Offshore Banking Unit

An offshore banking unit (OBU) is a financial service unit (normally a branch or subsidiary of a non-resident bank), which plays an intermediary role between non-resident borrowers and lenders. Generally an offshore banking unit is located in an international financial center or in the case of India. found in Special Economic Zones. Offshore banking units are allowed to accept deposits from foreign banks, from some onshore banks that permit deposits and other offshore banking units, and the OBU may make loans to non-resident companies as well.

The advantage of an offshore banking unit versus that of an onshore bank is that the offshore banking unit is free of regulations and restrictions normally imposed on domestic financial establishments as it pertains to foreign exchange and sometime tax concessions and relief packages. The activities of an offshore banking unit are not subject to the local restrictions as there might be on foreign exchange or other banking activities or regulations. Under law, offshore banking units (OBUs) are not authorized to take domestic deposits or conduct activity with local establishments or clients. All trade activity of the offshore banking unit must be offshore.

For purpose of this document the offshore banking unit herein will sometime be referred to as the OBU.

In most jurisdictions where offshore banking units are established, the OBU has a specific function, has a defined range of financial functions and banking activities that can be undertaken by the OBUS. In cased such as India and Australia foreign exchange activities conducted by the OBUs are free of regulations that normally apply to onshore financial entities, and receive tax concessions. These are simply economic strategies used to attract foreign company investment, and engage in a lucrative foreign exchange business.

Some offshore banking units may be branches of either resident or nonresident banks. In such cases, the ownership of the establishments is directly under control of the parent company and the accounts of the OBU are transposed onto accounts books of the parent company. On the other hand, the OBU can be and independent establishment or a franchise, where the name of the parent company is used, but the management and accounts of the offshore banking unit are independent from that of the parent company.

However, in most cases offshore banking units are branches of locally owned and established banks which set up the offshore banking unit to capitalize on international business and foreign exchange benefits afforded the offshore banking unit. These companies cannot take local deposits and assets of the offshore banking unit are held separately from parent company.

The advantages of offshore banking units for some is that the existence of the offshore banking unit establishment enables the company to conduct financial transactions with no currency restrictions; enables the company to make loans and payments in multi currencies; and enables the company to offer flexible international financial trade options that would not otherwise be possible with the domestic bank.

The first application of an offshore banking unit was established in the euro market and soon Singapore, Hong Kong India and other countries followed. In Australia, their tax policies are not very favorable for offshore banking business, but the country in 1990, established legislation for the provision of offshore banking unit, offering relaxed tax provisions. This move ensured the country was able to compete as an international financial center.

The additional benefits of offshore banking units may include tax exemptions on withholding tax and other tax relief packages on specific activities, such as offshore borrowing.

Legislation for offshore banking units are specific and defines the types of activities that can be conducted by the offshore banking units, generally:

12. at least one of the parties to transactions should be an offshore company or person,
13. the activity must be conducted by an offshore banking unit locate in the jurisdiction and
14. the offshore banking unit must be a resident of the jurisdiction or conducting business at or through a permanent establishment in the jurisdiction Some of the offshore banking unit activities and offshore banking services are: borrowing, lending, trading activities, investment activity, hedging activity. Most entities who are eligible to be offshore banking unit are banks, subsidiaries of such banks, other financial intuitions that are permitted to foreign exchange activity, life insurance companies, and fund managers.

In the United States, the International Banking Facility (IBF) is an in-house shell branch that makes loans to foreign customers. Its function is to that of on offshore banking unit. IBF deposits are limited to non-U.S. Residents, other IBFs, and banks owning an IBF, are free from reserve requirements, federal deposit insurance assessments, and exempt from some state income taxes.

Offshore banking units have a similar function to offshore banks, but the legal form or structure of the entity is different and has a few more legislative restrictions. Offshore banking units are found in specific zones, such are tax havens, trade-free or free trade zones.

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