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A financial center can be defined as a country where the trade of financial instruments such as commodities, cash, loans and shares of companies take place. The world map of financial centers can be classified into two groups: offshore and onshore.
Offshore financial centers are the centers that offer tax advantages to investors, i.e. these financial centers have very aggressive tax policies aimed to eliminate or significantly reduce the taxes that would pay the physical and/or legal persons in an onshore financial market. The outstanding countries of this group are Belize, Costa Rica, Anguilla, Saint Vincent and the Grenadines, Hong Kong, St Kitts & Nevis and Panama. Offshore financial centers can be divided into two groups:
The financial centers that were added in the black list in 2018 are countries that have developed investment programs for non-residents offering them a special fiscal regime with a tax rate of 0%. Also these countries have not signed yet or will never sign automatic information exchange treaties or deny providing the minimum information to other countries regarding their residents. However there are also some countries that were attributed to the black list that did have signed the automatic information exchange treaty but have not signed many bilateral agreements with other countries and this is the reason that other countries classify them as non-cooperating jurisdictions. The countries that are on the blacklist of non-cooperating jurisdictions in 2018 are: Samoa, American Samoa, Bahrain, Barbados, Grenada, Guam, Macao, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Trinidad and Tobago, South Korea, Tunisia, United Arab Emirates and Cape Verde.
The financial centers presented in the gray list in 2018 are countries that have signed the automatic information exchange treaty and have expressed the commitment to cooperate with other countries. Currently, most countries in the gray list have investment programs and favorable laws for non-residents to avoid paying taxes and to hide the identities of final beneficiaries of the companies, foundations and trusts. The offshore financial centers that were added to the gray list in 2018 are the following: Andorra, Armenia, Aruba, Belize, Botswana, Cook Islands, Curacao, Hong Kong, Fiji, Macedonia, Montenegro, Peru, Serbia, Jordan, Liechtenstein, Maldives, Morocco, Saint Vincent and the Grenadines, Mauritius, San Marino, Seychelles, Switzerland, Taiwan, Thailand, Turkey, Uruguay and Vietnam. Low percentage or absence of tax payments and opacity of the ownership of assets characterize offshore financial centers. On contrary, onshore financial centers are characterized by fiscal transparency and tax payments, as we will see further on.
Onshore financial centers are those centers where the financial resources of countries with high and low taxes are negotiated and administered. The best examples of these onshore financial centers are: New York, London, Hong Kong, Singapore and Tokyo, with New York being the most important center of the world.
The most important American stock exchanges are the NYSE and the NASDAQ. Both stock exchanges pay the payroll to more than 35% of the New York citizens. New York has been the most important financial center since the end of the First World War and has been a safe haven for all the world's investors during times global of crises. The financial center of New York is specialized in the trading of shares and stock, as well as raw materials and commodities.
The London stock exchange is the most important center of the European Union. The city of London lives by and for the investments made by foreign banks and insurances in the country. The London Stock Exchange is specialized in FOREX, commodities and bonds. London Stock Exchange has smaller scope of operations than New York Stock Exchange, yet it is considered as the second financial center in the world.
Tokyo occupies third place in the ranking of financial centers in the world and the first one in Asia. The most important stock exchange in Tokyo is formed by the 225 most important companies of the country and is known as Nikkei 225. The Tokyo stock exchange is specialized in financial and insurance services.
Hong Kong is considered the fourth most important financial center in the world. Companies that want to enter the Asian market have to go through Hong Kong mandatorily. Hong Kong specializes in capital management, banking services and insurance. The difference between the stock exchanges of Hong Kong, London or New York lies in the low taxation of companies, the time zone and a favorable environment for investment.
The Singapore Stock Exchange is the fifth financial center of the world. It specialized in the exchange of currencies, banking services and wealth management of high fortunes. Investment funds are attracted to Singapore thanks to low taxes and legal security offered by the country.
As we can see the main difference between onshore and offshore financial center lies in tax policy, legal security of the country and technological infrastructures of the country, its physical location and the time zone in which it operates.
The major banks and companies in the world often trade their securities in onshore financial centers but also have a very significant participation in the offshore market attracted mainly by the tax savings and the non-mandatory reporting of their accounts annually. Therefore, the union between both onshore and offshore jurisdictions is essential for the growth of any international company.