep the existence of the trust secret. Should outsiders nonetheless gain knowledge of its existence, and wish to know who is behind and controls the trust’s funds, it is also important to conceal who in reality has the right to dispose of the funds . Outwardly, the impression is given that the beneficiaries do not have the power to dispose the assets of the trust. This is important in order to claim that the trust funds are not owned and controlled by the beneficiaries, with the consequences that ensue for the obligation to report information on ownership and disposal. In actuality, the beneficiaries nonetheless have full control over the trust’s funds. In such cases, the trustee acts only on instructions from the beneficiaries.

It is often very difficult for outsiders to ascertain how beneficiaries control the trust. This is particularly true if external formalities that regulate the trust differ from how the trust is actually controlled. Indications of discrepancies are, as a rule, not easily discernable.

It is difficult to suppose that anyone would entrust valuable assets to a legal construct in a closed tax haven, where trustees appear to have irrevocable and full legal control and may disclaim all responsibility for any mismanagement. The settlor and/or the beneficiaries can keep control in ways that are not evident to the outside world.

According to trust agreements, trustees should ostensibly be irremovable and should hold irrevocable, discretionary powers to manage the trust funds. In reality, the settlors and/or the beneficiaries may nonetheless keep full control. The trustees may, for instance, when they are appointed, sign an undated letter of resignation to be kept by the settlors and/or beneficiaries to be made effective (i.e., dated by the beneficiaries) if and when it is necessary to sack trustees who do not do as they are instructed.

Trustees who act within arrangements giving the beneficiaries or settlor actual control over the trust may, according to circumstances, be in breach of regulations on money laundering if the criminal elements are otherwise met. 33 Indications that trustees have little decisive influence, contrary to the language of the trust agreement, may be seen in the manner in which they perform their responsibilities. Irrevocable and unrestricted control indicates that the trustees are responsible for ensuring that the trust agreement is followed in the interests of the beneficiaries. If the trustees, in spite of their right of disposal, have disclaimed all responsibility for the dispositions they make, this clearly indicates that the trustees do not in reality exercise control.

Certain legal systems also provide solutions for such arrangements. The trustee may choose not (“shall not be required”) to “interfere” in the management of the trust funds, or to seek information on subordinate companies, or to interfere in how the profits are distributed. This is common in trusts whose purposes is abuse.

Even if the resignation of the trustees is not formalized in writing, the beneficiaries’ relationship with trustees in tax haven-based trusts is entirely dependent on trust. This will not be forthcoming if the trustees do not comply with the wishes of the client – although they may formally have the opportunity not to do so. The settlors and beneficiaries frequently prepare a “letter of wishes”, which contains wishes for the trustees – as opposed to instructions. In practice, the letters of wishes are always complied with, if they are within the framework of the trust agreement. They are meant to be handy guidelines for the dispositions of the trustees, but are apparently not binding. They contain “suggestions” rather than “instructions”.

The purpose may also be to create apparent transparency. In such cases, the existence of the trust is not concealed, but outsiders are openly given the erroneous impression that the beneficiaries do not control the trust funds.

3.4.3 The trust structure and obligations to inform in respect of private and public interests

Most states impose on their citizens a number of information obligations in private and public law. These include the obligation to provide information on income and assets to tax authorities, lenders, creditors, the securities markets in certain situations, etc.

The question is what obligation to inform is placed on trust beneficiaries. This depends on how the trust is designed.

Without a public registry of trusts and trust beneficiaries, it is normally difficult for tax authorities and third parties to obtain knowledge on or become aware of the assets located in trusts. In cases of abuse, a trust in a tax haven will normally not own assets directly in countries that are not tax havens. The trust will frequently be the top tier in a corporate chain of “exempted companies”. Subordinate companies in tax havens may, in turn, own companies in countries that are not tax havens. If trusts are used in combination with one or more “exempted companies”, it is necessary to penetrate several layers of complex structures to uncover the underlying situation of ownership and the power of disposal

In practice, the control held by beneficiaries or settlors will not appear openly to the outside world when a trust is established in a tax haven. The trust is based on a private agreement that is not registered publicly, not including purely charitable foundations, which are irrelevant to this report. The trust is as anonymous as the settlor desires. If the trustee is a lawyer, it is generally claimed – often erroneously – that the management of the trust is subject to the lawyer’s obligation of professional confidentiality.

