Tax havens and offshore jurisdictions can be abused for tax evasion and money laundering purposes. Governments and the law enforcement community try to halt the inflow of suspicious financial transfers into their local economies. Additionally, forum shopping, where international businesses try to find the most ideal location for incorporation or registration of their company or business unit and optimize their tax burden, can be detrimental to some companies.

The difference between tax avoidance and tax evasion is crucial. Avoidance is legal, evasion is a criminal act. Fiscal optimization and neutral corporate taxation requires careful planning. Mistakes and wrongs have insurmountable consequences. The result is that both the formation as well as the closure of an offshore company needs to be executed with care.

To avoid that tax authorities start to investigate and eventually impose penalties on the alleged culprit, international rules must be obeyed. Most beneficial owners of offshore companies see little harm in the way they use their company. However, when an investigation is started, it is not easy to turn back time and limit damages.

Improper use of offshore companies and tax evasion can lead to financial penalties, or worse. The relevance of best practices and professional advice is evident. Yet, every year, tax authorities investigate a hefty number of cases of nationals they believe to have crossed the line. Such investigations can be triggered by events during the incorporation, executing and liquidation stages of the corporate life, but also by anonymous data dumps as seen in the Panama Papers and Paradise Papers disclosures. It should be noted that missteps by third parties can also draw the attention of investigators.