Accounting and financial reporting duties of foreign (including offshore) companies

Accounting (or bookkeeping) is usually understood as formation of systematic documented information on facts of economic life, assets, liabilities, income, expenses, sources of financing of a business entity, and preparing financial statements (accounts) on their basis.

In most countries accounting is one of the most important sides of business for the majority of entities. Only few of them enjoy exemption from accounting duties or simplified ways of accounting insofar as it is allowed by the law.

Are there accounting duties in offshore jurisdictions?

For a long time, the absence of a duty to keep accounting records, prepare and file financial statements with local authorities has been considered as one of the key features (and advantages) of companies incorporated in ‘classic’ low-tax jurisdictions. Moreover, the absence of a duty to disclose information related to financial transactions is still one of the essential characteristics of ‘offshore zones’ within the meaning used in many national laws and regulations.

But is it entirely true today? Even a superficial review of current laws in a number of low-tax jurisdictions shows that the situation has changed substantially.

From the end of the noughties of the XXI century the legislation of the most offshore jurisdictions has been considerably amended in order to counter money laundering and terrorism financing. Among other issues they introduced companies’ duties to maintain their accounting records, keep the documents related thereto and disclose them upon request of local competent authorities. Below is given a review of these duties in popular offshore jurisdictions.

Today almost all low-tax jurisdictions require companies to maintain and keep the so-called accounting records. The scope of this concept may differ depending on specific formulations of law – it may imply either a set of documents reflecting a company’s financial transactions (e.g. contracts, invoices, receipts etc.) or more or less systematized data that allows, if necessary, to prepare a full-fledged financial statements.

Jurisdiction	Accounting (record keeping) requirements
British Virgin Islands (BC)	BVI business companies are not required to file accounts with the state authorities. However, a company must: keep at the office of its registered agent or at such other place or places, within or outside the BVI, as the directors may determine, the records and underlying documentation of the company; and retain the records and underlying documentation for a period of at least five years from the date (i) of completion of the transaction to which the records and underlying documentation relate; or (ii) the company terminates the business relationship to which the records and underlying documentation relate. The term records and underlying documentation includes accounts and records (such as invoices, contracts and similar documents) in relation to all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place; all sales and purchases of goods by the company; and the assets and liabilities of the company. The records and underlying documentation of the company shall be in a form sufficient to show and explain the company’s transactions; and will, at any time, enable the financial position of the company to be determined with reasonable accuracy. A company must keep the relevant records and supporting documents for at least 5 years of the date of completion of a transaction or a business relation to which such documents are related.
Seychelles (IBC)	Preparation and filing of financial statements is not required (however a company may elect to do it voluntarily). A company must keep proper accounting records that are sufficient: to show and correctly explain the IBC’s transactions; to enable the financial position of the IBC to be determined with reasonable accuracy at any time; and to enable for accounts of the IBC to be prepared. Accounting records mean documents relating to assets and liabilities of the company including receipts and expenditure, sales and purchases and other transactions. An IBC must retain all accounting records for 7 years, from the date of completion of the transactions to which they relate.
Belize (IBC)	Preparation and filing of financial statements is not required. A company must keep its accounting records. The accounting records include financial statements, ledgers, receipts, contracts, invoices and all records and documents related to all and any transactions of the company, its assets and liabilities. These accounting records must show and explain the company’s transactions; and enable the financial position of the company to be determined with reasonable accuracy, and enable to prepare financial statements based on the records. All accounting records must be maintained and retained for a period of not less than 5 years following the closure of an account, or the end of a transaction, or the termination of a business relationship.
Cyprus Latvia UK Hong Kong Singapore	Accounting, preparation and filing of financial statements are required by law.

The laws of each of the offshore jurisdictions listed above (BVI, Seychelles, Belize) oblige companies to provide their registered agent with their financial documents (regardless of the place where they are kept) in cases where such documents are requested by the local regulator or other competent authority within the timeframes specified in such request.

In fact, this means that any offshore company (or, more precisely, a person exercising control over it and keeping its financial documents) should at any time be ready to provide the registration agent with the specified documentation.

Therefore, a company’s financial documents are expected to exist and to be sufficient to explain company’s transactions and ascertain its financial position. Otherwise a company may face considerable penalties or other legal procedures (depending on specific reasons for which a local competent authority requested these documents).

Comparing the requirements to maintain and keep accounting records in the three said jurisdictions, it is fair to say that today, despite the absence of a duty to prepare and file financial statements with the authorities, the offshore companies must anyway record their financial transactions and at least be able to prepare full financial statements on the basis of such documents.

For most types of companies in onshore jurisdictions (e.g. UK, Cyprus, other EU states), accounting, as well as preparation and filing of financial statements are required by law.

When the financial statements of an offshore company may be required?

We do not analyze here the cases arising in usual business turnover. For example, the financial statements may be requested by a company’s contractors before entering into a contract to assure themselves of solvency and good financial position of the company. Also the financial statements are usually examined by those who intend to acquire a share in the company etc.

But the main factor determining the need to prepare financial statements of a foreign company (whether it is an offshore company or not) is the need to ensure compliance with the legal requirements of the country in which the company’s controlling person is resident for tax purposes. The countries which have controlled foreign companies’ (CFC) legislation require the controlling persons to declare undistributed profits of controlled foreign companies and file their financial statements along with the home income tax return. The CFC’s profit is thereby taxed under the national tax rules of the controlling person’s country of residence.

How to prepare financial statements

Financial statements may be prepared either under the rules of the company’s state of incorporation or under the International Financial Reporting Standards (IFRS).

In cases where financial statements must be accompanied by auditor’s report, such report must be done either under the local rules or under the International Standards on Auditing.

For example, financial statements of all Cypriot companies must be audited due to the requirement of the national law. Accounts of companies incorporated e.g. in the United Kingdom or in Latvia must be audited in case if their figures exceed certain levels.

Besides the cases where audit is required by local laws, it may also be required by a company’s documents (e.g. Articles) or can be arranged voluntarily.

Summary

In order to comply with the latest legal requirements for keeping accounting records (as well as in cases where national CFC rules oblige controlling persons to file financial statements or other documents confirming profit of their foreign companies), it is recommended to ensure the following steps are taken in due time:

• ensure proper maintaining and keeping accounting records and underlying documentation on an ongoing basis. Such records must allow to ascertain the nature of all company’s transactions and to prepare financial statements basing on them. In particular, a company must ensure timely execution of contracts with its counterparties (suppliers, buyers, agents etc.); correctly and in due time prepare invoices, delivery notes, work/services acceptance certificates and other source documents; correctly issue payment documents, obtain bank statements covering the relevant periods;
• initiate in due time preparation of financial statements of a foreign company;
• ensure preparation of auditor’s report if:

1. it is required under the law of the country of incorporation; or
2. it is required under the company’s Articles or other corporate documents; or
3. a company arranges it voluntarily; or
4. it is required by the CFC rules of a country in which a company’s controlling person is resident.