What is an offshore jurisdiction?
An “offshore jurisdiction” is usually called a foreign state or territory with low taxes or full tax exemption for business entities. Companies incorporated there also enjoy simplified reporting requirements, low administration expenses, and a high level of confidentiality for business owners. Broadly speaking, “offshore” can refer to any location abroad that differs from the owner’s or investor’s home country. However, we will consider mainly classic offshore jurisdictions, sometimes called “tax havens”.
The list of offshore jurisdictions in the world is quite dynamic due to serious tax reforms in recent years. Some countries are losing the advantages they used to offer, but some remain attractive for international business.
Typical offshore jurisdictions include the Bahamas, Bermuda, the British Virgin Islands (BVI), the Cayman Islands and others. Many countries, among which are some former offshore jurisdictions, have switched to a territorial-based tax system. These include Gibraltar, Guernsey, Hong Kong, Isle of Man, Jersey, the Marshall Islands, Panama, Seychelles, Singapore, St. Kitts and Nevis. The United Arab Emirates continue providing tax exemption for its free zone companies under certain conditions.
What is an offshore company?
An offshore company is a legal entity duly registered in one of the offshore jurisdictions. In most cases, it is created as a private company limited by shares. It may conduct any business that is not prohibited by law and does not require a special licence.
Offshore companies are widely used in international trade of goods or services, agency, holding, investment, intellectual property or real estate activities, as well as for asset protection. They can operate globally and open bank accounts anywhere in the world, subject to country-specific restrictions. Companies engaged in particular activities must have the “economic substance”, which implies adequate office, assets and personnel in the country of incorporation.
Company laws of some countries preserve the status of “International Business Companies” (IBCs) to distinguish international (offshore) companies from entities operating mainly in the domestic market. Such jurisdictions as the BVI or Belize abrogated this division and now provide for a single status for all companies. Other countries, like the Bahamas or Seychelles, continue to have special IBC laws in place.
How to set up an offshore company?
To set up an offshore company, you need to take the following steps:
- Choose a preferred jurisdiction.
- Develop a desired company name.
- Determine who your company’s directors and shareholders will be. Decide if you need any nominees in the corporate structure.
- Prepare personal and other documents for customer due diligence.
- Apply to a registered agent or a professional intermediary for a company registration.
- Get the set of corporate documents from registration and start the business.
Step 1. Choose a jurisdiction
Today there are no perfect solutions that would meet all customer needs. Besides favourable tax conditions, the practical details of registering a business in a specific jurisdiction should also be assessed. For example, a chosen jurisdiction may have no available account opening options or be inconvenient for international payments due to restrictions established by third countries. Some jurisdictions are included in international “blacklists”, which may hinder banking
transactions or cause increased withholding taxes. Therefore, it is necessary to carefully weigh all the “pros” and “cons” of a specific jurisdiction in consultation with professionals.
An existing offshore company may move from one jurisdiction to another through re-domiciliation. For example, Seychelles, BVI, Cayman Islands, Gibraltar or UAE allow continuation procedures for companies incorporated within or outside these jurisdictions.
Step 2. Develop a company name
A company name must comply with the requirements of local legislation and must not be misleading or offensive. It must be unique and not duplicate names of existing companies. The name must be accompanied by the relevant ending, for example, “Limited”, “Corporation”, “Incorporated” or its abbreviation – “Ltd”, “Corp” or “Inc”. We recommend creating several alternative names before incorporation should the Registrar deny the main variant.
Step 3. Determine your company’s structure
Most offshore jurisdictions do not set requirements for director’s or shareholder’s residency or nationality. A company must have at least one director and at least one shareholder. The simplest company structure comprises a sole director and a sole shareholder. A company can stipulate the competence of its management bodies and the decision-making procedures in the company’s Articles or shareholders’ agreement.
Clients may act as directors and shareholders of their company or use nominees. Nominee directors are listed on the relevant corporate register but follow instructions of beneficial owners when making decisions. Nominee shareholders have no rights to any distributions made by the company.
