Why offshore? A lesson from David (and Ian) Cameron

As we saw today in the House of Commons, David Cameron is quite capable of defending himself over his ownership of shares in an investment fund before he became Prime Minister and so this blog is certainly not intending to act as cheerleader or critic of the points he made. But his circumstances create a valuable “teaching moment” for this blog and for those that question why investment funds are traditionally set up offshore in the first place.

Blairmore Holdings Inc, the entity in which he held shares from 1997 through to 2010, is an investment fund. Originally incorporated in Panama, it was operated out of the Bahamas and moved to Ireland in 2010. It invests in global equities and has a minimum subscription amount of US$100,000. Interestingly, it also has a mandate ensuring that almost all the fund’s income from its underlying investments should be paid out every year, rather than stored within the fund indefinitely, resulting in every single investor in that fund paying the appropriate level of tax on the relevant gains in their home jurisdiction, which Mr. Cameron duly did.

Therefore, investing in this type of fund structure doesn’t even amount to lawful tax avoidance, let alone illegal tax evasion. So why use “offshore” structures for these types of fund vehicles in the first place if there is not a “tax” angle to it?

Well, there are a number of good reasons, including the speed and efficiency at which this type of structure can be established in these jurisdictions by resident experts and the fact that these jurisdictions have a strong and stable corporate legislative structure ensuring that the rights of all of the investors are protected. But there is also a “tax” angle of course given offshore funds are often established in jurisdictions with zero or low rates of corporation tax. However, as we have already discussed, investors in these types of fund vehicles still pay their own personal tax upon any monies they receive out of a fund vehicle. Not only that, any gain on the underlying investments (for example, if the fund acquired some undeveloped land, developed it in full and then sold it for a profit) could feasibly be taxed at source before the net sum is passed onto the fund vehicle. The tax neutrality of the offshore vehicle ensures that there isn’t a third level of tax, which would result in a further reduction in the overall value of the investment prior to the investor receiving their return.

Now, one argument that is being raised in current media circles is that it is only the wealthy that are able to invest in a structure like this, giving them a distinct and clear advantage against everyone else. There are two significant points to raise in this regard:

  • anyone that has read the offering document of an investment fund will know immediately that there is of course a risk that your entire investment could be lost completely. The potential for higher returns therefore is based fundamentally around the risk/reward concept. An analogy would be placing a bet on an outsider in a horse race. Whilst the odds of 50-1 look enormously appealing, it might be far more prudent to back the 2-1 favourite if it is absolutely essential to you that you maximise your chances of not making a loss. However, if you can afford to lose the entire investment and want to give yourself a chance of a windfall, then the rank outsider might be the one to pick. Rightly or wrongly, the global regulatory authorities are of the view that because of the risky nature of these types of investments, they should generally only be open to those persons who can, for want of a better expression, afford to lose it all and secondly, fully understand the type investment they are getting into. Indeed, the Alternative Investment Fund Managers Directive was based precisely upon this very point. So when you note a high minimum investment requirement for a fund vehicle or indeed that it is only open to “sophisticated investors”, please do not think this is an attempt to ensure that only the rich can get richer. A fund manager is more than happy to take money from anyone (subject to appropriate KYC checks of course). The policy has been adopted to actually try to ensure that only the rich can get poorer; and
  • pension schemes are one of the largest investors into hedge funds and other types of fund vehicles across the globe. Pension schemes will structure some of their investments in very low-risk assets so as to safeguard the collected money and other investments, like hedge funds, to try and maximise the returns and benefit the overall pot as a whole. So, by allowing a pension scheme to invest into these types of tax neutral structures, the global regulators are attempting to ensure that every individual’s personal pension plan will provide its members the best possible retirement available. So, once you finally get to put your feet up and your pension allows you live comfortably during your later years, as well as securing the financial well-being of your dependents, maybe you could spend a short moment thanking the much maligned offshore vehicles for their role in your own personal financial stability.

Clearly, the case for offshore funds is nuanced, complex and not well suited to tabloid headlines or 140 character twitter feeds. As Richard Hay, a specialist in international tax law at Stikeman Elliott (London) LLP and counsel to the International Financial Centre Forums writes:

 “Allegations of criminality are easy to make and readily understood by the public. The workings of the international financial system, by contrast, are complex and not easily grasped. Many of those who benefit from offshore centres- including millions receiving workplace pensions- are not aware of the key role such centres play in their financial affairs.”

The Offshore Funds Blog exists, as we say, to “demystify offshore investment funds” and the events of the past week show exactly just how much work there remains to do. But we remain absolutely committed to the cause and hope that this blogs continues to unpeel the layers of what is a rather large onion indeed.

Philip Graham
Philip is a partner and expert on offshore funds at Harneys who puts his ever increasing grey hairs down to three young children, supporting Liverpool Football Club, and being married. In no particular order.


  1. Thanks for a well written informative article, unfortunately I think this whole issue is being politicised and turned into some form of class war by tabloid journalism.

    Interestingly on the risk and reward topic the analogy of outside bets is quite relevant this year – Grand National winner at 50-1 and Leicester all but winning the Premiership at 1500-1, high risk but did anyone throw large sums behind them?

  2. This is a really good article. The press have been sensationalizing this issue of “offshore tax havens” suggesting that such structures are used only by the rich to obscure wealth, by fraudsters for illegal activity, by multinationals for tax avoidance and by corrupt politicians. Anyone who is familiar with these jurisdictions know that they are thoroughly regulated and they certainly do not encourage breaking the law in any country. You should post this article in mainstream media – The Guardian, Times etc – to give readers a more informed and educated perspective. Thank you.

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