Offshore Financial Centre (OFC)
An offshore financial centre is a jurisdiction whose financial institutions do most of their business with non-residents, so that its external assets and liabilities are large relative to its own economy. Typical features have included low or zero tax and specialised company law.
Also called: offshore financial center · offshore centre · offshore jurisdiction · international financial centre
The IMF's 2000 background paper offered a practical definition: a centre where the bulk of financial activity is offshore on both sides of the balance sheet, where transactions are initiated elsewhere, and where most of the institutions are controlled by non-residents. The paper noted that a very broad reading would capture every major financial centre, which is why the term is usually applied to smaller jurisdictions whose financial sector dwarfs the local economy.
The IMF listed the traditional attractions: low or zero taxation, moderate or light regulation, banking secrecy, freedom from exchange controls, simple incorporation and legal systems suited to holding assets for others. In 2000 the Financial Stability Forum sorted OFCs into three groups by the quality of their supervision and cooperation. Much has changed since. Automatic exchange under the Common Reporting Standard and FATCA ended secrecy towards tax authorities, beneficial ownership rules tightened, and from 2018 the OECD required no-tax and nominal-tax jurisdictions to impose economic substance tests.
OFCs remain where many investment funds, special purpose vehicles, captive insurers and holding companies are domiciled, mainly for tax neutrality and legal predictability. For a payments business, an OFC licence may be quicker or cheaper to obtain, but correspondent banks often apply enhanced due diligence to OFC-licensed firms, and a licence there does not by itself bring bank access.
In practice
There is no single official list. The IMF, the FSF, the OECD and the EU have each used different criteria, so a jurisdiction can be treated as an OFC for one purpose and not for another.
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Commonly confused with
| Term | How it differs |
|---|---|
| Financial free zone | A financial free zone is a ring-fenced area inside a country with its own financial law and regulator, such as the DIFC in Dubai. An OFC is usually a whole jurisdiction defined by the non-resident orientation of its financial sector. |
See also
- Offshore BankingOffshore banking is the provision of banking services, such as deposits, loans and payments, to customers who are not resident in the country where the bank and the account are located. It describes a relationship between bank and customer, not a particular place.
- Tax NeutralityTax neutrality is the feature of a jurisdiction or vehicle that adds no layer of tax of its own, so that investors are taxed in their home countries much as if they had invested directly. It is not the same as being tax-free.
- Economic SubstanceEconomic substance is the requirement that a company earning income in a jurisdiction actually carries on the activity that generates it there, with adequate people, premises, spending and decision-making, rather than existing only on paper.
- Financial Free ZoneA financial free zone is a defined area within a country where financial services operate under a separate legal and regulatory framework, often with its own civil and commercial law, courts and financial regulator, while the host country's criminal law still applies.
- Correspondent BankingCorrespondent banking is an arrangement in which one bank holds deposits for another bank and makes and receives payments on its behalf, normally so the second bank can reach a currency or a market where it has no branch or license of its own.