Simply put, an offshore company is one that is located outside the country of residence. It is a company that is incorporated and will function in a different jurisdiction from that of its directors, shareholders or members and its purpose is precisely to function from another location. The reason why another location may be preferred for some business activities is that there are a number of offshore locations worldwide that offer attractive business conditions. The advantages of starting an offshore company will often be linked to confidentiality, lower tax rates, reduced administrative procedures and, most importantly, asset protection. We look at some of these advantages and how they can be of interest to investors.
An offshore company can be a vehicle used for multiple business purposes. Investors can explore the conditions for doing business in many jurisdictions, such as the advantages and uses of an offshore company in Singapore or Hong Kong as well as the traditional offshore centers like Belize.
Easy company formation
Many offshore centers have low set up and maintenance costs and a low capital requirement when opening an offshore company. The International Business Company, or the IBC, is a common type of legal entity that can be incorporated by foreign investors in a number of jurisdictions. It can be incorporated in Belize, the Bahamas, Seychelles and the company formation regime is special for these business structures.
A foreign investor needs only to follow a few key steps for company incorporation, among which we can mention appointing a registered agent and having a registered address in the chosen jurisdiction. In some jurisdictions, like Belize, the incorporation of an International Business Company can take place in the same day (although foreign investors may need to work with a local company formation specialist for this purpose).
Reduced administrative requirements
Offshore companies are subject to lighter accounting and reporting requirements compared to onshore legal entities. The accounting records can include the financial statements, the assets and liabilities, the sales and purchases and other information. Although the companies are expected to keep these records, in most cases there are no requirements to file the annual financial records or make the data available to the general public.
Tax neutrality is perhaps the top reason why so many offshore jurisdictions are attractive to foreign investors. In many offshore centers, there are no taxes on the income or profits derived by these business entities. In Belize, for example, the IBC can be completely tax-free, as long as it remains within its scope and complies with a number of important conditions, such as not owning property located in Belize (except for that used for office purposes, if applicable) and not engaging in business activities with Belize residents. These are not impediments for foreign investors as offshore companies are often used for international trading purposes and not for conducting local business.
Tax reduction and asset protection are often used jointly when opening an offshore company. At the same time, it is possible to use an offshore company simply for asset protection purposes and not for the tax-reduction advantages. What’s more, many jurisdictions that are used for the incorporation of an offshore company do not make it mandatory for the information about the company owners to be publicly stored with the local company registry. This means that although the information about the founders is recorded upon registration, it is not available for a public search. Investors who are interested in high confidentiality levels can check the local legislation for company information disclosure and, when needed, appoint a nominee director.
While it is true that an offshore company can be portrayed as a vehicle for illegal purposes, there are many legitimate and transparent uses for this type of company. Tax evasion and tax minimization are two different issues and, in most cases, owning an offshore structure will not be equal to avoiding taxation in the owner’s country of origin. A number of international treaties, such as different Tax Information Exchange Agreements and the Foreign Accounts Tax Compliance Act (FATCA) require that foreign financial institutions collaborate and report the foreign assets held by certain individuals. It is important to understand these principles as well as comply with the regulations that may arise between two distinct jurisdictions (in case of FATCA, it applies between the United States and a number of other jurisdictions, including the Cayman Islands, Panama or Seychelles – all of which are offshore centers).
The uses and advantages of starting an offshore company have to do with tax neutrality, asset protection purposes as well as financial safety and privacy. If you are thinking of starting an offshore company, one or more of these benefits may suit your business needs.