Ken C. Juno President, CEO ken@iecoil.com 1-504-957-8702

Lance Gaulon Vice President, Acquisitions lance@iecoil.com 1-504-352-2848

Bahamas Information

The Commonwealth of the Bahamas, as they are officially known, is made up of some 700 islands and 2,500 cays or islets scattered over 750 miles of the Atlantic Ocean. This 100,000 sq./mile archipelago begins about 50 miles due east of West Palm Beach, Florida, where Freeport on the island of Grand Bahama is located, and extends lazily some 500 miles southeastward, finally ending among the Turks & Caicos Islands [another Caribbean no-tax haven, geographically (but not politically) part of the Bahamas]. Only about 25 of the Bahama islands are inhabited, and three-fourths of the people reside on just two islands – New Providence (where Nassau the Capital is located) and Grand Bahama Island (Freeport).

The Bahamas – The Perfect No-tax Haven

The Bahamas have one of the largest volumes of tax haven business in the world. There is no personal or corporate income tax, no capital gains tax, no withholding tax, no inheritance tax, no death duties, no employment taxes, no sales taxes, and no probate fees in the Bahamas. Corporations, individuals, partnerships, trusts, and estates (including nonresident controlled Bahamian corporations) all enjoy this immunity. The principal source of revenue for the government comes from company registration fees and customs duties.

Economic overview – Tourism and Banking

Much of the information that follows was provided by Curtis M. Stewart, Consul for the Embassy of the United States of America in Nassau from a booklet dated April 1990.

The Bahamas is one of the most prosperous countries in the Caribbean. Both inflation an external debt are low, the government’s budget balanced, and the people enjoy one of the highest per capita incomes ($9,000) in the region.

Tourism and banking form the backbone of the economy accounting for two thirds of the total gross domestic product (GDP) and representing the primary source of hard currency in the economy. Tourism alone accounts for 50% of the GDP and employs about half the Bahamian work force of about 140,000. In 1988, tourism earnings totaled about $1.14 billion dollars. About 80% of the tourists are Americans. Because the number of American tourists is large, the Bahamian economy is closely linked to the U.S. economy. A Bahamian $ is freely exchangeable into one U.S. $.

The economy, which had boomed since the early 1980’s cooled in 1988. In 1988 tourist arrivals increased 2.6% from 3,079,385 (in 1987) to 3,158,028. In 1995 almost 3.5 million people visited the Bahamas. Ninety percent of these were from the United States. The amount spent by tourists in the local economy reached about $1.15 billion each year.

The main tourist centers are New Providence (Nassau and Paradise Island) and Grand Bahama Island (Freeport), both of which have several luxury hotels and casinos. Not coincidentally, about 75% of the 250,000 Bahamas population lives on these two islands (145,000 on New Providence and 50,000 on Grand Bahama).

The Government continues to promote tourist growth in the Family Islands. Carnival Cruise Lines recently invested $200,000,000 in a 1,550 room hotel/casino and convention center in Nassau. This expanded facility was completed in December 1989, increasing hotel capacity on New Providence by 12% and providing over 3,000 more jobs.

Bank and Financial Services Industry

Financial services are the economy’s second most important sector. The Bahamas’ status as a tax haven and its bank secrecy laws have led to its growth as an international banking center. Of the 404 banks and trust companies licensed in the Bahamas, about 75% actually have an office and staff in the country. Most of these banks manage assets for wealthy individuals, as well as for offshore companies and trusts.

Banking typically accounts for roughly 8% of the GDP and employs a little over 3,000 persons, 95% of whom are Bahamians. Total salaries and wages paid by the banking sector is estimated to be in the region of $60 million per year.

The majority of banks and trust companies are nonresident or offshore companies that generate no Bahamian dollar earnings and cover all their expenses for administration costs, utilities, maintenance and other overhead by bringing in foreign exchange. Total expenditures for these items by the banks are in the region of $120 million per year.

During 1988, several American and Canadian banks either sold all or part of their business in the Bahamas or moved part of their operations elsewhere. Chase Manhattan and the Bank of Montreal sold their retail business in Nassau, and the Bank of America and the Bank of Boston moved parts of their operations to Grand Cayman and Luxembourg.

One of the reasons Chase Manhattan, Bank of America and the Bank of Boston decided to sell their offshore retail banking centers probably had to do with the U.S.A.’s new sub-part F provisions brought on by the Tax Reform Act of 1986. Prior to the ’86 Act, offshore U.S. subsidiary banks that were controlled by the U.S. parent could solicit customer deposits without the subsequent profits being categorized as sub-part F income. Sub-part F profits are imputed back to the U.S. shareholders (parent) and federal income taxes are due. Under pre-Tax Reform Act of 1986 law, there was no imputation of profits back to the parent company in the USA. Before 1986, offshore banking operations in any tax haven could be run tax-free.

