The ABCs of IBCs

The international business company or IBC is the second oldest entity in the offshore practitioners’ bag of tools. It is from that venerable creation that virtually all other non-trust entities are derived. It was originally called an IBC to distinguish it from a domestic company. In the early days of offshore companies an IBC could only be owned by persons who were neither citizens nor residents of the country in which the IBC was incorporated.

There are two basic families of IBCs, British and American. The British IBCs are older. Their formation style inevitably includes two fairly long documents: The Memorandum of Association and the Articles of Association. In the American style those two documents are usually shorter and are denominated as the Articles of Incorporation and Bylaws, respectively. Under the British model both the Memorandum and Articles are filed with the Registrar of Companies, while under the American model only the Articles of Incorporation are usually filed. The Memorandum and Articles of Association in the British model usually delineate in great detail the rights and powers the company will have, while the American style Articles of Incorporation will contain broad sweeping statements of power, such as “to pursue any lawful business”, and may sometimes add specific prohibitions such as, “the company shall not engage in any banking, insurance, or trust activities”. British style companies are usually managed by a Managing Director chosen from a Board of Directors. American style companies are usually managed by officers appointed by the Board of Directors, which officers may or may not be directors themselves. These include a president, one or more vice presidents, a secretary and treasurer, (or secretary-treasurer). The British Managing Director is the equivalent of the American President/CEO.
During the last decade a whole new generation of corporate vehicles have come into existence based upon the IBC. These include: companies limited by shares, companies limited by guarantee, limited duration companies, hybrid companies, protected cell companies, limited liability companies, series limited liability companies, to name just the most popular. Each one of these new innovations has been driven by a particular need; either to suit the development of specific industry, or in response to outside pressures against IFCs by high tax countries.
Another very important development has been the use of domestic companies as tax-free vehicles for foreign operations or investments. For example, a Panamanian Corporation, or a Marshall Islands LLC are both taxable for any domestic business, but are entirely tax-free for any income solely from foreign sources. This approach is becoming increasingly common as a means by which IFCs blunt the ”unfair tax competition” attack of high tax countries. It has been so effective in blunting the attack, specifically because it exactly parallels the tax status of a single-member US LLC which is owned by a foreign person and has no US income.
This leads us to the most interesting of all offshore vehicles, the onshore entity in a high tax country which can be used by non-residents or non-citizens as a tax-free business structure. This genre includes trusts, corporations, LLCs, and limited partnerships in various major countries.
Over the course of the next few weeks, I will revisit the IBC issue and discuss in greater detail the history and pros and cons of each of the major kinds of IBCs and other entities mentioned today.
–The Navigator


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