Discover the pros and cons of setting up an offshore company, including privacy and a reduced tax liability.
Offshore companies are businesses that have been registered, established or incorporated outside of the country of residence. In this article, we explain the pros and cons of offshore companies, before focusing on how offshore companies in Spain are regulated.
Why do people register offshore companies?
Offshore incorporation is a straightforward process in all of the popular offshore financial centres and tax havens, and offers a range of benefits.
People primarily register offshore companies for the following reasons:
- Asset protection
- Reduced tax liability
- Protection against lawsuits
- Flexible business laws
- Ease of operation
Advantages of offshore companies
Forming an overseas company can provide offshore asset protection, confidentiality, enhanced privacy, tax savings, or can simply help you grow your business outside of the European Union.
The names of the officers, directors and shareholders can be excluded from the company’s documentation in many jurisdictions – meaning most offshore financial centres will not divulge the responsible individuals to a third party or foreign government.
This isn’t always the case, however, as exceptions will be made in the event that an act of terrorism or a criminal atrocity has taken place and is being investigated.
The placing of assets into offshore corporations can provide a strong layer of protection from future liabilities.
By having trusts, investments or bank accounts and other assets owned by your offshore corporation, it makes tracking them down via an asset search difficult.
Offshore companies provide effective asset protection and effectively screen your finances from public view.
Legal protection through incorporating offshore
If a legal opponent is pursuing a legal action against you, it typically involves an asset search to make sure there will be money to pay out, in the instance that a judgment is awarded against you.
Forming offshore companies and having assets held by the overseas company mean they are no longer associated with your name. Therefore your assets can be effectively shielded from legal opponents, judges and court rulings simply by incorporating offshore.
An additional benefit is simplicity and ease of operation. Most overseas jurisdictions make it simple for anyone who is interested in offshore incorporation, as they appreciate that time is, literally, money. The statutory obligations in the running of the offshore entity have been made simple too.
Disadvantages of offshore companies
In Spain, withholding tax of 21% is payable on interest and dividend payments, whether domestic or to non-treaty countries.
However, where dividends are paid to a company which has share capital that has been held during the prior year – equal to or above 5% – withholding tax does not apply. This means that tax is deducted before monies can be remitted or transferred to an offshore company.
Spanish wealth tax is charged on the value of your assets held on 31 December each year and both residents and non-residents alike are liable. Non-residents pay the tax on any property they own in Spain, while residents have to pay it on all their worldwide assets – in each case, net of liabilities.
Residents can at least benefit from quite generous tax-free allowances, but there are no such allowances for non-residents – a considerable disadvantage of operating an offshore company in Spain.
Risks related to an offshore company
As from 1 January 2007, tax avoidance measures came to an end and owning assets in Spain through an offshore structure lost any fiscal benefit.
In line with the rest of Europe, the Spanish authorities have been trying to introduce legislation that will curtail tax evasion and money laundering by entities located in offshore tax centres.
The main thrust of the legislation is in forcing such companies to demonstrate beyond reasonable doubt that their underlying activities are truly carried out in their respective offshore centre, and that these are indeed normal business activities.
Some offshore jurisdictions are more secure than others, whether in terms of political or economic stability. The physical distance, lack of knowledge of local customers, government and social attributes can increase the risks of financial loss occurring in some countries.
Renowned offshore locations
The following locations are well-known offshore locations:
- The Caribbean
- The British Virgin Islands