Here’s how the shell companies exposed in the Panama Papers work

Leaked documents from a Panama-based law practice have revealed how politicians, celebrities and other famous people use banks, lawyers and offshore shell companies to cover their assets.

Here’s a glance at shell companies and just how they are utilised:

Q What is really a shell company?

A A shell company, or holding company, is really a corporation without any active business or operations, a treadmill that passively owns the shares of another company. It might have had operations previously that are presently dormant or been wound down.

Q How do you generate a shell company?

A Incorporation of the company in many jurisdictions is straightforward and inexpensive, according to Christopher Steeves, leader of the tax practice group at law practice Fasken Martineau DuMoulin LLP in Toronto. He says establishing a shell or holding clients are generally no different than setting up any other kind of company.

Related

Panama Papers: Everything you need to know about offshore accounts used to hide wealth, avoid taxesRoyal Bank of Canada defends practices after being named in Panama Papers leak

Q  Can a shell company be utilized for legitimate purposes?

A Yes. You will find legitimate ways to use shell companies, such as helping startups gain cheaper and easier public listings on a stock market. Additionally, a person might prefer to own investments via a holding company for administrative ease, estate planning, creditor protection, income splitting with family members, or deferral of revenue taxes, says Steeves.

Q Can shell companies be utilized for illegitimate purposes?



A Yes. What recent events are revealing is that people might be using offshore holding companies to disguise the ownership of assets, says Steeves. As opposed to the guidelines in Canada, some offshore jurisdictions do not require that companies disclose the identity of officers and directors and there is no requirement for locally resident directors. “This makes it possible for someone to control a offshore holding company as the sole director without any disclosure of the control,” Steeves says. “If an individual was trying to control the ownership of assets without being personally identified with such ownership, they could easily transfer the assets to the offshore holding company.”

Q Are such transfers always suggestive of an issue?

A No. There is nothing, by itself, that’s illegitimate or illegal about such transfers and trying to preserve one’s privacy. But laws may be violated when the person does not disclose their ownership of the offshore holding company as required legally in the country where they reside or really are a citizen, Steeves says. For example, under Canadian tax laws, a Canadian resident that owns an offshore holding company may be required to report such ownership on his or her annual taxes. When they neglect to report such ownership, the person is subject to significant penalties.

Q Once a shell clients are created, is it hard to detect whether it’s being used for any legitimate purpose or perhaps an illegal one?

A  Yes, the creation of a business is really a commonplace activity. Determining if a company is getting used for an illegal purpose can likely only be based on a regulator, who’s auditing be it constituents are adhering to regulations, says Steeves.

Q Do shell companies only exist in so-called tax havens?

A  No. Shell companies or holder companies exist in every jurisdiction that allows for incorporations. “It is doubtful that they are more common in tax-haven jurisdictions,” Steeves says.