As terms the words offshore business and offshore company have no precise legal, tax or general business meaning, as the word offshore often means nothing more than anywhere other than the place of physical location of the person using the word (i.e. overseas). The word offshore often implies an activity, business or arrangement, which is in some manner not entirely legal.

Therefore, it is important to understand that we use the words offshore business and offshore company as terms of definition in connection with matters that are entirely legal, such as the structuring of international business and family wealth management or tax planning.

Wide ranges of clients use Offshore Companies, from large international corporations to small business groups (family businesses and private companies). Clients are engaged in different kinds of business activity, from Arts to Engineering, from Banking to Trading.

Many would question why they should use offshore companies and how they would benefit. In most cases, the jurisdiction has less regulation and control and therefore a better environment in which to conduct business using offshore companies. It is important to note that where there is less regulation the individual and the country together prosper.

Another reason to use offshore companies is to legally minimize the tax you are required to pay. When you are conducting your business in a foreign jurisdiction whereby they have minimal to no tax requirements on foreign individuals, it is very easy to drastically reduce taxes. Everyone has the right to legally reduce their tax liability to avoid paying any more tax than they are due.  

Maintaining privacy is another factor in deciding to implement offshore companies. Many jurisdictions have very strict banking laws that make it a criminal offence for anyone to divulge information inappropriately. It is important to choose a reputable jurisdiction when establishing your offshore corporation.

Typically, the clients use the different types of offshore companies to structure international business and for tax planning:

·        Very low or zero tax offshore companies incorporated in jurisdictions often described as tax haven islands, such as the differing types of offshore company that can be formed in offshore company formation centres such as the Seychelles, BVI or British Virgin Islands, Belize and etc.

·        Companies incorporated in jurisdictions which offer both offshore companies and onshore companies and which may benefit from favourable tax regulation and/or special offshore company regimes. An offshore company in those jurisdictions pays zero tax and is effectively a tax haven company, whilst an onshore company is tax resident and typically utilised for double tax treaty and international tax planning.

·        The companies and partnerships with limited liability. These classes of company are used for offshore business, international business and tax planning because they have the advantage of limited liability but the flow-through characteristics of a partnership for tax purposes. By this, we mean that profits are divided among the members, in proportion to their respective holdings, and are taxed in their hands.

·        Companies incorporated in the many onshore countries, which have tax regimes that are by statute tax advantageous for specific international purposes. So today the offshore world includes the expert implementation of specific structures domiciled in high tax onshore countries as diverse as the UK, Portugal, Singapore, Greece, Belgium, Austria, Spain, Switzerland, Luxembourg and the Netherlands.

Therefore the world of offshore is quite complex; offshore business consists not only of tax havens but also of onshore high tax countries competing fiercely to attract international companies and individuals with all manner of tax planning regulations and opportunities. These tax advantageous regulations are used for a wide variety of tax planning business, such as:

·        Double tax treaty planning relating to dividends, interest and royalty payments.

·        The establishment of holding, international headquarter treasury and finance operations.

·        Specialist business, for example leasing, insurance etc.

·        Personal and family wealth management and tax planning.

In fact, almost all countries offer tax regulations of one kind or another to encourage inward investment. International tax advisers have long been aware of the opportunities which exist for improving overall tax efficiency by using the special low tax regimes offered by high tax countries seeking to encourage international business.

However, successful implementation of such structures is dependent on a wide variety of issues, often relating to matters such as anti-avoidance provisions, double tax avoidance, controlled foreign company and management and control tests and provisions, transfer pricing, thin capitalisation, participation exemptions, capital gains tax and a lot of other ever-changing tax regulation.

