The term offshore company is ambiguous. It may refer to either:
- A company which is incorporated outside the jurisdiction of its primary operations regardless of whether that jurisdiction is an offshore financial centre (sometimes known as a non-resident company) i.e. a Canadian company may be 'offshore' for the purposes of a USA citizen ; or,
- Any company (resident or otherwise) incorporated in an offshore financial centre
Typically the requirements for company registration under the relevant provision for non-resident status (as in the former of the two options above) will be pursuant to some or all of the following criteria:
- Must be incorporated from outside the jurisdiction in question;
- Must not trade within the jurisdiction in question; and/or,
- Must meet nominal tax expenses levied by the jurisdiction in question.
Management and control
It is worth mentioning at this juncture that taxation of a company somewhere other than its place of incorporation is not by any means an exclusively offshore concept. By way of example consider a UK incorporated company which traded exclusively in France. If the board of directors of this company were based in France there would be no doubt that the company would be subject to French tax.
Consider also a US citizen running a Bahamas company from the US, there is no doubt that the activities of that company is subject to tax in the US.
The same principle extends to regulation also.
Benefits
Offshore companies have the following features which may be beneficial:
- Taxation - In most jurisdictions authorities will not seek to tax companies which they treat a non-resident save perhaps for a nominal fee -$300 BVI, £320 Isle of Man etc.
- Simplicity and Reporting - except for regulated businesses, such as banks or other financial institutions, some jurisdictions make it relatively simple to set up and maintain companies especially with reference to lesser reporting requirements than so-called onshore jurisdictions - the level of information required by the registrar of companies varies from jurisdiction to jurisdiction.
- Legal and asset protection - some jurisdictions have stricter provisions for allowing a court to pierce the corporate veil , and in many cases, corporate governance rules require the laws of the jurisdiction where the corporation is chartered, rather than where it is sued, to apply. For example Gibraltar makes it illegal for the trustee of an Asset Protection Trust to surrender its assets to a creditor of the settlor and in Switzerland it is illegal to disclose banking information.
- Fees - some jurisdictions impose much higher fees to incorporate than other jurisdictions. They may also impose much higher maintenance fees on a corporation's yearly renewal of its charter. This will vary from service provider to service provider and will be significantly based on the cost of local disbursements.
- Anonymity - by carrying out transactions in the name of a private company, the name of the underlying principal may be kept out of documentation since the company is a separate legal entity. Having said that, current anti-money laundering regulations often require banks and other professionals to look through structures. This will always be the case for any reputable bank but this does not render ineffective the use of corporate structures, rather it ensures they remain legally compliant.
- Thin capitalisation - Some offshore jurisdictions tend not to impose "thin capitalisation" rules on companies (except for regulated entities such as banks and insurance companies), allowing them to be formed with a purely nominal equity investment.
- Financial assistance - offshore companies are usually not prohibited from providing "financial assistance" for the acquisition of their own shares, which avoids the needs for "whitewash" procedure in certain financial transactions.
- Cost of operation - In many cases, i.e. where a self employment consultant provides service to a number of jurisdictions and is frequently travelling it is a matter of choice where he chooses to incorporate. In this case the fact that companies in an offshore financial centre are considerably cheaper than buying or renting premises, arranging to engage accountants, receptionists, IT providers etc would be.
Disadvantages
- Offshore companies are usually prohibited from conducting business or retaining employees in their jurisdiction of incorporation though this very much depends on the jurisdiction in question and type of company.
- For regulatory reasons, there are often certain restrictions on the type of business which an offshore company can engage in without the need for a licence. In practice this is no different from trading 'onshore' since the majority of banks have offshore operations and the majority of the world's insurance companies are offshore captive insurance companies.
- Due diligence in reputable offshore centres tends to be more strict than most onshore areas. For example, to open a bank account in the name of an offshore company, to comply with relevant anti-money laundering regulations, the bank will normally require documents verifying the identity of the signers on the account to be notarised and may require one or more professional reference letters from an attorney, accountant and/or banker who has known you.
- Certain countries have "anti-tax haven" legislation which makes it difficult to conduct business in those countries using an offshore company. For example, capital markets regulations in France prohibit using offshore companies as bond issuing vehicles.
- Where a shareholder of an offshore company dies, it is usually necessary to have the will admitted to probate in the offshore jurisdiction as well (or, if intestate, to have the letters of administration re-sealed in that jurisdiction), which can add to cost, delay and inconvenience in administering the deceased's estate.
Legitimate uses of offshore companies
- International trading, especially where the owner has no fixed residence
- Asset protection
- Captive insurance
- Yacht registration
- Tax avoidance
- Protection of intellectual property
- Succession planning
- Confidentiality (non-criminal)
Illegitimate uses
Historically the activities of offshore companies have included activities that were or have become illegal. These include
- The finance of terrorism
- Money laundering
- Tax evasion
- Fraud (including investor fraud)
- Protection from current or future creditors (including taxation authorities and spouses)
- Irregular trading practices (such as increasing margins on deals by interposing clandestinely controlled offshore companies as apparent third parties)
The situation has much improved since the 1970s and 1980s largely due to increased regulation and general changes in commercial practice. However some traces of these abuses persist today in both offshore and onshore jurisdictions.
Importance of choosing a legitimate jurisdiction
Many offshore jurisdictions are regarded by banks, the OECD and other bodies in the finance industry as being regulated either as effectively as or better than their onshore counterparts whilst others are known to be areas of dubious legitimacy.
Unfortunately gone are the days (if ever they existed) where the distinction between onshore and offshore equated to legitimate or illegitimate. The current position is that there is no correlation between legitimacy of jurisdiction and tax status. For example Nigeria would not be regarded as offshore but perpetrates much of the world's advance fee fraud whereas Switzerland would be regarded as a highly respectable jurisdiction.
It is no longer possible for illegitimate jurisdiction to operate in light of the OEDC and the FATF as well as current and pending US legislation (13/06/09). It is very much in the interest of most offshore jurisdictions to ensure their house is in good order as this failure to comply and subsequent sanctions could lead to the total economic collapse of a country dependent upon its international reputation.
Features of offshore companies
- Memorandum and articles of association or bylaws - these documents are fundamental to the existence of the company. The Articles detail the rights of the members, the objectives of the company and the internal processes of the company and the Memorandum states the type of Company and its capital.
- Certificate of Incorporation - this is issued by the Registrar of Companies or their equivalent, and is serves as proof that the company has been brought into existence. Other information may be necessary to prove that the company has not been liquidated or struck off such as a certified of incumbency or good standing.
- Registered Agent - it is often the case that an agent must be appointed in the jurisdiction in which the company is incorporated for the purpose of dealing with official communications with the registrar. The Agent will have to be licensed and will assume some level of responsibility for the company's activities.
- Regis
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