As a rule, trustees also desire anonymity. There are several disadvantages to being registered as an “owner” in public registers in states that are not tax havens, with the consequences that may arise in relation to third parties, or possible breaches of provisions against money laundering, etc. Frequently, trustees have little knowledge of how the underlying assets are actually managed, and what these assets truly consist of. This creates fear among trustees that funds may be managed in ways that create problems for the formal owners.

3.4.4 Discretionary trusts

With an eye to abuse, the so-called discretionary trusts are of particular interest. Under discretionary trusts, the trustees have the discretionary freedom – without instructions from the beneficiaries – to decide how the trust should be managed, within the framework of the foundation document (the trust agreement). 34

A central question is how a discretionary trust, and the distinction between the formal ownership of the trustees and the real ownership of the beneficiaries, should be regarded by the Norwegian legal system in respect of the obligation to provide information by Norwegian citizens who are beneficiaries of such a trust in a tax haven. The answer depends on, among other things, whether the beneficiaries have been deprived of management over the trust to the degree that they cannot be considered as owning or controlling the trust, and whether they do, in fact, benefit in a way that gives a reasonable assurance of access to the trust funds. The concealment of distributions or benefits made to a person domiciled in Norway will normally be regarded as an infringement of several provisions to provide information.

Distributions from discretionary trusts may, according to the trust agreement and all amendments, be constructed in many different ways. Even if the trustees have the discretion to exercise their power of disposal, this discretion is substantially limited by stipulations in written and unwritten agreements.

The basic provision inherent in the construct is that the trustees at the outset have only formal ownership disposal of the trust funds. The disposal is not exercised on their own behalf, but on the behalf of the beneficiaries (on trust) – within the framework of the trust agreement.

For the beneficiaries to be able to assert that they do not control the trust funds, the formal disposal (within the framework of the trust agreement) must be all but complete, unrestricted and irrevocable. Nonetheless, only the beneficiaries may claim distributions from the trust.

The most important written limitations on the mandate of the trustees lie in the trust agreement itself. Normally, the trustees are not beneficiaries and may not directly or indirectly distribute benefits from the trust funds to themselves. If the trust agreement, for instance, names individuals A, B and C as beneficiaries, this determines who the trustees may distribute funds to. The trustees then have no discretion in this important regard.

In addition to specified individuals or groups, a public service organization will frequently be named as a beneficiary. At the outset, the trustees would then be free to choose whether the distributions should go to charitable causes, or to one or more of the individuals A, B or C. In practice, this is not the case. It is common to name a charitable organization as a beneficiary. This gives the outward impression that the trust is established for a good cause, or that the purpose of establishing the trust is broader than merely to benefit one or more selected individuals. At the same time, there will still be beneficiaries to the trust in case the other beneficiaries fall away, for instance as the result of accidents or of unforeseen events.

In practice, in such cases, nothing, or very little, is distributed to charity. When the settlor (or later contributors of funds) and his family are named as beneficiaries, they receive the greatest share of the distributions. Naming a charitable organization as one of several beneficiaries does not lead to the trust being regarded as a charitable trust. Charitable trusts are established to further genuinely charitable causes, and are subject to quite different forms of public control, also in tax havens.

Discretionary tax haven-based trusts, in sum, create much ambiguity. This is partly because of the secrecy rules that prevent access to important information on the existence of the trust and its conditions of disposal. And partly because the legal classification of the trust also raises significant problems in establishing how the beneficiaries have disposal, in fact and legally, in the state where they are domiciled or belong.