Such advantages vary from one centre to another, but for sophisticated clients the key attraction is often the ability to establish an offshore legal structure which either eliminates or reduces a tax liability, or facilitates a transaction – or series of transactions – which would be precluded by constraints in the client’s home country. The motivations for individuals and corporations to utilise offshore planning and offshore companies include the desire to:

·        Reduce tax

·        Protect assets

·        Manage risk

·        Maintain privacy

·        Avoid bureaucracy

·        Reduce costs

·        Enhance assets

While it is true that the origins of the offshore companies lie in the avoidance of feudal dues and therefore, from the earliest days, were concerned with tax mitigation, there are many other, possibly stronger, reasons for using offshore companies. More broadly, the reasons for using offshore and utilising offshore companies for tax planning and offshore business include:

·        Free remittance of profits and capital

·        Security of property rights

·        Accessing low cost areas

·        Availability of offshore experts

·        Access to foreign insurance and reinsurance

·        Enhanced privacy

·        Customs and duty exemptions

·        Exchange convertibility

·        Government cooperation

·        Territorial taxation on foreign income

·        Fewer restrictions

·        Foreign investment inducements

·        Tested legal systems

·        Higher yields and returns

·        The availability of sophisticated banking facilities

·        Reduced taxation

·        The search for political stability

Offshore companies are also often a useful way of mitigating income, capital gains and inheritance taxes. Some examples of Offshore Companies working with clients are listed below. You will also find comments on these.

·        Trading

·        Holding

·        Investment

·        Intellectual Property

·        Real Estate and Land Ownership

·        Finance

·        Shipping & Transport Companies

·        Personal and corporate tax planning

Offshore corporations often hold investments in subsidiaries and/or associated companies, publicly quoted and private companies, as well as joint venture projects. Capital gains arising from the disposal of particular investments can be made without taxation. In the case of dividend payments, reduced levels of tax on income can be achieved by utilising a company incorporated in a zero or low tax jurisdiction that has double tax agreements with the contracting state.

Many large corporations are interested in investing in countries where no double tax agreement exists between the country of the investor and the country in which they are investing. In this case, an intermediary company is established in a jurisdiction with a suitable treaty. For example, Cyprus has an extensive double tax treaty network with many Eastern European countries, and the use of Cypriot companies for inward investment into these countries provides a tax efficient conduit.

Both large companies and individuals regularly use offshore companies as mediators to hold investment portfolios, which may consist of stock, bonds, cash and a broad range of other investment products. Cash assets held by offshore companies earn deposit interest gross or can be placed in collective cash funds.

Intellectual property, including patents, certificates for computer software, trademarks and copyrights can be owned by or assigned to an offshore company. Upon acquisition of the rights, the offshore company can enter into license or franchise agreements with companies interested in using those rights. The income can be accumulated offshore, and taxation on royalties can be reduced by the commercial application of double tax treaties.

The ownership of real estate and land by an offshore company can often create tax advantages including the legal avoidance of capital gains inheritance and property transfer taxes. By structuring the financing correctly, the offshore company can reduce the effective level of withholding tax on rental income.

Offshore finance companies are set up for the purpose of inter-group treasury management. Interest payments from group companies may be subject to withholding tax, but these taxes differ from the usual corporation taxes. The interest paid can be a deductible charge for taxation purposes, thus consolidating interest payments in an offshore finance company provides a tax saving.

Many large companies establish their own offshore companies for the purpose of mixing dividends of subsidiaries and deriving maximum advantage from tax credits. In certain countries, foreign exchange losses are not deductible for tax purposes. For example, if an offshore finance subsidiary that has been set up suffers a foreign exchange loss and that subsidiary company is then liquidated, the investment should be a tax-deductible item for the parent company.

Another area where offshore finance companies are used is leasing, particularly where an offshore structure is rich in funds, which, if they are not invested, may be repatriated, or subject to high levels of corporate taxation. Offshore companies are often utilised for the purpose of acquiring foreign entities, international restructuring of corporations, real estate and other investments, and other corporate finance-related projects.

Many individuals engaged in providing services in construction, engineering, aviation, computer, finance, film and entertainment could achieve considerable tax savings via an offshore-based private company. The offshore company can contract with an individual to provide him/her with services outside his/her normal country of residence and personal income can be accumulated free from taxation in the offshore centre.

Individuals often use offshore companies as personal holding companies. Offshore companies are regularly used for inheritance purposes and to reduce probate expenses. Such companies can provide privacy and may save clients professional and other fees. To reduce risks to both corporations and individuals, it is very important to select a politically and economically stable corporate domicile.

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