An offshore company is registered or incorporated outside the country where it has its main offices and operations, or where its principal investors reside. The term “offshore” can refer to any country, but it is mostly associated with certain countries, or jurisdictions, where the local laws offer asset protection, business flexibility, tax minimization and privacy protection. Forming an offshore company begins with choosing a business structure and jurisdiction. Then, the business owners must appoint a registered agent or trustee, incorporate the company and fulfill all financial reporting responsibilities.
Characteristics of offshore companies:
Offshore companies differ depending upon the corporate law in the relevant jurisdiction. All offshore companies have certain characteristics:
They are broadly not subject to taxation in their home jurisdiction.
The corporate regime will be designed to promote business flexibility.
Regulation of corporate activities will normally be lighter than in a developed country.
The absence of taxation or regulation in the home jurisdiction does not exempt the relevant company from taxation or regulation abroad.
Another common characteristic of offshore companies is the limited amount of information available to the public. This varies from jurisdiction to jurisdiction. Most jurisdictions have laws which permit law enforcement authorities (either locally or from overseas) to have access to relevant information, and in some cases, private individuals.
Most offshore jurisdictions normally remove corporate restraints such as thin capitalisation rules, financial assistance rules, and limitations on corporate capacity and corporate benefit. Many have removed rules relating to maintenance of capital or restrictions on payment of dividends. A number of jurisdictions have also enacted special corporate provisions to attract business through offering corporate mechanisms that allow complex business transactions or reorganisations.
Uses of offshore companies:
There are frequent allegations that offshore companies are used for money laundering, tax evasion, fraud, and other forms of white collar crime. Offshore companies are also used in a wide variety of commercial transactions from holding companies, to joint ventures and listing vehicles. Offshore companies are also used widely in connection with private wealth for tax mitigation and privacy. The use of offshore companies, particularly in tax planning, has become controversial in recent years, and a number of high-profile companies have ceased using offshore entities in their group structure as a result of public campaigns for such companies to pay their “fair share” of Government taxes.
Tax Haven:
A tax haven is a jurisdiction that offers favorable tax or other conditions to its taxpayers as relative to other jurisdictions. Particular taxes, such as an inheritance tax or income tax, are levied at a low rate or not at all. Maintains a system of financial secrecy, which enables foreign individuals to hide assets or income to avoid or reduce taxes in the home jurisdiction.
The following jurisdictions are considered the major destinations:
(1.) Bermuda:
Bermuda earned the dubious distinction of ranking No.1 on Oxfam’s 2016 list of the world’s worst corporate tax havens. Bermuda features a zero percent corporate tax rate, as well as no personal income tax rate. Due to the lack of corporate taxes, multinational companies have raked in huge amounts of money in Bermuda.
(2.) Netherlands:
The most popular tax haven among the Fortune 500 is the Netherlands, with more than half of the Fortune 500 reporting at least one subsidiary there. Oxfam’s list of the worst corporate tax havens placed this Benelux country at No.3.
National governments often use tax incentives to lure businesses to invest in their country. However, far too often tax incentives have been found to be ineffective, inefficient and costly, according to Oxfam.
(3.) Luxembourg:
This tiny EU member state remains a center of relaxed fiscal regulation through which multinationals are helped to avoid paying taxes. It’s the leading banking center in the Euro zone, with 143 banks that manage assets of around 800 billion dollars.
Pros: In Luxembourg, disclosure of professional secrecy may be punished with imprisonment. Asides from that, many international corporations choose Luxembourg as location for their headquarters and logistics centers, due to low taxes and excellent European location.
Cons: Tax exemptions on intellectual property rights may come up to 80% in Luxembourg, which is why many companies choose to manage their IP rights from here. However, it’s important to note that the tax exemption applies only to intellectual property rights instituted after December 31 2007.
(4.) Cayman Islands:
Assets of 1.4 trillion dollars are managed through the banks in this country right now. Being a British territory, which has 200 banks and more than 95,000 companies registered, the Cayman Islands is the world leader in hosting investment funds and the second country in the world where captive insurance companies are registered (designed to ensure the assets of a parent company having another object of activity). Over half of GDP is provided by the Cayman Islands financial services sector.
Pros: The Cayman Islands is one of the few countries or territories in which the law allows companies to be formed and manage assets without paying tax. This is considered legal and it’s not seen as a strategy to avoid taxes.
Cons: The tax benefits for incorporating in the Cayman Islands exists mainly for companies who are doing business in several countries, in order to avoid the hassle of dealing with various taxation systems.
(5.) Singapore:
Strategically located, the Republic of Singapore has a reputation as a financial center that’s really attractive to “offshore” funds of Asian companies and entrepreneurs.
Pros: Legislation on the confidentiality of banking information entered into force in 2001 and since then, the electrifying city-state is recognized by the strictness with which it implements that law. And Singapore does not waive these rules, in spite of pressure from foreign governments.
Cons: Singapore is not a country used by wealthy individuals seeking important tax benefits, as most countries from this region offer a relaxed tax regime.
(6.) Channel Islands:
Located between England and France, the Channel Islands host hundreds of international corporate subsidiaries.
The Channel Islands consist of two British Crown dependencies:
- The Bailiwick of Jersey, consisting of Jersey
- The Bailiwick of Guernsey, consisting of three separate jurisdictions: Guernsey, Alderney and Sark
Crown dependencies are not part of the United Kingdom, but are instead self-governing territories.
There is no inheritance tax, capital gains tax or standard corporate tax. This has made Jersey a popular tax haven, and the island now houses $5 billion worth of assets per square mile. Maybe you should add the Channel Islands to your list when you look for cheap places to retire.
