Uses of Offshore Companies
Political and Economic Situation
The first requirement for anyone wishing to establish their business or private interests offshore is to select a jurisdiction that provides political and economic stability so that business can be conducted with certainty, confidence and corporate security.
Essential Corporate Characteristics
Many offshore and tax planning jurisdictions have made efforts to ensure that their company law provides the following features:
- Limited liability.
- Minimal of directors liability.
- Minimal or optional statutory filing obligations.
- Nominee shareholders allowed.
- Disclosure of beneficial ownership either not required or limited to special bodies, such as offshore authorities or central banks.
- Broad range of permitted company names and suffixes to denote limited liability.
- Low capital requirements.
- No requirement for accounting records to be audited.
- Directors and/or shareholders meetings can be held anywhere in the world.
US Corporate Law
US Corporations have officers in addition to directors. Bylaws are often adopted after incorporation. Directors are often empowered to change bylaws.
Double Taxation Avoidance Treaties
Clients wishing to benefit from relief from a double tax treaty must establish a company situated in a Treaty jurisdiction. This is essential for minimum withholding tax on dividend payments and royalties from contracting states. Treaty jurisdictions also convey a non-offshore image.
This type of jurisdiction is mainly used because of the absence of corporate taxes on the company’s profits and usually only requires companies to pay a fixed annual license fee.
It is important to assess the taxation implications for the business and to decide whether a treaty jurisdiction is required. Usually, a treaty jurisdiction is not required for international trade, the movement of goods or most services. However, inward investment into certain countries requires a treaty jurisdiction to minimize the impact of taxation.
Advantages of offshore companies:
- Highest level of privacy protection.
- Limited liability
- Legal tax exemption.
- No accounting requirements.
- No reporting requirements.
- No fees for accountants.
- No auditing.
- No requirements on profession or financial standing.
- Business can be conducted internationally
Offshore Companies are used by a variety of clients, from large international corporations to small business groups. Clients are engaged in wide range of business activity.
- Investment Portfolios
- Investment Company
- Trading and Purchasing
- Trading Company
- International Trading and Purchasing Companies
- International Investment
- Personal Companies
- Holding Companies
- Royalty/ Copyright/ Patent Holding Company
- Holding and Property Owning Companies
- Holding Companies
- Intermediary Holding Companies
- Intellectual Property
- Real Estate and Land Ownership
- Property and Land Ownership
- Transport Companies
- Professional Service Company – Employment of Expatriate Staff
- Shipping Company
- Personal Service Companies
- Employment Companies
- Stock Market Listings and Capital Rising Exercises
- Shipping and Aviation Companies
- Intellectual Property, Licensing and Franchising
Both large companies and individuals regularly use offshore companies as mediators to hold investment portfolios, which may consist of stock, bonds, cash and a broad range of other investment products. Cash assets held by offshore companies earn deposit interest gross or can be placed in collective cash funds. Many clients prefer life insurance and pension contracts to be arranged by their offshore companies. Individuals often use offshore companies as personal holding companies. Offshore companies are regularly used for inheritance purposes and to reduce probate expenses.
Such companies can provide privacy and may save clients professional and other fees. To reduce risks to both corporations and individuals, it is very important to select a politically and economically stable corporate domicile.
Using a private offshore investment company would provide additional confidentiality for the investors and tax benefits for the investment returns. While investments in many high tax countries would be subject to withholding tax or capital gains tax at source, there are still plenty of investment instruments where no such taxation would be applicable. Funds accumulated through investment companies incorporated in offshore areas can be invested or deposited throughout the world and whilst generally returns or interest payable in respect of these funds will be subject to local taxation, there are a number of offshore areas in which funds may be placed as bank deposits where the interest and/or the capital gains are paid and kept gross. To invest in global securities including mutual funds not available to “local” citizens. Offshore jurisdictions are typically less invasive allowing for aggressive and unrestrained Free Enterprise.
Trading and Purchasing
International trading and purchasing companies often involve offshore companies in their trading transactions, because profits arising out of transactions involving purchasing goods in one country and selling them in another accumulate in the offshore company free from taxation.For European Union transactions, for example, the Isle of Man, Madeira, Cyprus etc. have become very popular locations for low tax trading activities. VAT registration is compulsory within the EU. In this connection the question of minimization of this tax arises. The use of Caribbean companies does not grant this opportunity. That is why the most popular jurisdictions for this purpose are the Isle of Man, Madeira and Cyprus.
Transferring funds to a low tax jurisdiction may enable a company resident in a high tax jurisdiction to compensate for trading losses through a company incorporated in a low tax jurisdiction.
An offshore company may act as a trading intermediary – distributor, import/export or sales company. The company would typically buy directly from the manufacturer and arrange the goods delivered directly to the end-customer from the place of production or purchase. This can be of particular interest where goods originate from one country, are sold in another, yet the principal is located in a third country. An offshore procurement company can be used by a domestic importer to source goods abroad, or an offshore sales company can be used by a domestic producer to distribute the goods.
