A captive bank is a wholly- or partially-owned subsidiary of a company that plays its role as a bank only for the benefit of one legal entity (usually the same company that owns the bank), its customers, and suppliers.
Captive banks generally offer all the basic baking services such as safe keeping of deposits. However, some captive banks also offer additional services like merchant banking and financing.
One very common, though not defining, characteristic of captive banks is that they are usually offshore banks. Offshore banks are banks that are located outside the country of residence of the depositor. The countries in which offshore banks are usually located are called tax havens since they have low tax jurisdictions, which is obviously advantageous financially and even legally.
Offshore banks, and thus captive banks, enjoy the following benefits due to the banking laws of the countries where they are usually located:
• Lower taxes – As mentioned earlier, these banks are located in tax havens. Transferring savings and investments to the captive bank means less tax liability for the bank customers since their country of origin has much higher tax rates.
• Greater privacy – Depending on the country where the bank is located, banking secrecy laws are usually more stringent. In some cases, anonymous bank accounts are even permitted.
• Easy access to funds – Due to lax banking laws, it may be easier to move around large sums of money.