3.4.5 Other forms of trusts

There are several types of trusts 35 with names based on the purpose of the trust, or the obligations of the trustees, or who benefits, etc. The following can be mentioned as examples: “protective trusts”, “express trusts”, “implied trusts”, “resulting trusts”, “constructive trusts”, “private trusts”, “public trusts”, “purpose trusts”, “asset protection trusts”, “sham trusts”, “illegal trusts”, etc.

The various designations may seem confusing, and several of the designations are “popular forms” that give characteristic features of some trusts, without the names in themselves having any legal significance for purposes of classification. There does not seem to be any consensus on how trusts should be classified.

Some trust forms are, like discretionary trusts, particularly apt for abuse.

“Cayman Islands Star Trust” (STAR-trust) is a new and sophisticated form of trust which was established on the Cayman Islands in 2001 and is referred to in “Part VIII” of “the Trusts Law” of 1997 (2001 Revision). 36 The law allows for the establishment of both “non-charitable purpose trusts” and “asset protection trusts”. The purposes are not limiting, in fact, they seem to extend the scope compared to alternative forms of trusts. All forms of trusts may be established as a STAR-trust – to benefit individuals, or various causes, or combinations of these. 37

A STAR-trust involves both “trust of a power” and “trust of a property”. 38 “Trust of a power” involves a trust “… if granted or reserved subject to any duty, expressed or implied, qualified or unqualified, to exercise the power or to consider its exercise”. 39 The control of the trust funds lies in the power. That power also includes powers of management and disposal. 40 A characteristic of this trust form is the special authority given to the trustees, who may make decisions on the management of the trust funds independently of the wishes of the beneficiaries. This has the consequence – or at least the appearance – of a trust that is not controlled by its beneficiaries.

“Virgin Islands Special Trust” (VISTA) 2004 is another newly developed form of trust that lends itself to abuse and to concealing the conditions of disposal. By placing a trust as the highest tier in a structure, the trustees have the formal authority to legally disposal of and control the shares of subordinate companies, and therefore their management and distributions. To create the necessary distance between trustees and beneficiaries, discretionary trusts are frequently employed. A precondition of such trusts is that the trustees have considerable freedom to dispose of the trust funds, with no other overriding control than that which derives from the trust agreement.

This may be a problem for beneficiaries who wish to keep control of subordinate companies while maintaining the advantages of having a discretionary trust as the top tier in the ownership chain. If the beneficiaries are not to be regarded as owners of the trust funds, the distinction between legal and beneficial ownership must be absolute. This means that the beneficiaries may not instruct the trustees.

The necessary distance is regarded as established through the discretionary element, i.e., the independent right of disposal given to trustees within the framework of the trust agreement. In the opposite case, the beneficiaries will be regarded as in control of the trust funds. If, however, the distinction is sufficiently clearly established, the trustees control also the subordinate companies.

In 2004, the British Virgin Islands introduced new legislation to solve the “problem” that control of the trust also implied control of the subordinate companies. 41 The solution – described as the primary object of the law – consisted of establishing the right to create trusts where the trustees are deprived of authority over and influence in subordinate companies. 42 Exceptions apply only in special cases where the beneficiaries decide otherwise or the trustees must intervene to protect the interests of the beneficiaries. This means that the trustees are formally regarded as owner of the trust, but they do not have disposal rights over the subordinate companies. Such an arrangement makes it relatively simple for those who have disposal of the subordinate companies to act as they want, without appearing outwardly as owners.

Certain trust constructs are designed in a way that is difficult to understand. Logical considerations of corporate law or business rationale suggest that clarity and transparency should be important elements in their design. Tax havens are open to the establishment of trusts that allow concealing structures, with modest regulations and obligations (”exempted trusts” of various kinds). 43 In these cases, it may be difficult or impossible for outsiders, who do not have access, to know the nature of the trust’s funds, and who in reality controls or receives distributions from the trust. It is difficult to see legitimate reasons for tax havens to develop these types of structures, whose activity should take place only, or primarily, in other states.

