Demystifying the Concept of Offshore Companies

By Pardeep Singh, Head of Precepts Corporate Services

Offshore companies are popular options for business owners due to varying reasons and there are currently over 40 regions that offer offshore companies. An offshore company is incorporated in a jurisdiction other than the jurisdiction that constitutes its main place of operations or where the company’s principal investors reside. In a broader sense, offshore simply means a jurisdiction other than your home country of operations.

These low tax jurisdictions are located in various strategic locations all over the world and they encourage foreign investors to set up such companies in their territories. In order to attract the capital of foreign investors, the majority of serious offshore areas guarantee by their law the operation of these companies, the security of the foreign investments made, as well as the protection of information.

The principal advantages of incorporating an offshore company include tax benefits, simpler reporting requirements, ease of company setup and ongoing administration, etc. The choice of a particular jurisdiction for offshore company incorporation is an important decision as it can have a significant impact on your business.

What are the key benefits of having an offshore company?

Asset Protection

By protecting assets in combination with a Trust, an offshore company can avoid high levels of income, capital and death taxes that would otherwise be payable if the assets were held directly.

Confidentiality

Offshore Companies offer privacy to the investors.

Estate Planning

Family and Protective Trusts (possibly as an alternative to a Will) for an accumulation of investment income and long-term benefits for beneficiaries on a favourable tax basis (without income, inheritance or capital gains taxes).

Simplify the transfer of assets and properties held in several countries

An offshore company can hold multi-jurisdictional assets and properties conveniently and ownership can be transferred by company shares. International Tax Planning Conduct business with low or no corporate taxes.

Reduce payroll and travel expense administration

With proper tax planning, offshore companies can protect the investment in other foreign countries. International Companies can loan funds to corporations in other foreign countries. This can be especially important when working in countries with strict exchange controls and high tax profiles.

Conduct business as an international entity

International Companies have the same rights as a person and can make investments, buy and sell real estate, trade portfolios of stocks and bonds, and conduct any legal business activities.

Minimise tax exposure when dealing with international transactions

Maximise profits from intellectual property rights, franchising, and licensing

An offshore company can franchise or license intellectual property rights in other foreign countries, allowing the profits to accumulate in a tax-free environment.

Protect investments in other foreign countries

International Companies can loan funds to corporations in other foreign countries. This can be especially important when working in countries with strict exchange controls and high tax profiles.

Common Misconceptions of Offshore Companies:

Offshore Business is illegal

This is false; offshore business is a legal and highly regulated industry in many jurisdictions such as Singapore and Hong Kong. An offshore entity is simply one that does not conduct business in the jurisdiction that it has registered in.

Offshore business is a new trend

The activity has a long history and is nothing new amongst international business owners. Some writers claim that offshore activity began as early as over 200 years ago.

Offshore Companies are in remote exotic Locations

When someone mentions about offshore company formation, people often think about far away, lesser-known countries such as the Bahamas, Cayman Islands, Dominica, Mauritius, or the Marshall Islands. Admittedly, those countries are some of the best places to incorporate a business offshore due to their legal and taxation systems.

However, where to incorporate your offshore company would generally depend on the location of your customers and suppliers, how they perceive the country, and specific activity of the business.

Tax reduction is the only benefit

Tax reduction and minimisation are some of the major benefits but other aspects such as requirements for company administration, dispensation with an audit, or the ease in the manner of conducting shareholder and director meetings could be considered as reasons for setting up these structures.
 
This article is first published on our newsletter, The Custodian Issue 14 on March, 2020. Click here to subscribe to our latest newsletter.

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