The new U.S. tax law now inhibits most offshore retail banking operations in tax havens and other foreign countries if the offshore bank is a Controlled Foreign Corporation under IRC §957(a) (i.e. more than 50% of its voting or value shares are owned by US shareholders).

Back in the 17^th century, pirates ruled the seas and land around the Bahamas Islands. Banking back then was a matter of digging a hole and sketching a treasure map where “X” marked the spot. Owing to its colored history, The Bahamas was the first international banking center to be established offshore (long before the Cayman Islands), and it is still considered to be setting the standard for other offshore centers even today.

Banking in the Bahamas is a bit more sophisticated today. There are currently 404 banks registered in the Bahamas. About 107 of these financial institutions are non-active or restricted operations, with persons specified in the license. The remaining 284 banks are financial institutions dealing with the general public, some of them being privileged under the Exchange Control Regulations to deal in any currency.

Fees paid by banks and trust companies vary between $1,000 and $160,000 annually, depending on the type of license.

Banks dealing with the public

Of the 284 or so licensed financial institutions, only about 9 are authorized to deal in “gold and foreign currencies”. Seven of these banks are clearing banks. A further 10 trust companies are authorized agents, and act as custodians and dealers in foreign currency securities.

These 19 authorized dealers and agents include three branches and three wholly owned subsidiaries of the largest Canadian banks , two branches and three subsidiaries of the largest U.S. banks, two branches and two subsidiaries of four of the largest U.K. banks, on Luxembourg branch, a subsidiary of a Swiss bank and one Cayman subsidiary. The remaining institution is a Bahamian based company.

According to Hans C. Weber of the Foreign Commerce Bank in Zurich, Switzerland… “Every investor who can afford some diversification should have a foreign bank account.”

Bank Secrecy Laws

The secrecy attached to relations and transactions between financial institutions has been another essential factor in attracting business to Nassau. The statute law of the Bahamas super-imposed upon the wisdom of the English law has strengthened the inviolability of secrecy and confidentiality in the tax haven.

The Bahamian secrecy laws are imposed on all Bank and Trust Companies, their directors, officers, and employees, attorneys, and auditors. Only with an order from the Supreme Court can a third party acquire information, in criminal matters, about any account. Tax evasion in one’s home country is not a criminal matter in the Bahamas. Any offshore account in The Bahamas is protected by this strict bank secrecy law.

The Bahamas is not a party to any tax or fiscal information-sharing agreements (i.e. tax treaties) with any other country. Once you open an account in the Bahamas, you are the only one who has the privilege to access it.

With these secrecy laws, you would think that the banks could be used to hide illegal money (like drug money). Any persons using the banks in an illegal manner will find that the secrecy laws do not apply to them and all the information about their account will be turned over to the proper official upon request of the Bahamas Supreme Court (based on the agreement of Mutual Assistance in Drug Matters with the United States.

The banking community thinks that the secrecy laws governing banks and trust companies should be tightened further, with a view of giving more confidence to the investor. But, foreign investors from thigh tax jurisdictions have no need to worry. Neither the IRS, Revenue Canada, nor the British Inland Revenue can obtain information about a bank account you may have in the Bahamas.

One word of caution to those citizens of high tax jurisdictions. Understating ones income by not reporting the interest income from an offshore bank account is a crime (felony) in the U.S., Canada, the United Kingdom, and most other industrialized nations. Proper tax planning and the use of holding companies and trusts can often relieve the foreign investor from breaking the tax laws of his home country.

Bahamian bankers will gladly open a bank account for you. It’s up to you whether you report the interest income or don’t. Bankers here will not disclose any information to any foreign revenue service under any circumstances.

The Offshore Banking Industry, part of the #2 industry in the Bahamas, provides individual investors with the opportunity to investors with the opportunity to invest in the European fashion 50 miles off the U.S. coast. While you are on your sunny Bahamian vacation, stop by and see what the offshore bankers can do for you.

Confidentiality and Anonymity

Anthony J.R. Howorth is a banker-writer and British citizen. Formerly with NatWest International Trust Corporation (Bahamas), Ltd. Anthony has 25 years of banking and trust company experience. Educated at Oxford’s New College, Howorth has lived in Barbados, the Cayman Islands, Panama and now the Bahamas.

In addition, the Bahamas is located in the New York time zone. There is representation of all major banks, a very acceptable climate and an international standard of living without any of the frustrations of traveling in and out of other major financial centers.

The private banks tend to specialize in discretionary management of large funds for selected private clients…they make healthy returns for their owners and their clients. They retain the utmost confidence from their clients and give the highest forms of confidentiality and anonymity.”

