Offshore funds: understand how they work – 10/04/2023 – Market

A project is being processed in Congress to change taxation on the gains of holders of funds in tax havens and exclusive investment funds in Brazil, concentrated in the hands of the “super-rich”.

The taxation of resources held by Brazilians in tax havens seeks to place taxpayers who hold investments in Brazil and collect taxes on their income on an equal footing and those who use offshore companies or funds (outside the country) to avoid paying taxes indefinitely.

Correcting distortions in these funds, which have already been at the center of investigations into money laundering and evasion of sanctions and taxes — such as those detected in 2016 in the case that became known as the Panama Papers — is the Lula government’s justification for changing taxation rules .

Understand what offshore companies and accounts are and how they work

WHAT ARE?

Offshore activities are those carried out outside the owner’s country of domicile. Generally, offshore companies and accounts are used to avoid paying taxes and keep the identity of their owners confidential. Many of them are opened in “tax havens”, that is, countries that charge lower taxes or even offer tax exemptions. Offshore activities are widely criticized for facilitating money laundering for illegal and criminal activities, such as terrorism.

WHERE ARE?

Most countries that offer low-cost and confidential financial services are on islands, such as the Seychelles, Cayman Islands and Bermuda, hence the name “offshore” (literally, off the coast, at sea). However, continental countries, such as Switzerland and Luxembourg, also lend themselves to this purpose.

ARE THEY ILLEGAL?

Not necessarily. Avoiding paying taxes is not the same as tax evasion. Some investors open offshore accounts and companies to pay less tax on financial income and also for business acquisition and merger operations.

However, many tax havens work with shell companies and under the “trust” system, which facilitate the concealment of the real ownership of accounts and offshore companies, favoring illegal operations, such as money laundering.

A “trust” is an entity created to manage financial operations and assets for the benefit of others. With this, the identity of the real owner of accounts and companies is protected, since in all financial transaction documents, it is the name of the “trust”, not the owner, that appears.