What can the Paradise Papers have in common with an “escheat” or a trade?

More than 13 million confidential documents have been leaked from Appleby law firm and from Estera and Asiaciti Trust, companies that specialise in doing business and managing assets through so-called offshore jurisdictions. Personalities on the lists, such as Queen Elizabeth II, Colombian President Juan Manuel Santon, and singer Bono, are also reportedly joined by some relatively well-known Slovak names. Although the wave of social resentment does not seem to be as intense as that of the so-called Panama Papers, it is another hurricane that is undermining the traditional business model used by these, mainly small, islands. If we assume that one day the world will be limited to absolute transparency, it is already very important to know the answer to the question of whether the use of offshore jurisdictions is illegal or even criminal.

In itself it is not. After the Panama Papers case broke, I asked a journalist whether he was a freelance or a permanent employee. Since he was working “full-time” at the media outlet in question, which at the time was also covering the immorality of tax havens, his answer “freelance” motivated me to ask why. The phrase “because of the levies” was indeed what he was going to say, but swallowing on the fly, he realised that the issue of tax havens was a bit more complex than he probably originally wanted to serve up.

Of course, tax havens are not just about tax optimisation, but also about corporate flexibility, asset protection, anonymity or minimal regulation. Using a tax haven for any of these reasons is also not per se criminal. The ingredients needed for a criminal offence, such as money laundering, are well known. However, if we are only talking about tax saving, it should be stressed that legal tax optimisation must be legal and legitimate at the same time. Always standing on solid ground is important not only in the context of automatic exchange of information (e.g. CRS reporting), the developing case law on abuse of law, the Paradise Papers case, the blurred line between administrative and criminal tax offences or possible political ambitions, but also for reasons of social responsibility and fairness. Tax optimisation must therefore be moral.

Since there are an infinite number of moralities in society, this concept is naturally objectively difficult to grasp, and thus difficult to apply in law. In very rare cases, morality, justice or legitimacy are objectively grasped by the courts and applied in tax optimisation cases. The Czech flagship case was the bailout of the multinational company CTP Property for restructuring without relevant economic sense, which represents perhaps the most demonstrative case of the application of tax justice in the entire Czechoslovak legal space. However, the exceptional nature of this case and the ‘unexceptional’ nature of, for example, Babiš’s crown bonds, in turn, demonstrate its very limited scope.

Justice, morality, or legitimacy, in its expansion, clashes with the institute of legal certainty (as seen, for example, in the case of the CAP in Slovakia). Thus, opponents of tax havens cannot argue merely that they are immoral. This is not only because they may be caught up in their own immorality, as the journalist mentioned above, but above all because we cannot grasp morality objectively enough. If we tried to assign normativity to each individual morality of the adjudicating body, it would be in violation of the very first article of our constitution.

Tax havens are thus primarily affected by technical provisions of Slovak and international law. While in tax law a number of technical instruments have significantly reduced the room for manoeuvre for illegitimate tax optimisations, the register of public sector partners has significantly strengthened ownership transparency and the fight against illegitimate anonymity of ownership. This does not mean, however, that tax havens cannot be used by entrepreneurs for optimisation and with open cards before the state. However, these must make economic sense, they must be legitimate.

Perhaps the most illustrative example of understanding legal and legitimate tax optimization is through pointing out the basic dilemma of the budding entrepreneur – “eserocka” or sole proprietorship? Even if the entrepreneur’s decision for an “eserocka” is motivated by the amount of tax and levy liability, neither the state nor any moral authority can require the entrepreneur to change legal form after 6 months because the entrepreneur has optimized by his choice. And what if at that crossroads I have a third option: the “Bermuda Essoroca”? Investing in a Slovak project through a “Bermuda escheat” can be more interesting tax-wise than through a Slovak “escheat”. Is it a problem if I want to provide investment services to my offshore fund and I enjoy travelling? The use of offshore jurisdictions is also frequent in the case of the so-called “offshore” jurisdictions. They have clients all over the world. Between Slovakia and moving his residence to Monaco, was Sagan deciding between “escheat and trade”? And what if I want to avoid double taxation by offshoring, like Dominika Cibulkova(read the article about Dominika Cibulkova’s possible motives)?

This is a short list of reasons why it may be worthwhile to create an offshore company today and where it will be very difficult for an opponent relying mainly on tax justice in the rule of law to do so. Indeed, if in deciding to use an offshore company I stand at the same crossroads as the aforementioned Slovak entrepreneur, choosing a tax haven is the same choice as preferring an “eseroca” to a sole proprietorship because of social security contributions.

Conclusion

The issue of the so-called. The issue of offshore companies in tax optimization from the perspective of legal assessment is more complex than it may seem at first glance. The assessment of compliance becomes more interesting with various more aggressive optimisation options. How should we assess a ‘change’ in the legal form of a business 30.6. from a sole trade to an “eserocka”, just to avoid social security contributions? Perhaps in the same way as setting up a Dutch shell company the day before the sale of a shareholding in a Slovak company for the sake of the sale. In this context, Patrik Tkáč’s call to set up Cypriot boxes to avoid capital gains tax on the eventual sale of a Slovak trading company seems less aggressive than Renáta Blahová, a partner at BMB Leitner, tried to portray it in her response to this call. Certainly less aggressive and less unlawful than the offences of illegal work or illegal employment that may have been committed by the journalist and his actual employer.