It’s and $8 trillion dollar market and taxes are a big obstacle

According to Keith Sjogren of Canadian Imperial Bank Commerce, Toronto. “The size of the market is estimated at $8 trillion dollars! Each year over $16 billion is handed down by the wealthy to their offspring. Another profitable business for private banks is the partnership program in a U.S. brokering business without fear of capital gains taxes.”

U.S. tax law allows foreign banks, nonresident aliens and foreign companies to trade in the U.S. stock and bond markets with a U.S. stockbroker without incurring capital gains taxes.

Numbered Bank Accounts

As in Switzerland, there is a Code of Ethics, which calls for bankers to know who they are dealing with – to prevent illegal activities. There is no such thing as a “secret” account. The bank client is known by bankers in charge of his or her account. Basically, one has a numbered account.

If you are a famous person, you might prefer to be a number instead of a name, but your identity definitely will be information available to bank officials.

If you need more anonymity open a ciphered bank account in Panama or try a “chop” account in Hong Kong. A “chop” account comes with your own personal seal. Only when the seal appears on your drafts can a check be cashed.

International Business Companies (IBCs) of the Bahamas

At one time the Bahamas were ranked third in the world as a banking/financial center, just behind London and New York. Today, the Bahamas still rank in the top ten, but have slipped down the list behind the Caymans and the British Virgin Islands. To regain some of its lost prestige, a new Companies Act was passed in 1990, and on January 15, 1990, the International Business Companies Act of 1989 went into effect. The Act simplifies the requirements for incorporation and reduces the costs of forming an offshore company in the Bahamas. This new law signaled the beginning of a new era for the Bahamian financial sector. In the first few hours, on the day the Act went into effect, 100 new companies were formed.

Michael L. Barnett, president of the Bahamas Bar Association , said at the 1990 Eight Bahamas International Financial Conference… “new (banking) legislation, together with the traditional features of the Bahamas (no taxes), which has made it a registrar financial center, has caused much excitement. I commend the International Business Companies Act, 1989 to your favorable consideration.”

An IBC is a company, which is restricted from carrying on business with persons resident in the Bahamas, and cannot invest in real property situated in the Bahamas, other than by holding a lease of property for use as an office. An IBC cannot carry on any banking, trust, insurance or reinsurance business, or provide a registered office for other companies. Essentially, an IBC operates internationally, investing in stocks and bonds, trading oil, gas, commodities, what have you. An IBC is not taxed in the Bahamas.

An IBC can open bank accounts, retain local professional services, prepare and keep its books and records, hold directors and shareholders meetings in the Bahamas. This is not considered carrying on a business in the Bahamas under the Act.

An IBC can also hold the shares or debt obligations of other companies incorporated in the Bahamas, and an IBC’s shares may be held by residents of the Bahamas.

An IBC is formed by lodging a Memorandum and Articles of Association with the Registrar’s Office. There is no fixed authorized capital requirements, nor is there a maximum limit on authorized capital. For an authorized share capital of $5,000 or less the annual license fee is $100. Where the authorized capital is more than $5,000 but less than $50,000, the fee is $300. Where the authorized capital exceeds $50,000 the license fee is $1,000 a year.

An IBC may be incorporated within 24 hours with two subscribers. The IBC may issue shares with or without par value, bearer or shares registered in someone’s name. An IBC has an option of stating in its Memorandum whether it will issue share certificates. IBC shares can be repurchased, redeemed or otherwise acquired, but only out of surplus or in exchange of newly issued shares.

At least one director must be elected to manage the IBC, and the director can be a corporation or individual, and need not be a resident of the Bahamas. The company must keep proper books and records at its registered office in the Bahamas, but these records are not open to public inspection, and no annual return has to be filed with The Registry.

An IBC must keep a share register, minutes of all directors and shareholders meetings, copies of all resolutions, a register of directors and officers, and books and records that reflect a fair assessment of the company’s financial position. It is also required that an imprint of the company seal be kept at the company’s registered office. While the company records are not open to public inspection, they are open to inspection by other shareholders, and even then the right to inspection is curtailed to be “Only in the furtherance of a proper purpose.”

The Bahamas Trusts (Choice of Governing Law) Act of 1989

The Bahamian concept of trust law and administration is derived from England.

In 1989 the government of the Bahamas of the Bahamas, in an effort to make the Bahamas a more favorable jurisdiction for the formation of trusts by foreign investors, sent the following summary which represents the primary gambit of the Commonwealth of the Bahamas’ Trust (Choice of Governing Law) Act, 1989.

“This act seeks to create a legislative basis where under persons who wish to create trusts in respect of property, whether such property is located in the Bahamas or elsewhere, may choose the laws of the Bahamas as the governing law of such trusts; whether or not they are resident in the Bahamas.