International Trading and Purchasing Companies
One of the most popular uses of a company incorporated in a low tax area is for international trading. Significant tax saving opportunities can arise by interposing an offshore company in to an international trading transaction. If an offshore company were to obtain products from one country, and then sell them on to another country the profits arising out of the transaction may be accumulated in the offshore company, free from taxation in the offshore centre.For European Union transactions, the Isle of Man and Madeira have become very popular locations for conducting cross-border trading activities. Both the Isle of Man and Madeira are able to obtain VAT registration, which is imperative for transactions within the European Union. As an example, if an Isle of Man company wished to source products from France for sale to Germany, the Isle of Man company would inform the French company of its VAT number so that it could zero rate its sales invoice. The French company would not have to charge VAT to the Isle of Man company. The Isle of Man company would then obtain the German company’s VAT number so that it could zero rate its sales invoice.
Both corporations and individuals regularly make use of offshore companies as vehicles to hold investment portfolios. Such portfolios may consist of stock, bonds, cash and a broad range of other investment products. Cash assets held by offshore companies may earn deposit interest gross or be placed in collective cash funds.Many of our clients instruct us to arrange for offshore life insurance and pension contracts to be established by their offshore companies.
High net-worth individuals often use offshore companies as personal holding companies to hold investments made in a number of different markets and countries. Personal holding companies can provide privacy and may save the professional and other fees associated. In this connection, offshore companies are regularly used for inheritance planning and to reduce the costs and time delays associated with probate.The selection of a politically and economically stable corporate domicile may reduce risks that both corporations and individuals may face in either their home or third party countries.
Royalty/Copyright/Patent Holding Company
A company can purchase or be assigned the right to use a copyright, patent, trademark, with a power to sub-license and subsequently exploit the intellectual property right in various countries. Such arrangements must be properly planned, as many high tax countries impose withholding tax at source on royalty payments. An existence of a double-tax-avoidance treaty between the countries involved may reduce such withholding tax.
Holding and Property Owning Companies
A holding company can be established and used to hold the shares of subsidiaries located in high tax countries. Most high tax countries require tax to be withheld on dividends to be paid to non residents, so attention should be paid to the availability of the double-tax-avoidance treaty between the country where the subsidiary is located and where the holding company is established.Many of the difficulties and expenses associated with investment in overseas property, such as holiday villas, may be avoided through the use of an offshore company to hold the title of the property. Sales of the property at a future date can be dealt with quickly and easily by the sale of the company shares to the purchaser. This also saves legal fees and overseas transfer and value added taxes levied by certain foreign countries. Where a person is domiciled outside a territory and owns assets located in that territory (for instance, property), then such assets may be protected against inheritance tax and higher rates of taxation by holding the assets through an offshore investment company.A high net worth individual with properties or other assets in a number of countries may wish to hold these through the medium of a personal holding company so that upon his demise the need to obtain probate in each country is avoided. This saves legal fees and avoids publicity.
There are often significant advantages in using an offshore holding company for the purpose of holding property.
Dividend payments, reduced levels of withholding taxes can be achieved by the utilisation of a company incorporated in a zero or low tax jurisdiction that has double tax agreements with the contracting state. An example of this is a Mauritian Offshore Company, which can invest into Indian companies and benefit from the double tax treaty that exists between the two countries. Moreover, there is no capital gains tax upon the disposal of the investment in India. Offshore corporations often hold investments in subsidiaries and/or associated companies, publicly quoted and private companies, as well as joint venture projects. Capital gains arising from the disposal of particular investments can be made without taxation.
Many large corporations are interested in investing in countries where no double tax agreement exists between the country of the investor and the country in which they are investing. In this case, an intermediary company is established in a jurisdiction with a suitable treaty. For example, the Madeira SGPS Company has been used for investments in the European Union, since corporate entities registered there can avail themselves of the EU Parent/Subsidiary Directive. Cyprus has an extensive double tax treaty network with many Eastern European countries and countries of the former Soviet Union, and the use of Cypriot companies for inward investment into these countries provides a tax efficient conduit.
Intermediary Holding Companies
Many large corporations and companies wishing to invest into countries where a double tax agreement does not exist between the investor’s country and the country where the investment is to be made will establish an intermediary company in a jurisdiction where there is a suitable treaty. The Madeira SGPS Company, for example, has been used extensively for inward investment in to European Union since corporate entities incorporated there are generally able to avail themselves of the EU Parent/Subsidiary Directive.Cyprus has an extensive double tax treaty network with many Eastern European and CIS countries, and the use of Cypriot companies for inward investment in to these countries provides a tax efficient conduit.
