Exemption from the obligation to prepare accounts

Companies with limited liability are independent legal objects with their own rights and obligations – independent of those of their owners. The right to establish limited liability companies is not without disadvantages, because the owners control the company, while this form of organization gives the owners protection against the company’s creditors. This gives substantial possibilities for abuse.

In order to reduce the dangers of abuse, limited liability companies typically have a statutory obligation to maintain accounting records. A company’s accounts should give a complete, systematic and periodical overview of its status and operations. It is important to have access to correct and reliable accounts for the benefit of third parties, especially when other means of scrutinizing the company’s finances are not available. This is particularly true for creditors, actors in the securities markets, employees, tax authorities, etc.

Accounts are important for the company’s employees, and more generally for society and economic life. Accounts are also important for the owners because the accounts give an overview of the company’s status and operations, in particular, for minority owners who do not have access to the corporate records as majority owners do.

18 Share certificates and company documents have a different status. This is also the case for bank deposits, but such deposits can often be accessed onshore though various kinds of bank cards.

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To reduce the risk that accounts can be manipulated, it is useful to have them verified through an independent audit, and to provide the opportunity to review past

accounting records. For this reason, it is also important that the accounting records and the material on which they are based are properly preserved.

“International” companies in tax havens are not normally required to prepare accounts.¹⁹ Consequently, there is no requirement for auditing accounts. If there are statutory obligations to prepare accounts, they are loosely worded. More detailed rules on application of accounting legislation as we know it from the accounting and

bookkeeping legislation in Norway, and most other developed rule-of-law states, rarely exists in tax havens – certainly not to a sufficient degree, or with the necessary controls and effective enforcement.

At the outset, the considerations that supply the rationale for the requirement for audited accounts should apply all over the world. Nonetheless, the reason that tax havens exempt companies from the obligation to prepare accounts seem reasonably obvious, cf. the discussion above. The obligation to present accounts involves a considerable amount of work for the legislative and administrative authorities

responsible for preparing the rules for accounting and documentation, and for follow-up, monitoring and control.

Tax havens apparently do not take into consideration the effect that “exempted companies” have on other countries, and since these companies have no liabilities to agents in the tax havens, these jurisdictions have no need for requiring “international”

companies to present accounts. Since the companies pay little or no tax, local

authorities have no need for the calculating taxable income which can be derived from correct financial accounts. In addition, no local creditors, investors or other private or public interests are affected by the operations of these companies.

In the legislation of tax havens, the accounting rules are described in different ways.

Generally, they are, as mentioned above, rather loosely worded. Formally, the exemption applicable to keeping accounts is frequently expressed as a discretionary right of the company’s directors to assess the need for presenting accounts (as

“directors think fit to keep . . . [and] . . . considers necessary in order to reflect the financial position of the company”).²⁰

There are also examples that certain types of companies have an obligation to prepare accounts, but the obligation is limited, and there is normally no obligation to publish the account statements.²¹ Some jurisdictions also distinguish between “private” and

“public” companies, or between categories of companies with differing accounting obligations.²² “Public” companies must – where they exist – prepare and publish

19 This is the case, for example, in the British Virgin Islands.

20 See for the Seychelles - International Business Companies Act, 1994, section 65 (1)

21 For example, in Gibraltar. See also Companies (Jersey) Law 1991, Part 16

22 Mauritius distinguishes between Global Business Company 1 and 2. The latter group is not obliged to prepare accounts, but the former is, in an abbreviated form. See a more detailed discussion in chapter 7 below. See Companies Act 2003, Subpart C – Financial Statements, Section 210 ff.

39 accounts, but there is often no accounting law to determine how accounts should be worked out. In some cases, there is reference to a few roundly worded general principles of accounting, and in others to the International Accounting Standards (IAS). The IAS are very comprehensive, and are not easily enforced without more precise rules on implementation. Sanctions for violating the rules are either very mild or completely non-existent in tax havens.