Its provisions include, inter alia, that:

(i) “A term if a trust expressly declaring that the laws of the Bahamas shall govern the trust is valid, effective and conclusive regardless of any other circumstances.”

(ii) “All questions arising in regard to a trust which is governed by the laws of The Bahamas or in regard to any deposition or property upon trust thereof including… questions as to:

(a) The capacity of the Settlor;

(b) any aspect of the validity of the trust or disposition or the interpretation or effect thereof;

(c) the administration of the trust…. Shall be determined in accordance with the laws of The Bahamas without reference to the laws of any other jurisdiction with which the trust or disposition may be connected.”

It must be recognized that this new law does not validate, inter alia, the disposition of property, which is not owned by the Settlor.

(iii) “No trust governed by the laws of The Bahamas and no disposition of property to be held on trust that is valid under the laws of the Bahamas is void, voidable liable to be set aside or defective in any manner by reference to a foreign law; nor is the accuracy of the Settlor to be questioned by reason that:

(a) the laws of any foreign jurisdiction prohibits or do not recognize the concept or a trust; or

(b) the trust of disposition avoids or defeats rights, claims or interest conferred by foreign law upon any person by reason of a personal relationship to the settlor or by way of heir ship rights…”

There is no requirement to register a Bahamian trust with the government, nor is it necessary to file a copy of the trust indenture with any Government authority, unless it is a unit trust offering shares to the public.

Bahamas Fraudulent Dispositions Act, 1991

Following the Bahamas Trust (Choice of Governing Law) Act, 1989, the Parliament of the Bahamas Trust (Choice of Governing Law) Act, 1989; the Parliament of the Bahamas enacted into law an Act to Amend the Law Relating to Dispositions made with an Intent to Defraud. The new law is now officially called the Fraudulent Dispositions Act, 1991.

Ship Registrations

The Bahamas also has a comprehensive procedure for ship registration through the Merchant Ship Act of 1976 . Foreign owned ships are eligible to be registered in the Bahamas if they are less than 12 years old at the time of registry and are ocean going vessels of 1,600 or more net-registered-tons and are engaged in foreign-going trade. Ships of less than 1,600 tons or older than 12 years may be registered with the expressed permission of the Minister of Transport.

Initial fees to register a ship of 5,000 tons or less are $1.20 per net registered ton, and $1.10 per ton on ships above that size, plus an annual fee equal to 10% of the initial fee, plus $900. For example, the registration fee for a 5,000-ton vessel would be $7,500 ($6,000 initial fee + 10% of initial fee or $600 + $900).

Ship owners who wish to transfer registry of existing ships to the Bahamas will not be required to have their vessels re-surveyed if the ship has valid safety and tonnage certificates.

The United States has an Exchange of Note Agreement (EON) with the Bahamas, which allows Bahamian registered ships to enter and leave U.S. ports for destinations outside the USA free of federal income taxes. IRC 883(a) limits the EON exemption to ships where 50% or more of the value of the stock in the shipping company is owned by individuals who are resident of the Bahamas, and to certain other shipping companies where the stock is regularly traded on a U.S. or foreign stock exchange.

Foreign Investment Opportunities

Perhaps the most promising sector for foreign investment in the Bahamas is agriculture, which, together with the fisheries industry, accounts for about 5% of the country’s revenues and employs about 5% of the labor force. Despite the fact that the Bahamas import over 89% of its food, agriculture production increase by 7,6% in 1989, with an estimated value of $34.38 million.

There are 238,000 acres of prime agriculture land, which remains uncultivated. The Bahamian Department of Agriculture has identified the following areas of potentially the most profitable for investors:

beef cattle production and processing,
pork production and processing,
tree food crops,
dairy production and processing,
winter vegetable crops,
Aquaculture and mari culture.

One of the Biggest No Tax Havens in Terms of Size

The Bahamas are the closest tax haven to the United States. As far as tax havens go, the Bahamas are one of the largest in land area. With over 700 islands and cays (pronounced “key”) totaling 5,400 square miles, only Panama, Vanuatu and Switzerland are bigger. The Bahamas are only slightly smaller than the state of New Jersey (7,400 sq. miles), and actually larger than Long Island, N.Y. (1,401 sq. miles- population over 10,000,000).

From the businessman’s point of view, the Bahamas are a zero tax haven, Like the Cayman Islands, Bermuda and Vanuatu (in the South Pacific), the Turks & Caicos Islands and Anguilla; the Bahamas are devoid of all direct and indirect taxation. There are no corporate or personal income taxes, no estate, gift or inheritance taxes, no sales, withholding or capital gains taxes in any of these no-tax havens. Like the pillars of antiquity were a symbol of democracy, freedom and power, modern Bahamians enjoy more freedom and democracy than found in either Greek or Roman societies. No excise men needed here.

