A bank account with €2,500 in it, a couple of weeks (or even days), some straightforward paperwork and there it is – a brand new company.
© DELFI / Šarūnas Mažeika

These are the basic steps to incorporate a private limited liability company in Lithuania. Considering the recent Panama Papers scandal the question arises whether Lithuanian companies can be (or are) used as offshore companies.

It is true that the Lithuanian legal system in certain areas is more advanced than many of the so-called global tax havens, for example, according to World Bank DB 2016 rankings, Lithuania is in 8th and Panama in 44th position for starting a business.

However, this does not mean that there are no attempts to adopt the same practices of the use of offshore companies from the Seychelles, Panama or British Virgin Islands. But do Lithuanian regulators realise this?

The worldwide debate over the legality of offshore companies has been in the open for some time already. The most recent examples include the G8 summit in 2013 where strong political will was expressed to fight against aggressive tax avoidance and to encourage transparency of company ownership.

Some countries have followed such policies, for example, in 2015 the UK Companies House opened up its company register and made all public digital data accessible free of charge (including financial accounts, details on directors, secretaries and shareholders).

However, fears that these measures might not be enough were strengthened by the leak of documents from Panamanian law firm Mossack Fonseca which showed clear evidence of money laundering and tax evasion. Moreover, it revealed that a combination of completely legal procedures can lead to a legally grey area or even unlawful results.

The paradox that illegal activity may result from legal actions is applicable not only to offshore structures but also to companies based in Lithuania.

For example, the Supreme Court of Lithuania has ruled that if a company is established for a single purpose to avoid mandatory legal requirements, it cannot be used to shield its shareholders.

The specific case involved a citizen from a country outside the EU who had limited rights to acquire immovable property in Lithuania.

In order to avoid such restrictions two sets of legal actions were implemented: firstly, a new private limited liability company was established and, secondly, the company acquired a parcel of land. Although both sets of actions were legal and allowed by the letter of law, the end result which enabled the foreign citizen to control the plot of land was considered to be unlawful.

Similar logic and arguments can be applied to a widespread practice in offshore companies of appointing nominee directors or even shareholders.

Nominees are usually used to hide the true directors and shareholders of companies from the public eye - they are listed in the register of companies but the identity of the true shareholders is usually unknown.

Sometimes this legal mechanism is used for more or less legitimate reasons, for example, to protect trade secrets, but in some instances it can be the cause of money laundering, avoiding liability and tax avoidance.

The phenomenon of nominee directors and shareholders exists not only in Panama but in Lithuania as well, which is a rather disturbing trend because it begs the question of what is being concealed and why.

However, there are legal ways to deal with directors or shareholders that are shielding themselves behind a company and nominees.

Legally they might be treated as shadow directors – persons who operate secretly as they are not listed as official directors (and most of the times use nominees to sign all documents) but who in fact direct or control a company.

It is debatable whether being a shadow director (as well as being a nominee director or shareholder in an offshore company) is illegal in itself. However, if such actions are taken in order to cause harm and then to avoid legal consequences, shadow directors are usually held liable.

All of the above shows that offshore companies (or national companies who have adopted the same modus operandi) should be treated by the end result that they cause and not by the legality of individual stages of legal actions.

In some situations, offshore companies might be a legitimate way to do business, in other cases they may be a vehicle for illegal activity.

Revealing this, of course, requires more information to be available to the general public about companies and their members. The only way to combat activities balancing on the edge of legality and hiding behind arguments of secrecy and confidentiality is to shed more light, and require disclosure of more information.

There is already public debate about whether the Lithuanian companies office register should make more of its records available to the public free of charge. Making them available free would be a welcome move as it would not only stimulate trade but would also allow the identification of possible fraudulent companies earlier and improve the ability to take appropriate legal measures.

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Dr. Paulius Miliauskas is Partner at the law firm Confidence

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