If you turn to the back pages of the Economist or Time magazine you will quickly see Ireland's popularity as an offshore tax haven.

Both magazines carry numerous advertisements from companies offering to set up Irish companies for foreign investors through which they can conduct their business tax free. All offer a choice of ready-made companies, management and administrative services and bank introductions for as little as £225. The service is similar to what they can provide in other parts of the world such as Hong Kong, the Seychelles and the Bahamas. Some of the advertisements are more intriguing though. Waterford-based Chartered Offshore Services, for instance, offers some free advice to any of its potential clients. "Rule number one . . . Do not use an incorporation agent in your country as this creates a file on your offshore identity in your own country. This is not wise," reads its advertisement in last month's Economist.

That company failed to respond to calls from The Irish Times this week. But in response to a query from a caller who said he was acting on behalf of a potential overseas client, a representative of the firm said it was reluctant to talk to any Irish residents at the moment in the light of the current controversy surrounding these companies. However, he offered to deal with the query if details were forwarded by email.

Company formation services are legitimately used by millions of investors throughout the world. Some promoters are using Ireland's International Financial Services Centre and the State's membership of the European Union as selling points to certain types of investors. This, they claim, gives Ireland added respectability as an offshore location for their funds.

Many promoters also advertise their services in Ireland on the Internet, highlighting it as a location that offers "prestige and credibility" and citing the international success and reputation of the IFSC. However, other states

within the EU as well as Russia and Eastern European countries are also taking a great interest in Ireland's burgeoning offshore companies sector.

The Garda says it has been contacted in relation to some of these companies by international police authorities. These enquiries are usually based on suspicions that a company is being used to launder money.

Last year in Britain, the Chartwell Reinsurance Corporation group was forced to seek a High Court injunction after it discovered that a group trading as KLH Consultants had set up an Irish registered non-resident company using its name.

The Irish company had been registered as Chartwell Reinsurance Company Limited, stating that it would be acting as a reinsurer accepting business on a worldwide basis. The British reinsurer was one of five insurance and reinsurance companies which KLH had said it was representing.

It subsequently won a permanent court injuncton to stop the use of its name by KLH.

Another feature of some non-resident companies is the use of a corporate name that would suggest the firm concerned may be associated with the IFSC.

According to information filed at the Companies Office, one of the most common activities registered by such companies is reinsurance.

Referring to the potential for abuse by those companies set up to appear as if they were trading at the highly regulated IFSC, one IFSC-based reinsurer said it was extremely worried about the damage this could do to the centre.

Some legitimate companies opt to conduct their international reinsurance businesses on a tax-free basis using an Irish registered nonresident company.

Merrion Reinsurance, for example, which is part of the international insurance group Real America, has been operating its worldwide business through an Irish registered company for more than three years, legitimately using this structure to avoid paying tax.

A spokesman says the company has recently entered into discussions to register as an Irish resident company with the insurance division of the Department of Enterprise, Trade and Employment as it is keen to become a player in the Irish market.

"We have enjoyed the benefit of paying no tax for three years now and it looks like we are going to have to bite the bullet and pay tax once we become domiciled here," he says. Merrion Reinsurance is a very substantial company. In the last financial year, it reports that it earned gross premium income of $12 million (£9 million), down from $18.8 million in the previous year. By legitimately using the offshore company structure available here, it has managed to gain a huge advantage over reinsurers which operate as part of the IFSC.

Those at the centre pay a special tax rate of 10 per cent on their business activities operated from Ireland while Merrion Reinsurance doesn't pay any tax.

This is no doubt a matter of some annoyance to those reinsurers which have given a commitment to be part of the IFSC and to create jobs in Ireland.

Most industry sources admit it may be some years before the full impact of the damage being done to the international reputation of the IFSC by the activities of some non-resident companies becomes evident. But they believe that it may be very serious.

"It is more likely to manifest itself, not so much in the amount of business that will leave the IFSC, but in the projects that will ultimately be lost to other countries," said one source.

The authorities are aware of the potential damage to the IFSC and to Ireland's reputation as a legitimate place to do business if it is seen as a haven for foreign investors to hide money from their tax authorities.

So far it is understood that the matter has not been formally raised in the context of the ongoing EU tax negotiations in which Ireland is involved. But it may not be long before it is.