Overview of Offshore CompaniesOverview of Offshore Companies

What is an offshore company? 

Generally, an offshore company is one that is incorporated, organized, formed, and/or governed outside the jurisdiction where its primary operations take place and where its owners are domiciled.

What are the typical requirements for registering an offshore company?

Must be formed from outside.  Generally, an offshore company must be formed from outside the offshore jurisdiction.

Cannot operate within the jurisdiction.  Generally, an offshore company may not “operate” within the jurisdiction of registration.

Payment of registration and renewal fees.  Generally, an offshore company must pay nominal registration and renewal fees (annually) as assessed by the offshore jurisdiction in question.

How are offshore companies typically taxed?

No tax in the offshore jurisdiction.  Normally an offshore company will not be taxed in the jurisdiction of registration.

Domestic taxes.  Obviously, the jurisdiction(s) wherein operations are conducted (muscle center); management decisions are made (nerve center); and where the ultimate beneficial owners reside, may levy taxes on an offshore company.

For example, a United States citizen who runs a British Virgin Islands company from her residence in Los Angeles will no doubt be subject to taxation in the United States (both federal and state).

What are the benefits of using an offshore company?

Tax savingsMany offshore jurisdictions will not impose taxes on international companies registered under their laws, other than nominal registration and renewal fees.  Such fees vary from jurisdiction to jurisdiction, but are not necessarily much higher than similar fees charged by secretaries of state in US state jurisdictions.

Asset protection from domestic creditors.  The laws of many foreign jurisdictions make it much more difficult for a court to pierce the company veil.  In many cases the governing law in an action will be the law where the company is chartered, rather than where the company is being sued.  Moreover, some jurisdictions require the actual appearance of plaintiffs within the offshore jurisdiction to litigate an action. When used in conjunction with an offshore asset protection trust, offshore companies can provide higher levels of protection.

Simplicity in administration and registration.  Except for regulated businesses, such as financial institutions and banks, many foreign jurisdictions make it relatively simple to set up and maintain foreign companies. With that said, the level of information required by the registrar of companies varies from jurisdiction to jurisdiction.

Increased privacy and anonymity.  Individuals can avoid unwanted publicity by owning property or other assets through an offshore company. By carrying out transactions in the name of a private offshore company, the name of the underlying owner may be kept private, since the company is a separate legal entity. In some jurisdictions it is even a crime for a banker to reveal your association with a bank account to an individual outside of the bank. In many offshore jurisdictions a company’s ownership records are not even available in any type of public record.  The Nevis LLC statute, for example, imposes a penalty of up to $10,000 or two years imprisonment on the registrar or his employees if they are convicted of disclosing private information obtained through their government office.  Domestic jurisdictions rarely protect owner’s privacy so well.

Different investment opportunities.  Funds accumulated through investment companies set up in offshore areas can be invested throughout the world, including in some global securities and other investment funds which are not available to citizens of the United States. Offshore jurisdictions are typically less invasive, potentially allowing for more aggressive and unrestrained business dealings and investment trade.

What are the disadvantages of using an offshore company?

Increased regulatory restrictions.  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 license. In reality this is no different from transacting such business domestically since the majority of banks have offshore operations and the majority of the world’s insurance companies are offshore captive insurance companies.

Heightened due diligence in financial management.  Due diligence in reputable offshore centers tends to be more strict than most onshore areas. For example, to comply with relevant anti-money laundering regulations in opening a bank account in the name of an offshore company, the institution will normally require documents verifying the identity of account signers and the notarization of their signatures.  Sometimes they even may require professional reference letters from an attorney, accountant and/or other professional service provider who has known the signer.

Negative stigma associated with offshore tax havens.  Certain countries have legislation establishing “anti-tax haven” rules and policies making it more difficult to conduct business through an offshore company. For example, regulations in France prohibit using offshore companies as bond issuing vehicles. Sometimes offshore companies might wrongly be perceived as unethical, and established for laundering money, promoting terrorism or carrying out other fraudulent designs.  With that said, public perception has greatly improved in recent years largely due to improved regulation, changes in commercial practices, and increased global business dealings.

Difficulty in death and incapacity.  Where an owner of an offshore company dies, it is usually necessary to have the owner’s Will admitted to probate in the offshore jurisdiction as well as in the domestic jurisdiction.  This can add to cost, delay and inconvenience in administering the deceased’s estate.  Similar legal challenges might arise in governing the offshore company in the event of an owner becoming incapacitated.  Just as with domestic companies, owning offshore company interests through inter vivos trust agreements can alleviate many of these concerns.

Which jurisdiction should be used when establishing an offshore company?

Political stability.  Arguably the most important consideration for those selecting an offshore jurisdiction relates to both political and economic stability.  Without such stability companies cannot be governed with much confidence and financial security.  Good offshore jurisdictions should not be exposed to volatile political movement or the likelihood of government takeover or invasion. One bad example was the country of Liberia, whose offshore company laws were made useless through political turmoil and military conflict.

Economic strength.  A similarly important factor to consider is the offshore jurisdiction’s economic strength and stability. Good offshore jurisdictions have transparent economic policies, stable currencies, and few restrictions on investment and international trade.

Flexible, modern, well understood legislation.  Another very important factor is that the legislation of the offshore jurisdiction be flexible, up to date, and well understood.  With that being said, the offshore company legislation of many jurisdictions is practically identical to each other. The best specific example of this is that many foreign jurisdictions have taken the International Business Companies (IBC) Act of the British Virgin Islands (BVI) and adopted it with hardly any change. The legislation of relatively new offshore centers tends to be well thought out, having remedied shortfalls of earlier laws in other more mature jurisdictions. The trade off of course would be that other more mature offshore jurisdictions would tend to have more predictability in the interpretation of their laws than in the newly-born offshore jurisdictions.

Reliable and independent judicial system.  Successful offshore company jurisdictions must have reliable, independent judiciary systems, with proven records of defending company interests, especially against the claims coming from outside such jurisdictions.  The judicial systems of such offshore jurisdictions should protect economic liberties by the rule of law.

Ease of formation and administration.  Offshore jurisdictions should have laws that make the formation and ongoing administration of their offshore companies relatively simple.  For example, some jurisdictions require the naming of a minimum of two or three Directors while others require just one.  In this example, choosing a system where more than one director is required can make your corporate structure much more cumbersome and difficult to get things done while observing the required legal formalities.

David M. Grant