Updated on July 18, 2023
The captive bank operates as a separate legal entity, but it is solely dedicated to serving the financial needs of its parent company and other entities within the group. It does not offer banking services to the general public or external customers. Typically, the captive bank handles various banking activities for the multinational group, including cash management, treasury operations, lending and borrowing, foreign exchange transactions, and other financial services tailored to the specific needs of the group.
One significant characteristic of a captive bank is its strategic location in a tax haven. Tax havens are jurisdictions that offer low tax rates and favorable regulations to attract businesses. By establishing the captive bank in a tax haven, the multinational group aims to benefit from advantages such as low capital requirements and freedom from exchange controls. The choice of a tax haven allows the captive bank to minimize its tax liabilities and optimize its financial operations. It can take advantage of lenient regulations and tax incentives provided by the tax haven jurisdiction. This can result in cost savings and greater flexibility in managing the group’s financial affairs.