Exchange Controls

Approval from the Central Bank to conduct business in any currency other than the Bahamian dollar is required of nonresidents, but is easily obtained from the Exchange Control Department.

Bank Secrecy Code in the The Bahamas

The Bahamas bank secrecy law is a carbon copy of the Cayman Islands Bank and Trust Companies Regulation of 1966. When the Cayman government went hunting for bank secrecy laws to bolster their status as a tax haven, they merely copied the secrecy laws of the Bahamas, than adopted them as their own.

Government – Political Stability

Until 1973 the Bahamas were a colony of Britain, but on July 10, 1973 Britain ended its 300 years of colonial rule and the Bahamas became the Commonwealth’s 33^rd independent member. Black prime minister Lynden O. Pindling , who led the drive for independence, was easily elected by the House of Assembly with the help of the black majority, which make up 85% of the 250,000 people living in the Bahamas. Assembly members are elected by universal suffrage and they appoint the Prime Minister.

The transition from colony to independent nation was a peaceful one and the new government has made it clear that it does not intend to disrupt the Bahamas tax haven status with its fragile financial infrastructures.

Today, the Commonwealth of the Bahamas is a constitutional monarchy with Queen Elizabeth II of Great Britain the official head of state. Under the 1973 Constitution, the British Monarch appoints a Governor-General who ceremoniously appoints other members to the 17 member Senate. Effectively, the black majority, which control the Assembly, now control the white minority in the matters of political affairs in the Bahamas.

In regards to political stability, you have to rate the Bahamas as one of the most stable tax havens in the world. With strong ties to Britain, protection from a foreign aggressor is practically guaranteed by the British Royal Navy : On the negative side, the Bahamas still have a serious unemployment problem among its 200,000 black inhabitants. Outbreaks of civil unrest have happened in other tax havens.

From Blackbeard to Donald Trump, the Bahamas have a Colorful History

The recorded history of the Bahamas began on October 12, 1492 when Christopher Columbus landed on San Salvador (Watling Island) and claimed it for Spain. Here Columbus took six Indians from the island and proceeded to Rum Cay and Long Island, two other Bahamian islands 50 miles to the southwest. The Spaniards that followed Columbus were not interested in these rocky islands, and never established settlements.

In 1647 the Eleutherian Adventurers Company was formed in London to colonize the islands. Drawing members from England, Bermuda and the Carolinas, they settled at Governors Harbor on the Island of Eleuthera. With the blessings of Oliver Cromwell they later settled in Nassau, on the island of New Providence. In 1703 the settlement in Nassau was destroyed in a Spanish raid thereby allowing the pirates to strengthen their position. Captains Avery and Edward Teach (the famous Blackbeard), and two pirate women, Anne Bonny and Mary Read, are among the famous pirates that were based in New Providence. It is estimated that as many as 2,000 pirates were resident in New Providence at one time. In 1720 the royal governor Captain Woodes Rogers was forced to ally himself with the pirates to fend off another Spanish attack.

After the American Revolution some 3,000 American loyalists and their slaves settled in the Bahamas. When slavery was done away with in 1834, the islands declined into economic recession, and many people moved away. During the American Civil War the blockade-runners gave new life to the economy. Later, during Prohibition, many rumrunners gave new life to the economy. Later, during Prohibition, many rumrunners set up headquarters in the Bahamas, using speedboats to deliver their contraband liquor to the Atlantic States.

It wasn’t until the late 20^th century that the Bahamas evolved into an important financial center and tax haven for entrepreneurs such as N.Y. real estate tycoon Donald Trump. Trump was owned of a luxury Paradise Island hotel and casino, until he sold out to Merv Griffin. Griffin later sold out to a South African investor who pumped $120,000,000 into the properties, renaming it Atlantis .

Nassau and Freeport in the Bahamas. Nearest Tax Havens to the United States.

We left Ft. Lauderdale at 2:15 on a Friday afternoon on a Delta airline flight. Forty-five minutes later our plane touched down in Nassau – one of several zero tax havens in the Caribbean. I’m a tax planner specializing in the use of tax havens. My journey to Nassau was a career move – to experience first hand. The fact that Nassau in the Bahamas is a tourism Mecca in a tropical paradise surrounded by some of the most beautiful beaches in the world was only a secondary inducement to my trip. The fact that the Bahamas were once ranked third in the world as a financial center, behind New York and London, and the fact that companies New York and London, and the fact that companies can be registered here for around $1,000 and companies can trade stock exchanges free from capital gains taxes – that’s enough to whet anyone’s appetite.

