Offshore companies are companies conducting their business activities outside the country of their domiciliation. Normally, the country where the company is registered charges nothing or little in taxes and applies minimal control to commercial enterprises. These opportunities are available only if the company does business in other countries. Offshore companies are most often registered to minimize the tax burden. Many politicians oppose offshore company formation because they believe that an offshore-registered company is nothing else but a legal instrument of tax evasion. The key word here, however, is ‘legal’. An offshore company is not a tax evasion instrument. Rather, it is a method of tax burden reduction.
The first offshore zones appeared in the Caribbean (in Panama) and today they can be found all over the world. Whatever region of the globe you look at, you will find an offshore jurisdiction there.
Because offshore-registered companies help to repatriate the capital from the country where the business operations are conducted, governments of many states take positive action against this. Instead of prohibiting formation of offshore companies, they create ‘offshore zones’ on their own territories. You can find Free Economic Zones or Free Trade Zones in a great number of countries. Strictly speaking, they are not offshore zones but they also offer serious tax benefits to their resident companies. You can read more about offshore jurisdictions and Free Trade Zones by following the link and find out where you could establish a business company on beneficial conditions.
Main reasons for offshore company formation
Every entrepreneur will have his or her own goals to achieve via establishing an offshore company but the main reasons for registering an offshore company are usually the following ones:
- Protection of personal capital against possible unfavorable changes in the economy or politics of the company owner’s home country. The person may also want to be protected in case of divorce. An offshore company can also protect the owner from illegal seizure of his/ her property by the country’s authorities or by a criminal group.
- Minimization of the fiscal burden. This is probably the central goal that most entrepreneurs pursue when establishing offshore companies. Offshore company maintenance does not come at zero cost because some fees are payable in the country of the company’s registration anyway. But the offshore company owner can save a lot on taxes especially if he/ she comes from a high-tax country.
- Facilitation of international business operations. An offshore company can be a great solution for those entrepreneurs who wish to enter a regional market. An offshore company registered in that region is inexpensive to maintain but it can serve as a wonderful platform from which the company owner can trade in the region or provide services there.
- Acquisition of additional fundraising opportunities. An offshore-registered company may give access to bank loans in the countries where the interest rates are low.
Offshore companies typically serve the following business purposes:
- Holding the property that is located in the company owner’s home country and/ or other countries;
- Import and other trade operations;
- Owning companies whose assets consist mainly of real property;
- Trading in real estate and other property types (making a purchase or sale deal via an offshore company can help you increase the non-taxable amount);
- Activities connected with stock markets;
- An offshore bank can issue loans and provide other banking services to customers;
- Registration of marine and air transportation vehicles;
- Insurance services.
Whatever business area an offshore company works in, it has an important competitive advantage. Namely, it has to pay less in taxes than companies registered in onshore jurisdictions do. Consequently, an offshore company can sell its products or services at lower prices thus attracting a larger number of customers.
In general, maintaining an offshore-registered company costs approximately the same as maintaining a domestic company. The important difference between a domestic and an offshore company is the fact that the latter cannot conduct business operations on the territory of the country where it is registered. What it can do, however, is as follows:
- Own shares of domestic companies;
- Own property located in the company owner’s country of origin;
- Own intellectual property registered in the company owner’s country of origin or in other countries.
Please note that we do not claim that you can pay nothing in taxes if you register an offshore company and use it to conduct business operations. Your income will often be taxed at the place where it is obtained. We only claim that an offshore company can help you reduce your overall tax burden.
Main differences between an offshore company and an onshore (domestic) commercial company
The main differences between an offshore and a regular onshore company are as follows:
- An offshore company belongs to a citizen of a foreign country: not the country where the offshore company is registered.
- Offshore companies are rarely managed from the country of their incorporation. Normally, they are managed from the country of the company founder’s residence or from the country where they conduct business operations.
- Offshore companies are spared the need to produce large volumes of financial documents.
- An offshore company does not pay any taxes in the country of its incorporation but it does pay an annual company registration fee.
- Most often, offshore companies work in accordance with international business regulations. At the same time, they have to abide by the national laws of the countries where they conduct business operations.
Popular types of offshore companies
In view of the purposes listed above, offshore companies can be divided into the following three types:
- Trading and intermediary companies: they buy and sell, import and export various types of goods. Sometimes an offshore company can also be used as an intermediary between the seller and the buyer.
- Holding companies: they make investments, own real property, manufacturing facilities, marine and air transportation vehicles, and so on.
- Financial companies: these can be banks, insurance and reinsurance companies, or financial management companies.
Management and maintenance of an offshore company
Anyone can be an owner of an offshore company, be it a natural person or a legal entity from a foreign country. Most often, the number of offshore company owners is not limited: it can be one person/ company or many people/ companies. Some restrictions may apply to the company Director, however. In some offshore jurisdictions, for example, only a natural person can act as the company director, not a legal entity.
As far as offshore company maintenance is concerned, things have been changing for the worse recently. In particular, many offshore jurisdictions have been forced to introduce economic substance requirements. This means that your offshore company has to have some tangible assets in the country where it is registered.
Opening an offshore company can help you protect your assets and save on taxes. However, not everything is so simple with offshore company formation in the modern world and you had better seek professional assistance if you would like to register an offshore company.