Offshore Banking Tax

bank buildingThe offshore banking sector grew along with the increase in foreign investment and the widening of the global economy. Offshore banking is a major feature of offshore tax havens, where large sums of foreign funds and investment capital are deposited.

An advantage that offshore banks have had over onshore banks, or rather, banks which offer their services to the domestic public, is the exemption received from offshore banking tax. Exempting offshore banks from offshore banking taxes is based on the concept that the banking services of these institutions are provided solely to customers who are located internationally and not locally within the offshore jurisdiction of operation.

This makes the clientele of offshore banking tax free services a fundamentally worldwide one that strongly depends on advanced internet banking facilities, telephone banking and credit and debit card services. Offshore banking tax exempt institutions render services for which costs are applied, as well as free of charge.

Licenses are categorized according to the services that offshore banking tax exempt institutions intend to provide. There are generally two main types of offshore bank licenses; namely, General Bank License and Restrictive Bank Licenses, which are often referred to as Unrestricted “A” Class Offshore Banking License and Restricted B Class Offshore Banking License, respectively; or simply an “A” Class or “B” Class license. Offshore banking tax exempt institutions with general licenses are capable of providing bank services to residents within the jurisdiction of formation and internationally. Given that offshore banking tax exempt institutions are required to solely provide their services offshore, general license offshore banking tax exempt institutions are generally required to pay offshore banking tax for functioning as an onshore bank. Some of the services that are offered to local residents include international transfers, opening of savings accounts, fixed deposits and the provision of loans and mortgages. However, offshore banking tax is applied to the bank for the provision of these services locally.

On the other hand, Restrictive or Restricted B Class offshore bank licenses allow offshore banking tax free institutions to solely provide services offshore. This type of license does not allow offshore banks to provide services to the local public as in the case of a General or A Class offshore license. In each instance, offshore banks are required to have a specific amount of capital in order to commence operations.

Foreign banks may also acquire offshore banking tax free status if they carry on offshore banking business with a given offshore jurisdiction either through a subsidiary that has been incorporated within the jurisdiction has been granted an offshore banking license under the relevant offshore banking laws or through a branch which is administered separately and independently from any branch or subsidiary which is allowed to operate as an offshore banking tax exempt institution under the relevant laws.

Banks generally symbolize wealth and treated as institutions of prestige. Likewise, offshore banks are often viewed as international wealth contained within concrete walls. Offshore banking taxes are imposed mostly on the interest earned by the holders of offshore tax free accounts by their country in which they reside. Regular bank taxes such as withholding taxes, stamp duties including other types of indirect and indirect taxes are not imposed on offshore banks.

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