Step 4. Prepare due diligence documents
Before proceeding with company incorporation, a registered agent will conduct customer due diligence. Each new client provides the registered agent with due diligence documents for all persons or entities involved in the company, including ultimate beneficial owners. These are personal identity documents, address proof, bank references and documents confirming the beneficial owner’s business background and source of funds, as the case may be.
It is also essential to determine the purpose for which you are registering an offshore company and its main activities. Although a company may conduct any lawful business, you will need to disclose the planned activities to the registered agent and further to the bank, where you will open a corporate account.
Step 5. Apply to a registered agent for a company registration
Offshore companies are incorporated with the assistance of a local registered agent. It is a corporate service provider duly licensed in the country of incorporation. In most cases, ultimate customers communicate with the registered agent through a professional intermediary in their country of residence, for example, through an international consulting or law firm.
The registered agent provides the company with a registered office address and other requested services. The agent ensures the company observes local record-keeping and reporting requirements. However, the entire responsibility for the company’s compliance with the requirements of the law lies with its directors and owners.
Step 6. Get corporate documents and start the business
After registration, a client receives a ready package of company documents duly notarized and apostilled where necessary. It includes a certificate of incorporation, memorandum, articles, and first corporate resolutions. A company can start its business – open accounts, make contracts, acquire assets – immediately upon incorporation.
Does an offshore company pay taxes?
Generally, offshore companies have very little or no tax liability. In most cases, they are exempt from corporate income tax, capital gains tax and withholding taxes in the country of incorporation.
Unlike purely offshore jurisdictions, countries with a territorial tax system impose income taxes. However, the companies receiving entirely foreign-sourced profits can use income tax exemption.
At the same time, an offshore company’s profit can be taxed under controlled foreign companies (CFC) rules effective in the country of the shareholder’s or beneficial owner’s residence. Certain countries may impose increased withholding tax on outgoing payments destined for offshore companies or apply other restrictions.
Companies must pay a fixed annual fee to renew their active status on the register. Usually, such a fee is about a few hundred US dollars a year. The delay in payment of the annual fee will entail penalties and further striking off the register. To be restored in the register, the company must pay all fees and penalties due.
What reporting must an offshore company submit?
Offshore companies have long been exempted from most reporting requirements. However, the situation has changed in recent decades due to increased international pressure.
Although companies are not obligated to prepare audited financial statements, they must keep proper accounting records and supporting documents. The registered agent must be able to provide such records to the local regulatory authority upon its request.
Some jurisdictions require the companies to submit a financial summary or annual financial return, usually consisting of a simple income statement and a balance sheet. Such a summary or return is filed once a year and does not need to be audited.
Companies incorporated in jurisdictions with the “economic substance” legislation must also file the economic substance reporting, the content of which is established by relevant local laws.
What about confidentiality?
The information on shareholders and beneficial owners of an offshore company is usually confidential and unavailable to the general public. Under normal circumstances, it is known only to a registered agent, a professional intermediary and a bank which maintains the company’s account. Upon request, a registered agent must disclose this information only to a court or a competent authority.
A beneficial owner is an individual who ultimately owns and controls the company through a substantial shareholding (25 per cent or more) or by other means. Companies are usually required to keep their register of beneficial owners as an internal company document, along with registers of directors and members.
Several countries have established central registers of beneficial owners held by the Registrar of Companies. Some of them, among which are the BVI and Cayman Islands, are planning to provide public access to the beneficial ownership information, guided by the model agreed with the United Kingdom and the EU member states.
Key benefits of setting up an offshore company
- Quick and straightforward incorporation procedure.
- Low annual costs of company renewal and administration.
- No corporate income tax or tax exemption for profits generated outside the jurisdiction.
- Simplified reporting requirements.
- Sufficient level of business owners’ confidentiality.
- Inbound and outbound re-domiciliation options.