(7.) Isle of Man:
The Isle of Man is considered somewhat of a financial center for low taxes. This tiny island, located between England and Ireland has a very low income tax, of maximum 20% and no more than 120,000 pounds.
Pros: Low tax rates are not the only advantages offered by this small island. Their pension plan is also really great, which is way many companies choose to have their employee pension plans held in accounts in this country. It’s possible to benefit from these pension plans starting from the age of 50 and onwards.
Cons: Establishing companies in the Isle of Man may be costly, especially for non – commercial activities and the registration process can be quite complex.
(8.) Ireland:
Ireland is often referred to as a tax haven, despite Irish officials asserting that is not the case. However, a Congressional Research Service report found that American multinational companies collectively reported 43 percent of their foreign earnings in five small tax haven countries: Bermuda, Luxembourg, the Netherlands, Switzerland and Ireland.
(9.) Mauritius:
Located in the Indian Ocean, near Madagascar, Mauritius is another island that attracts many foreign investments. A large number of international corporations have subsidiaries established in Mauritius.
Pros: The corporate tax levied in Mauritius is really low, compared with other jurisdictions, of only 15%. Capital gains and interest are not taxed in Mauritius and residents can also benefit from various tax exemptions, due to double tax treaties.
Cons: Mauritius was used as a location for investments, especially for those directed towards India, but in May 2016, a new protocol amending the double taxation treaty between India and Mauritius was signed. This gives India a source based right to tax capital gains, which arise from alienation of shares of Indian resident companies acquired by Mauritius residents.
(10.) Monaco:
This tiny state has only 36,000 residents, but it attracts many entrepreneurs and companies willing to invest in this small country. Why? Because the income tax for residents hasn’t changed since 1869.
Pros: Once a person has become a Monaco resident, they are allowed to keep all the income they make, without any limitations. It’s no wonder that most of the world’s millionaires are residents of Monaco. Corporate taxes are also really low, which makes Monaco a great location to start a company.
Cons: In order to become a Monaco resident, a person needs to be a citizen of an EU – member state or have a long-term French visa. It’s also necessary to deposit at least 100,000 Euro in a bank in Monaco, to have private health insurance and to buy a property in Monaco.
(11.) Switzerland:
Switzerland has in its banks right now the equivalent of 6.5 trillion dollars of assets under management, and 51% of that comes from abroad, so it’s not really a surprise the country is also a global leader in asset management, with a market share of 28%.
Under international pressure, Switzerland has relaxed slightly in recent years its laws on fiscal secrecy, but the lobby for keeping these regulations remains strong as evidenced by the aggressive policy of the country against pressures for disclosure of information in this sector.
Pros: Combining low taxes with a top – notch banking system, it’s no wonder that Switzerland is one of the most popular tax havens in Europe. Opening a Swiss company is a relatively fast process, compared with the legal hurdles of other European states.
Cons: Although any individual or legal entity is allowed to register a company in Switzerland, one of the conditions required by Swiss law is to have at least one Swiss company director. To solve the Swiss directorship issue and tackle company formation Switzerland you should talk to experts.
(12.) Bahamas:
Pros: In the Bahamas, the personal income tax rate is zero. It can’t get any lower than that, right? There is also no wealth tax, no capital gains tax, no withholding tax and various other tax benefits both for individuals and for companies.
Cons: Not everyone can take advantage of a tax exemption on personal income, just those who are also residents of the Bahamas. Obtaining the residence here requires, in particular, the realization of an investment in a local property of a minimum value of $500, 000 (or a minimum of $1,5 million for the accelerated procedure).
The Bahamas doesn’t levy direct taxes, so there are no double tax treaties with other countries, but this tiny country has signed tax information agreements with 29 other countries, including USA, UK and Canada. However, information disclosure is limited to criminal matters.
(13.) Hong Kong:
Hong Kong is one of the emerging tax havens, as here assets of 2.1 trillion dollars are managed right now. It has the second largest stock market in Asia, after Tokyo, and shows the highest density of people with fortunes of more than 100 million dollars. Just under half of foreign investment in China went to Hong Kong in 2012 for example.
Pros: Companies incorporated in Hong Kong pay tax only on profits sourced in Hong Kong and the tax rate is currently at 16.5%. There is no withholding tax on dividends paid to foreign shareholders and no tax on capital gain.
Cons: China’s control over Hong Kong hinder initiatives to increase transparency and further enables the holders of bearer securities – instruments for some of the most harmful criminal activity – to remain unidentified. This damages somewhat the credibility and the reputation of companies registered in Hong Kong.
(14.) Malta:
Malta makes it on the top of the list of the countries with the lowest taxes in the world in 2016, which is why is one of the best tax havens in 2017. Living on the small Mediterranean island makes it possible to gain the status of resident and to be thus taxed only on income from local sources.
Pros: One of the best tax advantages for individuals and companies is that there is no tax levied in Malta for revenues obtained abroad.
Cons: Maltese nationality can also be obtained through a citizenship by investment program, for those who want a faster process. However, in order to obtain Maltese citizenship, it is necessary to make investments in Malta worth about 1 million Euros.
(15.) Panama, which is a significant international maritime centre. Although Panama (with Bermuda) was one of the earliest offshore corporate domiciles, Panama lost significance in the early 1990s. Panama is now second only to the British Virgin Islands in volumes of incorporations.
(16.) New Zealand, the remotest jurisdiction, has the advantage of being a true primary jurisdiction but with a tough but practical regulatory regime. It is well positioned for the Asian market but retains close ties to Europe.
(17.) Nevis: the offshore companies located in this Caribbean island of the Federation of Saint Kitts and Nevis are exempt from all local taxes, including income, withholding, capital gain taxes, stamp duties and other fees or taxes based upon income or assets originating outside of Nevis or in connection with other activities outside of Nevis.
