Tax Haven UK – 2 – Bearer Shares

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Alistair Darling has said the UK is not a tax haven. That is not true. It is, using any reasonable definition, including that which I proposed recently. I've already suggested one obvious reason why it is, which is the existence of the domicile rule, so let's take a second example that is less obvious.

This is the fact that the UK allows the issue of bearer shares. This is deliberate. The right survived into section 779 of the Companies Act 2006. As one formation agent who seems to specialise in the more esoteric end of the market has noted, UK companies with bearer shares are 'our most popular package with UK residents'. It's not hard to see why:

1) This option allows the names of the real owners of the shares in a company to not just be hidden: they simply aren't known. As Wikipedia notes:

A bearer instrument is a document that indicates that the bearer of the document has title to property, such as shares or bonds. Bearer instruments differ from normal registered instruments, in that no records are kept of who owns the underlying property, or of the transactions involving transfer of ownership. Whoever physically holds the bearer bond papers owns the property. This is useful for investors and corporate officers who wish to retain anonymity, but ownership is extremely difficult to recover in event of loss or theft.

2) This means that not only can the ownership of a company be hidden, it can be transferred at will without this being known, stamp duty or capital gains being paid, and without any organisation dealing with the company being any the wiser. Money laundering regulation becomes virtually impossible in that circumstance.

3) This does, of course allow companies with such shares to be used to hide all sorts of activity in classic tax haven style.

4) It does also make such a company a perfect Cecile for money laundering in its own right. The company can be created, apparently legitimately, and then be stuffed with cash, following which the ownership of the shares is passed through simple transfer of physical possession of the bearer share (an act for which no audit trail can be created) with the resulting proceeds being liquidated elsewhere.

5) All this is made much easier because UK companies can be struck off the company register without question usually being asked by any authority on payment of a fee of £10.

Question has to be asked as to why the UK allowed this to continue when bearer shares are known to be used for this purpose and many tax havens are taking steps to prohibit them. For example, the British Virgin Islands (of all places) has better standards than the UK, as notes:

Bearer shares are now prohibited unless authorised by the memorandum or articles of association, and bearer share certificates must be deposited with a custodian who has been approved by the BVI Financial Services Commission.

A company which had existing bearer shares (created before 1 January 2005), and which re-registered on 1 January 2007, is obliged to deposit its bearer shares with an appropriate custodian on or before December 2010.

In that case it is only possible to conclude that the UK deliberately wished to keep this option so that it could continue to operate as a tax haven by allowing the issue of bearer shares.