You can gain considerable competitive advantages if you register your company in an offshore jurisdiction. The most important thing that you can do is reduce your tax burden. You could not bring it down to zero but you could be able to save on taxes by registering an offshore company. Below we explain in simple words what types of offshore jurisdictions exist and what benefits they offer to international entrepreneurs.
What is an offshore zone?
In the economic sense, an offshore jurisdiction is one that does not tax certain types of locally registered companies. Countries that charge taxes at low rates are also often referred to as offshore jurisdictions. In addition, the company registration procedures are usually simple in offshore zones. Besides, they provide relative confidentiality of company owners’ personal information. The names of the company’s beneficial owners and directors are often unavailable to the public. A high level of personal information confidentiality is another important factor that attracts business people to offshore jurisdictions.
You should realize that a great number of giant international corporations have offshore-registered subsidiaries. It is understandable because low taxes and lax reporting requirements would attract any entrepreneur. What profit do the authorities of the offshore country make from foreign companies registered on its territory if they charge zero taxes? Offshore-registered companies have to pay a fixed company registration fee every year. You can find out about the procedure of setting up an offshore company from this source.
Types of offshore zones
Depending on the tax regime, the level of personal information confidentiality, and the reporting requirements, offshore zones can be divided into two groups.
Zero-tax jurisdictions
There are several countries that exempt locally registered companies from all taxes on the condition that these companies do no business whatsoever on their territories. If they meet this requirement, they do not have to pay the corporate income tax and often many other taxes as well such as capital gains tax, or tax on dividends. Zero taxes are spelled out in the legal documents of these countries.
Previously, these countries also did not require keeping any corporate records and filing any reports. Today, however, you have to keep the records in most zero-tax jurisdictions but you normally do not have to file any reports. Bright examples of zero-tax jurisdictions are Seychelles, the British Virgin Islands, and the Marshall Islands.
Low-tax jurisdictions
There are a few countries that can be referred to as offshore jurisdictions only at a stretch. They have some characteristics typical of offshores. You can minimize your taxes by establishing a company in one of such countries but you will have to meet certain conditions to be able to do that.
At the same time, the authorities of these countries monitor foreign companies closely, unlike the authorities of zero-tax jurisdictions. On the other hand, low-tax countries enjoy more trust and more respect in the international business arena.
You do have to file annual financial and tax reports in these countries. In some of them, you also have to undergo regular audits and the company registers are available to the public there.
Such jurisdictions are also sometimes called ‘midshore’ jurisdictions because they are in the middle between zero-tax offshore countries and high-tax onshore countries. Examples of such jurisdictions include Hong Kong, Malta, Singapore, and others.
If you set up a company in Hong Kong, for example, you will have to pay taxes only on locally made incomes and the tax rate is not too high – 16.5%. Your income derived from other countries is not going to be taxed in Hong Kong. In Malta, the corporate tax rate is 35% but it can be legally reduced to 5%. Certain types of income are completely excluded from the tax base in Malta.
Characteristics of offshore zones
You can find a few dozen offshore zones on the planet. For some zero-tax jurisdictions, offshore services are the main source of revenues that go to the national budgets. They have to compete for the customer, which makes them offer attractive conditions to foreign entrepreneurs looking to register offshore companies. International regulators, however, put barriers in their way. They may declare an offshore country ‘uncooperative’ and put it on the black list. A company registered in a blacklisted country cannot be used for international business operations.
Let us point out the most important characteristic of offshore zones
Low or zero taxes. If a company is registered in an offshore zone and it conducts all its business operations in other jurisdictions, it can be totally exempted from taxes in the offshore zone.
Simplicity of company registration. The application document package is not very large. Please note, however, that the company founder has to undergo client identification procedures in all offshore jurisdictions these days.
Availability of nominee services. In some offshore countries (but not in all of them) you can hire nominee company directors and nominees shareholders. This is a way to enhance confidentiality of your company ownership information.
Minimum reporting requirements. As a rule, an offshore-registered company has to keep the records but it does not have to submit any reports.
All business operations have to be carried out in other countries. We do not mean to claim that you are not allowed to do business in the offshore jurisdiction where your company is registered. You can, but then you will lose your tax-exempt status.
We have to note at this point, that all offshores have been forced to introduce economic substance requirements. You have to have a company office in the country and some company personnel. Even if you can register an offshore company without economic substance, you won’t be able to open a bank account for it.
Most often, companies with no real turnover are registered in offshore zones. These can be consulting companies or financial service providers, for instance. However, some corporations engaged in international trade also register subsidiary companies in offshore zones to economize on taxes and customs duties.
How do offshore zones benefit from foreign entrepreneurs?
As we have noted above, offshore zones do not charge taxes but they charge company registration fees. At the same time, the fees are not their main source of income because they are rather small. When a foreign entrepreneur sets up an offshore company, he or she makes investments into the country in any case. He/she rents an office, hires personnel, buys local products, stays at local hotels (many offshore jurisdictions are simultaneously paradise islands with white sand beaches and clear seawater). The foreign entrepreneur engages in international trade operations and makes large bank deposits. Banks, in their turn, charge commissions and service fees, which also brings capital to the offshore jurisdiction. Thus, taxes are not the only type of income that the country’s authorities can derive from a foreign company registered on the territory of the country.
When choosing where to set up an offshore company, please bear in mind that each jurisdiction usually has an ‘area of specialization’. Some of them are good for registering trusts or LLCs while others are suitable for registering airplanes or marine vessels.