Intellectual property, including patents, certificates for computer software, trademarks and copyrights can be owned by or assigned to an offshore company. Upon acquisition of the rights, the offshore company can enter into license or franchise agreements with companies interested in using those rights. The income can be accumulated offshore (on careful selection of an appropriate jurisdiction), and taxation on royalties can be reduced by the commercial application of double tax treaties. Countries such as the Netherlands, the UK, Madeira, Cyprus and Mauritius are good examples of jurisdictions used for holding intellectual property.
Intellectual Property, Licensing and Franchising
Intellectual property, including computer software, technical knowledge, patents, trademarks and copyrights can be owned by or assigned to an offshore company. Upon the acquisition of the rights, the offshore company can then enter in to licence or franchise agreements with companies interested in the exploitation of such rights around the world. The income arising from such arrangements can be accumulated offshore and by the careful selection of an appropriate jurisdiction; withholding taxes on royalty payments can be reduced by the commercial application of double tax treaties. The UK, Netherlands, Madeira, Cyprus and Mauritius are good examples of jurisdictions used for holding intellectual property.
Real Estate and Land Ownership
The ownership of real estate and land by an offshore company can often create tax advantages. By structuring the financing correctly, the offshore company can reduce the effective level of withholding tax on rental income.
Offshore finance companies are incorporated for the purpose of inter-group treasury management. Interest payments from group companies may be subject to withholding tax, but these taxes differ from the usual corporation taxes. The interest paid can be a deductible charge for taxation purposes, thus consolidating interest payments in an offshore finance company provides a tax saving. Many large companies establish their own offshore companies for the purpose of mixing dividends of subsidiaries and deriving maximum advantage from tax credits.In certain countries, foreign exchange losses are not deductible for tax purposes. For example, if an offshore finance subsidiary that has been set up suffers a foreign exchange loss and that subsidiary company is then liquidated, the investment should be a tax-deductible item for the parent company.
Another area where offshore finance companies are used is leasing, particularly where an offshore structure is rich in funds which, if they are not invested, may be repatriated or subject to high levels of corporate taxation.Offshore companies are often utilised for the purpose of acquiring foreign entities, international restructuring of corporations, real estate and other investments, and other corporate finance-related projects.
Since some countries suffer from political and economic uncertainty, many large corporations reduce the risk by moving their base of operations and ownership of assets offshore. For example, Luxembourg and Bermuda are host to many companies that have re-domiciled their operations.Offshore companies are regularly employed to raise money through loan or bond issues. Such an arrangement may serve to reduce withholding tax on interest payments. For example, countries such as the UK levy a withholding tax on interest paid to non-residents on non-quoted bonds, thus it is vital to avoid double taxation in such cases.
Many important offshore jurisdictions (Panama, Liberia, Isle of Man, Jersey, Gibraltar, Cyprus, Bahamas, Belize) have modern ship and pleasure craft registration facilities for the purpose of providing low cost registration fees and exemption from tax on income derived from shipping and chartering activities. The owners of pleasure craft operating within EU waters for extended periods require specialist advice with regard to VAT.
To file first position liens against assets and property closing the door to predatory litigation before it begins.To segregate high-risk investments from other more secure holdings.
To protect retirement funds from possible bankruptcy.To provide for the transfer of assets for the next generation in an efficient and discreet fashion.
An individual can save professional fees and unwanted publicity by owning property or other assets through an offshore company. A high net worth individual with properties or other assets in a number of countries may wish to hold these through the medium of a personal holding company so that upon his demise the need to obtain probate in each country is avoided. This saves legal fees and avoids publicity
Personal Service Companies
Many individuals engaged in the provision of professional services in the professions and in the construction, engineering, aviation, finance, computer, film and entertainment industries can achieve considerable tax saving benefits through the establishment of a personal service company, based offshore.The offshore company can contract with an individual to provide him/her with services outside his/her normal country of residence, and personal income can be accumulated free from taxation in the offshore centre.
Many companies utilise offshore companies for the employment of staff working on overseas assignments. This helps to reduce the costs associated with payroll and travel expense administration, and may provide a tax and social security saving benefit for the employees.
Stock Market Listings and Capital Raising
With political and economic uncertainty in some countries, many large corporations have sought to mitigate risk by moving ownership of assets and bases of operations offshore. Luxembourg and Bermuda has been host to many companies wishing to re-domicile their operations.Offshore companies are regularly employed to raise money through loan or bond issues. Such a structure may reduce withholding tax on interest payments.
Shipping and Aviation Companies
The use of offshore companies to own merchant ships and pleasure craft has been an important function of certain offshore jurisdictions, such as Panama and Liberia together with the Isle of Man, Madeira, Jersey, Gibraltar, Cyprus, Bahamas, Belize and Mauritius.The use of offshore shipping companies can eliminate direct or indirect taxation on shipping. Ships or yachts may be owned by an offshore company and registered in an offshore jurisdiction which can prove a cheaper and more tax efficient method of ownership.
Registration of vessels at British Ports of Registry such as Gibraltar may be particularly beneficial, as the British flag has always been regarded as one of the world’s most dependable and brings with it international recognition and protection.