One cannot discount the magnificent beauty of these tropical islands surrounded by Shallow Seas – called Baja Mar in Spanish. When the astronauts were asked what was the most beautiful view on earth from outer space, they chose the emerald, blue, topaz and mauve Baja Mar encircling the Bahamas. And it’s no wonder. From your plane window the Bahamas look like nothing you have seen before. Fascinating, breathtaking, unforgettable.

Freeport on Grand Bahama Island

Nassau on the island of New Providence is the seat of the Government of the Bahamas, but Nassau is certainly not the only place where one can conduct offshore business. Grand Bahama Island 70 miles to the north of Nassau is a splendid tropical oasis strategically located just 60 miles off the coast of Florida. Grand Bahama possesses virtues no other Caribbean island can boast, planned development and tax benefits offered in the Freeport/Lucaya area.

Freeport began as the brainchild of Wallace Groves, an American businessman who dreamed of building a planned community from the pine forests of Grand Bahamas. After realizing Grand Bahamas potential, he signed the Hawksbill Creek Agreement with the Bahamas government and the British Crown in 1955 wherein a company, The Grand Bahamas Port Authority, agreed to develop a large area of Grand Bahamas Island for industrial an commercial use, dredge a deep water harbor an construct an airport, build schools and hospitals and other basis community needs. In return, the Government granted the Grand Bahamas Port Authority 150,000 acres of land (230 square miles – twice the land area of the Cayman Islands) known as the Port area, and gave it exclusive rights to grant and administer business licenses.

The Hawksbill Creek Agreement also allowed for many attractive tax benefits, including freedom from corporate and individual tax.

In Hawksbill Creek Agreement also allowed for many attractive tax benefits, including freedom from corporate and individual tax.

In 1961, the Port Authority growth momentum experienced resurgence with the involvement of Sir Charles Hayward, a wealthy British Industrialist. Today the Port Authority Group of Companies is owned, controlled and managed by Sir Charles’s son, Sir Jack Hayward and by Mr. Edward St. George, who acquired an ownership position in 1976. I had the good fortune to meet with Mr. St. George in his office at the Port Authority building while on a business trip to Freeport in February. I was very impressed with their organization. These businessmen own and operate the Intercontinental Airport where I landed, the island’s water and electric company, the Port facilities for ships, and built the roads on Grand Bahamas. Recently, they sold the telephone company to the Bahamas Government.

About 40,000 people live in Grand Bahamas, of which about 15% are expatriates. The local currency is the Bahamian dollar, which is parity with the U.S. dollar. It is unnecessary therefore to convert US$ upon entry into the country.

Freeport on Grand Bahamas has unparalleled advantages for the potential investor including (1) excellent banks with very strict nondisclosure laws and with the ability to conduct business from a warm tropical Caribbean island, (2) close proximity to U.S. mainland (25 minutes from Miami), (3) good transportation facilities with U.S. Immigration and Customs pre-clearance, (4) stable economic and political climate, (5) excellent communication facilities.

Management Trustee Companies – Offshore Quarterbacks

Taking a cab from the Nassau International Airport you pass through the famous Cable Beach area. Further on down West Bay Street, on the right hand side, you’ll come upon Coutts building, a most impressive layout – covering 10 acres or more of prime real estate. Housed in this office building, which looks more like an upstate New York’s socialites mansion than an office building, are the books and records of thousands upon thousands of offshore companies and trusts belonging to wealthy clients from all around the globe. Coutt’s clients come from Saudi Arabia, the United States, Great Britain, France, West Germany, Canada, Mexico, Columbia, Argentina, Brazil – anywhere there are high taxes. Coutts also have clients from other tax havens like the Cayman Islands, Channel Islands, Panama, Gibraltar, Bermuda, Hong Kong and Singapore.

While local lawyers and accountants can expedite the incorporation and day-to-day affairs for the client’s holding company, it is the management trustee companies like Coutts that handle the business of the rich and famous. Minimum opening deposit to establish a relationship with Coutts is said to be $500,000.

Offshore advisors, in conjunction with local lawyers, accountants, banks and trust companies, by and large, can handle all the formalities of forming and running a client’s offshore company or trust in the Bahamas. They can provide a registered office and mailing address, a secretary and management team, accountants and bookkeepers for the company’s books and records, and much more. Often these people will run the day-to-day affairs of offshore companies for foreign investors.

Typically bank and trustee companies in the Bahamas provide the following services:

Company formation and management,
Personal trustee and executor ship services,
Offshore Banking services,
Mutual funds and unit trusts,
Estate planning/personal wills,
Custodian and safekeeping,
Registrar and transfer agents
Registered office facility,
Accounting and administrative services,
Portfolio Management,
Offshore Bank Management
Captive Insurance,
Corporate trustee,
Pension funds,
Nominee, attorney and agency services,
Bond and stock trading facilities,
Ship registration services,
Foreign sales corporation services,
International trading companies,
Multi-currency time deposits.

