Discover the pros and cons of setting up an offshore company, including privacy and a reduced tax liability, and learn how to register, establish or incorporate your business outside of your country of residence.
In this article:
- What is an offshore company?
- Advantages of offshores companies
- Disadvantages of offshore companies
- Risks related to an offshore company
What is an offshore company?
Offshore companies are businesses that have been registered, established or incorporated outside of the country of residence.
Offshore incorporation is a straightforward process in all of the popular offshore financial centres and tax havens and can provide a wide range of benefits to the company and company principal(s).
Renowned offshore locations
The following locations are well-known offshore locations:
- The Caribbean
- The British Virgin Islands
Switzerland as tax haven
Switzerland is not offshore, but is considered as one of the most convenient jurisdictions for offshore corporation formation because of the low taxation enabled by peculiar local tax laws. Furthermore, the attraction for company formation is increased by the high international prestige and authority of Switzerland.
Offshore opportunities in the Netherlands
Although the Netherlands should not be considered as an offshore finance centre, it provides outstanding opportunities to use Dutch corporations in structuring international financial transactions. This is due to its extremely wide network of double taxation treaties (over 78 taxation treaties have been concluded, including treaties with most of the major developed nations of the world), its participation exemption, its 0% withholding tax on interest and royalty distributions, and its tax ruling system in conformity with OECD standards.
The Netherlands has a liberal tax regime including generous participation exemption where dividends received and capital gains realised are exempt from Dutch Corporate Income Tax. Dutch tax law has many other aspects but specialist advice is required to successfully navigate the complexities.
Advantages of offshore companies
Overseas company formation can provide a wealth of benefits:
- Asset protection
- Reduced tax liability
- Protection against lawsuits
- Flexible business laws
- Ease of operation
And, simply, it can facilitate growing your business outside of your country of residence.
Conducting business and undertaking banking transactions in the name of a legal entity, such as an offshore corporation, provide significant privacy and confidentiality benefits. Most offshore financial centres will not divulge the responsible individuals within the offshore corporations to a third party or foreign government. However, 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 and overseas legal structures 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 highly effective asset protection and effectively screen your finances from public view.
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 event 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. The statutory obligations in the running of the offshore entity have also been simplified.
Disadvantages of offshore companies
Proving ownership may be difficult
Due to the absence of detailed, publicly maintained registers, proving ownership of a company registered offshore can be difficult. While anonymity can be an advantage for overseas companies, when it becomes in the owner’s interests to declare themselves as the beneficial shareholder, this might be a difficult exercise.
Bringing the money back exposes you to taxation
One of the main drawbacks is in the area of remittance and distribution of the assets and income of the offshore company. Once monies are transferred to the resident country, they become subject to taxation, which can negate the benefits of the initial tax-free environment.
Taxation of offshore dividends in Belgium
Dividend income that is received by a Belgian holding company from a company based elsewhere (where income from foreign sources is not taxed) will pay corporate income tax at the normal Belgian rate. In addition to offshore jurisdictions, this would also include companies based in Costa Rica, Hong Kong, Malaysia, Singapore and Oman.
Where dividends are received from holding companies or subsidiaries that are based in territories with more advantageous tax systems, the dividends are subject to Belgian corporate income tax. Other than corporations located in traditional offshore tax havens, this list would include companies located in Luxembourg, Liechtenstein and Uruguay.
Taxation of offshore dividends in Spain
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 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.
Risks related to an offshore company
Is operating an offshore company considered tax evasion?
In most of Europe, 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.
There are large tax risks associated with administering non-Swiss corporations from outside of Switzerland, for example. According to Swiss law, a company has its tax residence where effective administration and control of the entity is carried out. Effective administration and control is where the day-to-day operations of the entity are carried out. Holding directors’ meetings in Liechtenstein twice a year or signing off resolutions on a remote island may not help to establish a non-Swiss place of administration and control from a Swiss tax viewpoint.
Another example: the main risk in relation to a company not registered in the UK is falling foul of HMRC taxation rules. The HMRC never approves tax schemes, although any tax avoidance scheme must be registered with them. Having a company registered outside the UK cannot protect an individual from UK tax legislation surrounding IR35 (legislation surrounding the taxation of contractors). According to HM Revenues and Customs (HMRC), it does not matter where a company is incorporated when investigating whether a contractor is subject to IR35.
Retrospective legislation can be used to declare a tax-evasion scheme that was legal some years ago as no longer legal now. In this case, substantial back taxes plus interest and penalties may become payable that would eliminate all the benefits of the non-locally registered company.
Other risks of opening an offshore company
Some offshore jurisdictions are more stable than others, whether from a political or economic perspective. Physical distance, lack of knowledge of local customers, government and social attributes can increase the risks of financial loss occurring in some countries.
Additional risks for offshore corporations are similar to those for onshore corporations e.g. risks associated with the market, interest rates and credit. A further consideration is that of reputational risk.