Wealth and asset preservation are often the end goals of high-net-worth individuals and corporations which has led to lawyers finding loopholes within the law to aid this end goal. This led to the creation of Bearer shares, Shell companies and trust funds by lawyers and favourable jurisdictions, to encourage the inflow of cash and assets in these jurisdictions. Some of these favourable jurisdictions are; British Virgin Islands, Panama, Switzerland, Cayman Islands etc.
This article seeks to explore how Bearer shares have been used over the years as tools for tax avoidance and tax evasion.
A Bearer share is “an equity security wholly owned by whoever holds the physical share certificate’’. The issuing firm neither registers the owner of the stock nor tracks transfers of ownership; the company disperses dividends to Bearer shares when a physical coupon or share certificate is presented to the firm. The transfer of a Bearer share is fairly easy, as it requires just the physical share certificate to be given to the new owner because the share is not registered.
This type of share was very popular and its use was widespread within Europe. The Panama Paper showed that Bearer shares was one of the biggest ways taxes were being avoided and evaded by the rich. Its ability to promote privacy made it very attractive. This made it one of the biggest tax evasion vehicles and led to countries such as The United Kingdom, Nigeria and Switzerland all abolishing it and requiring such shares to be registered. This solves the issue of anonymity that has made Bearer shares so attractive.
Under certain conditions, some companies may still be operating with Bearer shares however, in many cases, companies being controlled by Bearer shares have been made to register the shares, such as in the United Kingdom where Bearer shares have been illegal since 2015. Nigeria abolished Bearer shares under S. 175 of CAMA 2020, which prohibits any company from issuing Bearer shares.
There are two main benefits associated with the use of Bearer shares which are privacy and ease of transfer. The highest degree of anonymity possible is maintained with respect to ownership in a corporation by a holder of Bearer shares. It would appear that banks in some jurisdictions are under no duty to disclose the data of those involved in the purchase of Bearer shares even though they handle the purchase of these Bearer shares. Also, banks can act as a form of intermediary in receiving dividend payments for the Bearer shareholder and even show confirmation of this during shareholder meetings. Furthermore, law firms can also act as intermediaries by purchasing the shares for their clients as seen in Mossack Fonseca.
There are two main reasons why Bearer shares were popular;
- Privacy: Bearer shares provided privacy and anonymity for its shareholders as the company was not required by law to be registered publicly by any party. It also provided a cover for the true owners of the company whose identity could not be revealed and enabled the company to buy assets, transfer assets and move money between bank accounts without the true owner being known.
- Easy transfer: Bearer shares just like the name suggests, means that the holder of the psychical share certificate becomes the beneficial owner of the shares. Since the shares are not registered, just the physical copy needs to be given to the new owner.
It would appear that the jurisdictions offering Bearer shares have been on a decline due to clampdowns by their various governments.
The Organization for Economic Cooperation and Development (OECD) and jurisdictions where Bearer shares exist have taken measures that prevent the issue of privacy and have required the shares to be registered in order to know the owners of the corporations. Thus, it has led to the immobilisation of Bearer shares and has required banks that open accounts for such companies to manage them.
Also, Luxembourg and Switzerland have prohibited the use of Bearer shares, which have also been rejected throughout the EU. These shares are still operating in Bulgaria but they are immobile in nature.
Banks can act as a form of intermediary in receiving dividend payments for the Bearer shareholder. This is due to the fact that countries have taken steps to prohibit mobile Bearer shares.
However, immobile Bearer shares are still available in Panama but it attracts a charge of 20%. There is only one jurisdiction in the world that still allows mobile Bearer shares. It is known as the Marshall Islands located in the Pacific.
The Marshall Island allows for the companies owned via Bearer shares to be set up quickly and cheaply. The Marshall Islands does not require an annual report or account once Bearer shares have been set up as they are tax-free in nature. Bearer shares are mobile in nature and makes transfer easy since only the physical share certificate needs to be passed to the new owner.
A lot of jurisdictions have taken steps to prevent a company set up via mobile Bearer shares from opening bank accounts. This is also applicable to the Marshall Islands. It may be possible to open bank accounts with companies owned via mobile Bearer shares with banks where a lot of commercial relationships have taken place, but it would appear that this rarely happens due to the clampdown on Bearer shares by countries.
One way of opening a bank account is by immobilising Bearer shares, where the banks can act as trustees for the beneficiaries.
It would appear that Bearer shares are no longer as attractive as they used to be, and have lost some of the advantages they once had, but they can in some cases still be useful.