Tax Planning, not Tax Evasion, Should Be Your Goal

For the U.S. taxpayer finding the right people to form and run your offshore company (or trust) is as important as what to invest in the first place. Only nonresident aliens (naturalized Bahamians or other foreigners) should be employed as bookkeepers and trustees. The reason is very basic.

The U.S. courts generally will not subpoena a nonresident alien to appear before a U.S. grand jury to answer questions under oath about a U.S. taxpayer’s offshore activities. On the other hand, U.S. courts and the IRS can and will subpoena a U.S. citizen who is a bookkeeper or trustee or director for an offshore company or trust. Ordinarily, the IRS will initiate an investigation only when the offshore operation is run in violation of U.S. tax law, or when a U.S. tax liability exists. It is very important that you employ only offshore managers who are nonresident aliens to run your tax haven operations.

In an enquiry, the IRS will approach the U.S. citizen taxpayer simply to ask questions and gather financial information about his offshore company or trusts. The Tax Reform Act of 1986 granted the IRS much broader powers to gather information from U.S. citizens (but not nonresident aliens) with operations in the foreign sector.

Since the IRS has no jurisdiction in the Bahamas or any other tax haven, it cannot direct its questions to Coutts or any other Bahamian based lawyer, bank or management trustee company. In their information gathering the IRS seeks to:

Establish whether the offshore company is a Controlled Foreign Corporation (CFC) . If it is not, no tax liability generally exists for the U.S. taxpayer (shareholders), and he is free to go about his business.
Establish whether a U.S. person owns 10% or more of the voting stock in the offshore company. If no U.S. person owns the requisite 10% voting stock, no U.S. tax liability can result under CFC provisions. The U.S. taxpayer is free to go on with his affairs (untaxed!).
Determine whether the offshore company has Sub-part F income (i.e. passive incomes such as capital gains, interest from foreign bank accounts, dividends, royalties) for the current fiscal year, or prior fiscal years. For the IRS to make a proper determination, it must have access to the books and records of the foreign corporation.

The Tax Reform Act of 1986 gave the U.S. courts and the IRS special powers to secure offshore books and records by more or less allowing the IRS to twist the arm of the U.S. shareholder who resides in the United States to furnish the info. Relying on Bahamian Bank Secrecy Laws alone is not always the wisest recourse. The directors of a properly managed offshore company should easily be able provide the IRS with enough information to squelch further investigation (satisfy the IRS that no tax liability exists), thus avoid a tax or legal problem for the U.S. investor.

It takes good tax planning and a talented offshore team to make a plan work. You should contact the Tax Haven Reporter at the address below in the Bahamas if you need to recruit competent managers. Many management trustee companies and lawyers do not possess adequate in-house tax planners conversant with the U.S. tax laws. It’s often up to you to see that it’s done right.

I Currently work with a Bahamian law firm, an accounting firm and two reputable banks here in Nassau. The law firm and accounting firm have over 30 years of experience. Accountants, lawyers and trust companies typically charge about $1,200 or more to register an IBC (no trusts & no tax planning).

If a client wants to form a company through the mail in 24 hours he should contact me ASAP. I’ll then forward the company memorandums, company seal and appropriate fees to my attorneys for their approval. Two memorandums will then be sent to the Government Registrar, without the client even coming to Nassau. When the client is ready he should contact Lance Gaulon at 504-352-2848 or lance@iecoil.com and I’ll tell you exactly how to send the money.

You will be able to open a bank and security account for your IBC so you alone have signature authority over the accounts – if that’s the way you want it. I have business agreements with two of Nassau’s major banks. These Bahamian banks have been in operation here in Nassau for over 30 years. These banks have subsidiaries in all the other tax havens, including the Caymans, Hong Kong, Monaco, Zurich, Gibraltar, the British Virgin Islands and Jersey in the Channel Islands. One is a giant British bank – like Chase Manhattan – with more than 2,000 offices worldwide. One of the banks has no offices inside the United States. You can choose whichever bank you want. With either of these banks clients can open broker’s accounts anywhere in the world and trade under the guise of the bank’s name. The client’s IBC does not appear on the stock certificates, and his anonymity is totally preserved.

Masking a client’s Stock Market Trades is a traditional way of doing business here in the Bahamas and in the other tax havens. It’s done by most all the major bank and trust companies. Banks in the Bahamas do not have to file tax returns with the IRS.

The Bahamian Bank Secrecy Code forbids any bank executive or advisor from giving information to any outside tax collector, attorney or foreign court.

The costs to form an IBC (International Business Company) range from $1,950 to $2,950.

