Accounts, Taxes, Audit

Does an offshore company have to file annual reports?

Offshore jurisdictions do not require companies to submit annual reports to the authorities in the country of incorporation (no financial statements, no tax returns, and no consolidated statements). In order to keep a company going and to comply with the laws all the company needs to do is to pay government fees and duties to the country’s budget. Figuratively speaking, payment of these fees replaces the company’s duty to pay taxes in the country of incorporation.

However, if an offshore company conducts any business on the territory of a foreign state, the company must abide by the laws of that state and file all necessary reports with the local authorities. This situation primarily occurs when a company sets up a branch in another country. In that case the company must be registered with the local fiscal authorities and pay corresponding taxes to the country’s budget.

Are there any fines for non-filing or late filing of the accounts?

Since the laws of the majority of offshore countries do not require submission of any kind of reports or accounts, there are, naturally, no non-filing penalties.

In offshore countries, where filing of accounts is prescribed by the law, as well as in onshore jurisdictions, non-filing or late filing of accounts to the corresponding authorities will incur penalties for a company. The amount and the procedure of levying and charging of such penalties depend on the laws of the country of incorporation.

When is it time for a company to go through annual audit?

The majority of offshore companies do not have to have their accounts audited. This duty is imposed upon the companies incorporated in onshore jurisdictions, such as Cyprus, the UK, the Netherlands etc.

Hong Kong is the only offshore jurisdiction where the local laws require that all the companies undergo annual audit and submit accounts to the Inland Revenue Department.

Each country has its own periods for filing audited accounts. In Hong Kong, for example, newly registered companies must submit their first returns within eighteen months from the date of incorporation. In order to avoid penalties, a tax return must be filed with the IR Department within a month from its completion.

What is a Double Taxation Avoidance Agreement and how to use it?

Double Taxation Avoidance Agreements (DTAA’s) are international government-to-government agreements which serve to avoid unlimited taxation on the same income in multiple countries. Such agreements are usually made to encourage cross-border economic activities.

You should bear in mind, however, that the availability of such agreements is limited (they are available to the residents of the treaty countries) and that DTAAs provide relief from certain, clearly-defined types of tax only.
As a rule, offshore companies, or companies enjoying preferential tax treatment, may not benefit from DTAA’s.

So, preferential treatment under a DTAA is available to companies incorporated onshore (say, in Cyprus, in the UK, the Netherlands etc.) and with respect to the so called ‘direct taxes’ only: income tax, capital gains tax, property tax. The treaties do not make provisions for ‘indirect taxation’, such as VAT.

In order to claim benefits under a DTAA, an onshore company must obtain a certificate issued by tax authorities in the country of its incorporation, confirming that the company is indeed a tax resident of that country.

How vast is the network of Double Taxation Avoidance Agreements?

To date, more than one thousand treaties, conventions and agreements on avoiding double taxation have been concluded worldwide and this number is constantly increasing. Developed countries take the lead in the number of treaties made, thus providing for the preferential tax treatment of both national and foreign businesses in regard to their overseas activities.

A wide network of DTAAs has been created by such countries as Cyprus, Switzerland, the Netherlands, the UK etc. This network has been used extensively by businesses in many countries for tax planning purposes. Governments, in their turn, take measures to prevent improper use of DTAAs (so called ‘treaty shopping’).

The network of tax treaties made by offshore territories is far less extensive. It is usually one or several tax treaties with the country of which an offshore country was a dependent territory and with which the offshore country maintained strong economic relations.

What if an offshore and a local company are associated (affiliated)?

According to the OECD Model Tax Convention, “where an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State”, and “their commercial or financial relations differ from those which would be made between independent enterprises”, such enterprises are referred to as associated (affiliated) companies.

DTAAs, especially those built upon the Model Convention, stipulate that “any profits which would have accrued to one of the enterprises, but have not so accrued”, in view of the abovementioned relations, “shall be included in the profits of that enterprise and taxed accordingly”.

Thus, due to “close relations” between a local and an offshore company, the tax imposed upon any of them may be revised and some additional tax, as well as fines and penalties, may be charged.