It is unclear whether accounting rules are enforced, and if they are, how they are enforced. This is the case partly because rules worded in the ways described above are difficult to enforce, and partly because local authorities generally have no interest in controlling and enforcing very extensive and complex rules since local interests are not involved. In the Cayman Islands, for example, the accounting rules state that,

“directors shall cause proper books of accounts”. This applies to “all sums of money received and expended by the company, and the matters in respect of which the receipt and expenditure takes place; and … all sales and purchases of goods by the company and the assets and liabilities of the company.”²³ Requirements relating to the assessment of values, for example, write-offs or depreciation, are not mentioned unless it is understood that these requirements lie within the expression “proper books”.

The company legislation of Jersey states that the accounts should give a “true and fair view”. What this implies is unclear; for instance, whether the wording refers to requirements in accordance with US GAAP, which also use this expression. When there is no obligation to conduct an audit, it will be up to chance as to whether the local financial authorities check that accounts are kept in accordance with certain standards.

The “Articles of Association” (AoA) of an “exempted company” may, for instance, describe the requirements for the company’s presentation of accounts like this:

The company shall keep such accounts and records as the directors consider necessary or desirable in order to reflect the financial position of the Company.

The Company shall keep minutes of all meetings of directors, members, committees of directors, committees of officers and committees of members, and copies of all resolutions consented to by directors, members, committees of directors, committees of officers and committees of members.

The books, records and minutes required by (the paragraphs above) shall be kept by the Registered Office of the Company or at such place as the directors may determine, and shall be open to the inspection of the directors at all times.”

The directors shall from time to time determine whether and to what extent and at what times and places and under what conditions or regulations the books, records and minutes of the Company or any of them shall be open to the inspection of

23 See Cayman Islands Companies Law (2004 Revision), Section 59.

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members not being directors, and no member (not being a director) shall have any right of inspecting any book, record, minute or document of the Company except as conferred by Law or authorised by resolution of the directors”. (Emphasis added)

In practice, it is up to the owners to decide whether accounts should be kept, and if they do, whether and how they should be preserved. The interests of third parties (here: the users of the accounts) are absent. That accounts may be kept if the management finds it necessary is, strictly speaking, not necessary to regulate. The opposite situation – a prohibition against keeping accounts – is hardly thinkable.

It is also somewhat unusual to include in the provisions that give directors the right to access and inspect the books. Theoretically, it is possible that the company’s owners or its “Registered officer” refuses access and deprives management of the possibility of inspection. However, this would apply to decisions that the management not only has the right to scrutinize, but have actually made. Because of its position, the management will arrange for the preparation of accounts and minutes of what they have decided.

In companies where “management” is only a formality, such rules may be practical, but then to give the formal management access to the decisions that have actually been made.

It is alien to Norwegian legal culture to allow the management of a company to decide whether or not to keep accounting records. The obligation to keep accounting records is imposed in the interests of third parties who, in the case of limited liability

companies, have a reasonable claim to information on the status and operation of the company to which they are connected. The company’s owners have the possibility of deciding for themselves how to supervise and control the company. Tax havens take a different view when it comes to considering the need for protection of those who refer only to the company. Both formally and in practice, third parties have been deprived of any possibility for access.

In most countries, companies pay taxes on their profits. Company accounts are the basis for the calculation of income and assets. In most tax havens, “exempted

companies” are exempt from paying taxes and other duties. The charges levied on the companies are not calculated on the basis of profits, and so there is no need to rely on the company accounts in order to calculate the correct charge. Although there is no statutory obligation to keep accounting records, it is obviously not forbidden to

prepare accounts. The company and its management can have an interest in presenting accounts to the outside world and third parties in other jurisdictions.

There is no guarantee that accounts presented by companies registered in tax havens accurately reflect reality. Sometimes they include fictitious financial constructions created by the company’s owners, but are nonetheless signed by the company’s

“directors”. This does not include companies that are registered in tax havens but whose stocks are listed on the stock exchanges of other states. In such cases, accounts

41 will be kept according to the requirements of the stock exchange on which they are listed, or in accordance of the rules of the country in which the stock exchange is located.