3.4.6 Redomiciliation of trusts

A number of tax havens allow redomiciliation or migration of trusts (for instance, to a different tax haven) if it is regarded as expedient. This is achieved by transferring the position of trustee to a different jurisdiction. The assets of the trust are not moved. They are located in subordinate companies – that may, in principle, be scattered across the world. This is effective in cases of abuse, where the purpose is to conceal real ownership and the power of disposal.

Since trusts are not registered publicly anywhere, the position of trustee may be moved between various jurisdictions without formalities. But local agents who have fulfilled the function of trustee, or had other commissions for the trust, will still, as a rule, keep the documentation that shows what they have received in the form of wish-letters or instructions, as well as what dispositions they have made of trust funds, and what decisions they have made.

3.4.7 Exemptions

Trusts are normally exempted from tax liabilities, obligations to present accounts, obligations to preserve accounts etc., in the same way as “exempted companies”. The exemptions do not apply to charitable trusts.

3.4.8 The Commission’s observations

The Commission would point out that it is problematic that trusts are often not registered anywhere, while at the same time they are frequently the top tier in a chain of subordinate companies. The opportunities for abusing trusts to conceal ownership and the authority to dispose of the trust funds are many and difficult to uncover. The possibilities for abuse lie in the trust structure itself, which, together with rules on secrecy, make it difficult to uncover both underlying facts and the true legal regulation of the trust.

Particularly problematic are trust structures which mask the fact that the beneficiaries actually control the trust, whereas the formal regulation (falsely) states that the trustees have full and unrestricted authority in accordance with the trust agreement. In the Commission’s view, trusts that are granted the same exemptions as limited liability companies are at least as apt to be abused.

3.5 Cooperation between concealing structures in tax havens and other states

In cases of abuse, the concealed structures in tax havens will often work with concealing mechanisms in other states. In such cases, the purpose is to operate through tax haven-based structures without this being obvious to the outside world.

Companies and trusts in tax havens are frequently not trusted in other states, as a result of the broad secrecy rules. Links to companies in tax havens can be masked in a number of ways. We have seen above that many tax havens allow the use of company suffixes from other states.

It is also common to use virtual addresses and mail drop-services. Virtual addresses mean that a company may outwardly present itself with an official address in a financial centre in a country that is not a tax haven. Frequently, it is the address of an office building whose occupants specialize in this kind of service. Anyone who approaches the company will establish contact with a switchboard that presents itself with the virtual address. The stationary, etc., of the company uses this address, which also has references to e-mails, telephone numbers, etc., that do not identify the jurisdiction in which the company is registered. Mail to and from the company is always sent via the virtual address in order to prevent third parties from discovering where the company is actually registered. When contacting the company by telephone, a prefix to the virtual company’s jurisdiction appears on the display, and enquiries are conveyed to the company’s real owners who are not domiciled or do not permanently reside in the tax haven in which the company is registered. The purpose is to conceal that the company is registered in a tax haven, and frequently also to conceal the identity and whereabouts of the real owners. This type of deceit is harmful when it is important that customers know the identity of the real owners and how to contact them.

Alternatively, a related conduit company may be established in a “respectable” country and used in order to conceal the underlying structures in tax havens.

This type of facade is possible, in part, because the real companies and their ownership are concealed in tax havens.

3.6 The secrecy rules of tax havens and fundamental human rights.

The European Convention on Human Rights of 4 November 1950 (ECHR), contains a number of articles to guarantee “all” or “anyone” protection against abuse, loss and injury. Material values, too, are protected, although their position is somewhat different from the protection of life and health. See, for example, the first amending protocol of 20 March 1952. Victims of a number of forms of economic crime are thus, in principle, protected by the catalogue of rights in the convention.