Working with the Controlled Foreign Corporation & the “New” PFIC Provisions

It’s nice to dream about tax havens and no taxes (one of God’s original gifts to mankind!), but U.S. citizens should study their Federal tax laws before jumping in feet first. If a U.S. Shareholder [as defined under IRC §951 (b)] owns shares in a Bahamian company that is a Controlled Foreign Corporation [as defined under IRC §957(a)], the Sub-part F income (as defined under IRC §954) of that Bahamian CFC will be imputed to the U.S. taxpayer. When sub-part F income of a Bahamian CFC is imputed to the U.S. shareholder, the shareholder must include it on his tax return and pay taxes on it. Sub-part F incomes include dividends, interests, capital gains, and a host of other types of incomes, but exclude “rents and royalties” from the active conduct of a trade or business in the haven.

There are constructive ownership rules under IRC §958 that can make a U.S. shareholder own shares directly and indirectly through other foreign corporations, trusts and partnerships. In the example below, if a U.S. shareholder owned 25% of the shares in Z, and Z owned 100% of the shares in Y, then the U.S. shareholder would be considered to indirectly own 35% of the shares of Y by virtue of Z’s 100% stock ownership in Y.

The CFC provisions under IRC §951 to §958 account for most of the U.S. tax planner’s problems, but four other sections of the Internal Revenue Code can lead to other adverse tax problems. Without going into a full discussion, these other provisions include (1) the “new” Passive Foreign Investment Company provisions (IRC §1291-97); (2) Accumulated Earnings Tax (IRC §532); (3) the Foreign Personal Holding Company provisions (IRC §551); and the Personal Holding Company provisions (IRC §541).

Example #1: Twenty U.S. Investors own all the shares of Bahamian CFC Z. Z owns a Bahamian hotel costing $10,000,000 that has after expense profits of $1,500,000 from rentals (rents are not sub-part F income) in 1989. Company Z also owns 29% of the shares in a 2^nd Bahamian company Y which owns $5,000,000 in U.S. stocks and Treasury bonds issued after July 18, 1984. Y’s interest income from bonds was $1,000,000 (passive interest is Sub-Part F income)

For purposes of determining the U.S. taxpayer’s tax liability, only U.S. shareholders (persons that own 10% or more of Z’s voting stock) are subject to imputation of Z’s sub-part F income. However, if Z does not have any Sub-part F income, no imputation of offshore profits can happen.

But what about the sub-part F income of Bahamian investment company Y? Because all of Y’s 1,000 shares of voting stock are owned by Bahamian Trust X, there will be no U.S. Shareholders of company Y. Sub-part F income of Y will not be imputed to the U.S. shareholders of X, because with respect to Y, there are no U.S. shareholders. Only U.S. shareholders that own 10% or more of the voting stock of Y [directly or indirectly through the stock ownership rules of IRC §958(a) & (b)] can have sub-part F income imputed to them under the CFC provisions. Consequently, Y’s $1,000,000 in passive profits can be accumulated tax-free offshore.

The Tax Reform Act of 1986 added the “new” Passive Foreign Investment Company (PFIC) provisions to U.S. tax code. IRC §1291-97 can subject the U.S. shareholder of an offshore company to a special “penalty tax rate” and “add-on interest penalty” under IRC §1291 if the offshore company is a PFIC. A company is a PFIC if more than 50% of its assets are passive in nature or more than 75% of its income is passive income. Again, attribution rules through other foreign entities are applied to make the PFIC determination.

In the above example, Bahamian Company Y is a PFIC because more than 75% of its income is passive (i.e. from interest, dividends or capital gains). Bahamian Company Z is not a PFIC because less than 50% of all Z’s assets (which include Z’s proportionate share of Y’s assets) are passive type assets (29% of Y’s $ 5,000,000/$11,450,000 or 12,7%), and less than 75% of Z’s income is derived from passive investments (29% of Y’s passive income of $1,000,000 belongs to Z for purposes of determining Z’s total income ($1,500,000 [rents] + $290,000 from Y). Z’s percentage of passive income is 16,2%. Since this is below the 75% allowed under the U.S. regulations, Z is not a PFIC.

In the example above, Y’s passive income might actually have amounted to $20,000,000 before Z’s proportionate share of Y’s income would cause Z to exceed the 75% passive income limit. (i.e. 29% of $20,000,000 = $5,800,000 attributed to Z makes Z’s passive income ratio $5.8 mill/$7.3 (total income = $5.8 Y income + $1.5 Z rents = $7.3 mill.) or 79.5%.

YOU MAY CONTACT ME AT ANY TIME FOR QUESTIONS YOU MAY HAVE:

LANCE GAULON lance@iecoil.com 1-888-427-7575 or 504-352-2848