The notorious bearer stock has long been part of offshore terminology. You may have come across this concept while researching offshore financial strategies. These tools are a bit taboo as they have historically been associated with shady activities involving the concealment or laundering of money, tax evasion, or other illegal activities. (What is Bearer Shares)
Despite all these ideas, I still don’t quite understand what is bearer shares, how they work, and whether they still have a place in today’s world of offshore financial management. No. This article aims to answer these important questions and give you a clear understanding of this somewhat enigmatic financial instrument.
What is Bearer Shares?
What is Bearer Shares: A bearer share is similar to a company’s common stock, with one important difference. Names of bearer stockholders are not recorded anywhere.
It is not on the company or public register, nor is it on the share certificate itself. The legal owner of shares is the person who owns the physical share certificates belonging to bearer stock.
How do they work?
The function of a bearer share is actually quite simple. In addition to ownership of the underlying shares, holders of bearer shares are entitled to all the rights and benefits. That come with owning the shares, namely dividends. In order to receive dividend payments, shareholders must provide physical share certificates to the company at the time the dividend is paid.
Needless to say, bearer share allows for unprecedented confidentiality and anonymity for their owners, as there is no registered name associated with The Bearer. This also leads to their bad reputation and comes with some additional risks.
The process of buying and selling a bearer share is also very easy as there is no need to record a formal transfer of ownership. Stocks, like other tangible assets, can be freely bought, sold and/or transferred.
Bearer shares can of course be used to your advantage because of their uniqueness and confidentiality. However, it is important to recognize that these types of instruments also carry downsides and significant risks. Consider these benefits and risks in turn. (What is Bearer Shares)
The advantages of bearer shares
The main advantage of a bearer share is that they provide an unprecedented level of privacy. The names of bearer stockholders are not tracked by anyone. No licensing agencies, no law firms, no banks, no one.
Even if the bearer share owner’s name was originally recorded. The transfer of ownership is impossible to trace and the complete anonymity of the current owner is guaranteed. In addition, neither the Company nor its owners shall be obligated to determine what persons have come to own the Share Certificates. As long as someone presents a physical document. They have the right to share it regardless of how they obtained it.
Bearer shares are a convenient way to protect your assets due to the high level of privacy they offer. Anyone who fears their assets will be confiscated by the courts due to divorce, liability lawsuits, or bankruptcy can properly hide their assets with bearer shares.
This is especially true when the bearer shares relate to companies located in foreign jurisdictions with good asset protection laws. Because this provides additional protection against domestic risk to assets.
That being said, there are many other highly effective ways to protect your offshore assets and maintain a high level of financial privacy. High-income individuals may prefer a more “legitimate” fund with less risk associated with bearer stocks.
Another advantage of bearer shares is that they are very easily transferable between owners. Since physical possession of the share certificate is the only requirement for proof of ownership, shares can be transferred simply by physically giving the share certificate to the new owner.
This leads to many advantages. The obvious advantages here too are confidentiality, increased liquidity, reduced administration, and zero transfer costs. However, this lightness also comes with risks. We will discuss this further.
Why are Bearer Shares High Risk
Bearer shares have advantages and legitimate uses, but they are associated with a number of disadvantages and risks, including:
Theft and/or Loss
Bearer shares are highly vulnerable to theft or loss. This is because ownership is determined solely by physical possession of the share certificate and no record of rightful ownership is maintained. Likewise, owners cannot be relied upon in the event of loss or physical damage to their stock certificates.
Proof of Ownership Issues
Proof of ownership may be required. B. If a company wishes to open subsidiaries and/or bank accounts abroad, shareholders must provide proof of ownership. However, many countries do not accept bearer stock certificates as valid proof of ownership because the individual’s name is not on the certificate.
Problems Opening a Corporate Bank Account
Banks are usually reluctant to just accept organizations which have issued bearer shares. This is because corporate ownership cannot be tracked. This exposes banks to unknown and unnecessary risks.
As a result, it is difficult to find a bank that wants to open an account with a company that continues to issue bearer shares, and the number of banks that accept such companies is decreasing.
In the past, it may have been used for illegal tax evasion due to the anonymity and confidentiality that bearer shares provide. But governments and regulators are taking serious action against such activity, making it difficult to escape. Furthermore, we never endorse illegal tax evasion.
Finding legal ways to reduce your tax liability is much better. This means that tax requirements are fully reported and complied with. The problem with bearer shares is that lack of proper records can make this difficult. So bearer shares can actually lead to more tax complications and more pitfalls than before, and the cost of hiring professionals to navigate these waters can be high.
Bearer shares have gotten a bit of a bad reputation over the years because of how they are (misused). In the past, it has been used for tax evasion, money laundering, and funding various types of criminal activities.
Even if you or your company do not intend to engage in such shady transactions and are using bearer shares legally, suspicions of tax evasion and other questionable transactions will automatically arise. Of course, this can lead to unnecessary challenges and checks.
The difference between bearer shares vs registered shares
The main difference between bearer shares and registered shares is that your name appears on the share certificate in registered shares, while your name does not appear in bearer shares. Ownership of bearer shares is therefore determined by the person who owns the shares. Ownership is determined by the physical owner as there is no proof of ownership.
This makes the transfer of shares much easier and seamless without endorsements. Registered shares, on the other hand, must be duly annotated and authenticated to be effectively transferred.
Bearer shares are still available?
The number of jurisdictions that allow the use of bearer shares has steadily declined over the last few decades as governments began cracking down on illegal financial activity and tax evasion. Currently, only a handful of countries allow these stock products. Furthermore, most of these countries only allow the use of “fixed” bearer shares.
These are a special type of bearer shares that are regulated by a licensed trustee or bank that keeps a record of ownership of the shares and transfers made. While this “locks in” the sharing and eliminates many of the risks associated with it. It also eliminates the aforementioned benefits of privacy and seamless transmission.
Some countries, such as Panama, allow the use of bearer shares, but at a high cost in the form of a 20% penalty withholding tax on dividend payments to shareholders. Until recently, the Marshall Islands was the only country that allowed free use of mobile bearer shares without additional costs or complications.
However, in 2015, the OECD took steps to end this, and by 2019 all information on existing mobile bearer shares was disclosed or canceled, ending mobile bearer shares completely.
Bearer shares have had their place in the history of offshore finance, although they are sometimes misused. This type of stock certainly had legitimate uses and benefits. However, it is clear that they are rapidly becoming extinct and in many ways no longer exist in their original form. (What is Bearer Shares)
Moreover, even if such shares are used legally, the risks involved are significant. Fortunately, there are many other legitimate and highly effective ways to achieve greater financial privacy, wealth protection, and tax relief through the many offshore financial instruments available today.
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