The tax haven secrecy rules, broadly speaking, often function as a denial of justice for those who experience loss and damage, regardless of whether these are public of private actors. 44 The consequence is that the existence of, reasons for, or extent of the loss is not disclosed, and illegally taken funds cannot be recovered.

The system of the European Convention of Human Rights implies that those who lodge complaints against states for the European Human Rights Court in Strasbourg (EHRC), must first exhaust the national means of justice before the complaint is taken under consideration, cf. ECHR article 35 no 1. Law is developed through complaints, and the convention is dynamic and should be interpreted in the light of “present days conditions”.

Primarily private individuals have the right to lodge complaints to the EHRC, but also enterprises are protected in several articles of the convention. States may lodge complaints according to the ECHR’s article 33.

The Commission would point out that human rights give the opportunity for protection, so that those on whom damage is inflicted because of concealing structures in tax havens, may secure their rights. It has been shown repeatedly that state leaders in developing countries conceal very valuable assets in several jurisdictions for instance in Europe, where the ECHR applies. States against whom complaints are lodged must have acceded to the treaty. The convention was passed by the member state of the European Council, whereas the UN conventions of 16 December 1966 have a far wider geographic range.

Furthermore, it is known from a number of cases, that developing countries have had great difficulties in gaining access in several states that have acceded to the ECHR. Consequently, developing countries, too – because of the secrecy rules – have no realistic possibilities to repatriate stolen funds. The Commission would point out that the amounts concealed are enormous in absolute numbers, and even greater relative to the poverty in the states from which the funds have been stolen.

To the extent that formal and material conditions allow, developing countries should seek to bring states that hide illegal capital flows and stolen funds before the human rights organs.

The Commission would underline that many human rights questions remain untried. Those who suffer a denial of rights, or are denied access, or are denied repatriation because of rigorous secrecy rules, may only have a final answer to what rights they have by lodging complaints against the respective closed jurisdictions for the human rights organs.

The Commission would encourage developing countries to explore the possibilities human rights give for enforcing a right for access to and repatriation of stolen funds. Civil society is encouraged to assist developing countries in this work. The work must also include an exploration of the possibilities for complaints that are inherent in various UN conventions. 45

3.7 Particularly on the harmful structures outside tax havens.

The Commission would point out that there are a number of examples that the type of harmful structures that characterise pure tax havens also exist in countries that are not normally referred to as tax havens. This is particularly the case with company structures that are apt to cooperate with tax haven-based structures, and to cooperate with states that have built a large network of tax agreements. The tax agreements should safeguard against double taxation, but they can also be abused for so-called “treaty shopping” by the establishment of closely related companies that do not conduct any activities.

Several industrialised countries have established company forms that are exempt from the obligation to audit, and/or are liable for little or no tax in limited areas. There are provisions for pass-through solutions that work so the tax base in both the source state and the state of residence is undermined by recourse to an artificial intermediate company in a pass-through state.

The Netherlands is an example of this last case, but also other jurisdictions have established more or less activity-less structures that in the main only hurt other states.

Several states allow very harmful secrecy rules, even if they cannot be regarded as classical tax havens. Examples of this are Belgium, Switzerland, and Luxembourg. Company structures in Delaware (USA) also contain substantial harmful elements.

It is also an important point out that those who abuse tax havens actually live in countries that are not tax havens. Measures to combat the harmful effects of the legislation in tax havens must therefore also be enacted in other states.

The Commission would point out that it is important that developed rule-of-law states discontinue all arrangements that are apt to be harmful to other states. Tax havens often point to such arrangements as an argument for not enacting the necessary changes before other countries do the same. For instance, tax havens frequently point to the secrecy rules in Switzerland. As long as Switzerland does not change its rules, the tax havens see no reason to do so either.

The Commission would point out that the motive force for the development of harmful structures often derive from well-developed financial centres in large industrialised countries. Consultants in these countries contribute both with general counselling and with the organizing of structures that are apt for abuse.