An offshore banking license allows the holder to operate a bank in one country that provides services to depositors who are residents in other countries. The license is issued by the country in which the bank is operated, which is not necessarily the country in which the holder is a citizen or resident. Usually these countries have low or even zero tax rates, meaning depositors can lower their tax bills by banking there, rather than in their own country. However, many countries, including the United States, still require residents to pay tax on their offshore bank account holdings, if, that is, the tax officials are able to prove such holdings exist.
Many holders of an offshore banking license are not interested in running a bank as such, and won't take deposits from the public. Instead, they will be seeking to operate a bank that exists solely to handle the finances of a business they own and run in their country of residence. This set-up can lead to lower taxes and greater privacy, through both legal and illegal methods.
There are two main types of offshore banking license. A general license, often called a Class A license, allows the holder to carry out all types of banking business. A restricted license will limit the holder to activities specified in the license.
Most countries that offer offshore banking licenses will require both an annual fee and paid-in capital. The amounts involved can vary immensely, though in virtually every case, the paid-in capital is considerably higher than the annual fee. The fee goes to the country's government, while the paid-in capital is used as the operating cash of the bank and gives some degree of security that the bank will remain solvent and operational.
One of the most important variations among countries that offer an offshore banking license is their approach to taxation. Countries that offer a "fully compliant" system will cooperate fully with the tax authorities of the countries in which depositors reside. Other countries offer minimal or no cooperation.
Offshore banking licenses should only be obtained from the relevant government authorities. Many older licenses contain a clause that claims the license can be transferred, meaning they can be sold on to somebody else. However, most of the countries that issue such licenses have laws barring transfers and these laws override any clauses in the license itself. The main reason for this is to make sure all license holders go through the government's vetting process.