The revelation of “Los Papeles de Pandora” , the investigation of the International Consortium of Investigative Journalists (ICIJ, for its acronym in English), has released the list of names of up to 600 Spaniards, among which there are many celebrities such as Pep Guardiola or Julio Iglesias , who have opaque businesses and the establishment of offshore companies that will be talked about a lot these days, so we are now going to explain in detail what an offshore company is, what it means, how it works and what it is for.
What is an offshore company, what does it mean, how does it work and what is it for?
The term ” offshore “ means “outside of jurisdiction” and indicates a company incorporated in countries where tax expenditures are limited and institutions guarantee bank secrecy and a high level of privacy .
These countries that are known as “tax havens”, in fact, do not respond to requests from foreign judges . To start an offshore company it takes a maximum of 48 hours, without offices or employees. Sometimes you don’t even need an owner – a figurine or even a fancy name is enough.
These companies are almost always empty boxes that carry out commercial or financial activities carried out in other countries. Through legal loopholes and complex bureaucratic systems, they register large profits in so-called tax havens , where the tax burden (the amount of taxes to be paid) is negligible or in any case less than the rest of the world.
Example of how an offshore company works
To better understand what this type of offshore companies established by many rich and famous corresponds to, we can give an example :
Let’s say that a multinational prepares a container full of bananas in Ecuador , which costs the company 1,000 euros. He sells them to a French supermarket for 3,000 . Which country applies taxes on that profit of 2,000 euros: France, Ecuador? The answer is: “where society decides.” The multinational creates three companies , and owns all of them: EcuadorCo, HavenCo (in a tax haven) and FranceCo.
EcuadorCo sells the container to HavenCo for 1,000 euros and HavenCo sells it to FranceCo for 3,000 euros . Basically, that’s it (bananas per se don’t even pass near the tax haven).
To understand it better: it cost EcuadorCo 1,000 euros to prepare the container and it was sold for 1,000 €. Therefore, EcuadorCo does not record profits and therefore does not pay taxes.
Similarly, FranceCo buys it for € 3,000 and sells it in the supermarket for € 3,000. Again, no profit or tax.
HavenCo is the key to the puzzle. He bought the container for € 1,000 and sold it for € 3,000, with a profit of € 2,000 . But it is based in a tax haven, so it does not pay taxes.
Tax evasion
As we see and understand from the example, thanks to the offshore company and the place where it is established, the tax laws that make any legally established company have to declare their profits and ultimately pay taxes are not met.
On the other hand, these types of companies that operate outside the law are established from a favorable tax structure , but they are also created by law firms that are specialized in the creation of this type of company and that precisely have offices in the countries where these types of accounts are established. In the current case of “Los Papeles de Pandora”, up to 14 law firms appear , according to information from LaSexta, among which are Alcogal, Trident Trust and Asiaciti.
Is it a crime to have an offshore company?
However, the law considers that this type of company is not a crime . Or rather, having money in this type of company is not a crime as long as you declare it in your country of origin.
The crime is committed when the offshore account or company is used in a hidden way to move money that has not been declared, that is when a violation of tax laws occurs. And unfortunately, many turn to these tax havens to save taxes , launder money, deduct non-existent costs or also, to escape the demands of creditors.