What is an offshore?
What is an offshore (offshore company)?
An offshore is more of an economic and geographic concept than a legal term; as of yet there is no legal definition for this phenomenon. It is a concept commonly used in tax planning to refer to companies incorporated in countries where they are fully exempt from local tax.
Normally, these companies do not have to file any accounts or tax returns, they are easy to administer and provide a high level of confidentiality, as the owner’s details are not public. However, tax exemption of an offshore company in the country of registration does not automatically mean exemption from tax in a country where the company actually conducts its business.
What is an offshore jurisdiction?
An offshore jurisdiction is a country whose laws grant exemption from tax and filing of accounts or tax returns to companies incorporated within its territory.
Most offshore jurisdictions are island states whose revenues mostly come from government fees payable upon registration of a company and its annual renewal. Offshore countries are located all over the world: in the Caribbean, the Indian Ocean, Southeast Asia and even Europe.
How many offshore zones are there in the world?
There is no single list of offshore zones. Several such lists have been drawn up by international organisations or authorities of a particular country based on various criteria. Each of these lists has its own purpose and application.
For example, there are three lists compiled by the international organisation OECD that divide countries based on the implementation of international tax disclosure standards. These standards stipulate the disclosure, on demand, of any tax information for the purposes of implementation of and compliance with domestic tax law. And this is irrespective of the domestic tax requirements or bank secrecy.
The first list includes forty jurisdictions that have fully implemented these standards. The second list comprises countries that have committed to these standards, but have not implemented them in full (32 countries). The third list of ‘uncommitted’ countries is currently empty.
How do these jurisdictions differ?
The offshore jurisdictions offering company formation for tax planning needs differ from each other in a number of aspects:
- reason for tax exemption (no tax provided by law, non-resident status of the company, tax applicable to income derived within these countries);
- ease of company administration (requirements for the directors and shareholders, requirements for share capital, costs associated with the formation, operation and maintenance of a company);
- reliability and professionalism of the registered agents who provide ongoing maintenance of the company;
- jurisdiction image (whether or not the jurisdiction is on any blacklist, complies with the requirements of the OECD, FATF etc, whether or not the details of company directors and shareholders are available to public);
- stable legislation.
Is it legal to use offshore companies?
The national law of most countries does not prohibit citizens from setting up legal entities abroad and thus become shareholders in overseas companies. Likewise, domestic companies are not prohibited from entering into civil law relations with overseas companies, but only if both the citizens and companies comply with national law.
This means the answer to the question: “Is it legal to use offshore companies?” will sound something like: “Yes, if they are used in accordance with national law”. An offshore company is an instrument that may bring benefit or harm, not by itself, but rather the way in which it is used.
Where and how can an offshore company be used?
The characteristics of offshore companies are as follows:
- they are exempt from tax in the country of incorporation;
- they are exempt from filing reports on their financial condition;
- they are ensured a high level of confidentiality: information about the internal structure of the company (details of directors, shareholders, and beneficial owners) are not disclosed to the authorities.
This is why such companies are particularly effective when used as:
- a holding company;
- a company to attract and make investments;
- a company to accumulate resources (including insurance premiums – captive and other insurance and re-insurance companies);
- a holder of copyrights and other intellectual property.
And, of course, the most common use – ordinary commercial activity associated with the import and export of goods.
Are there any business restrictions for offshore companies?
Citizens of most countries are normally not prohibited by national law from having shares in overseas companies. The laws of offshore jurisdictions, in turn, do not have any restrictions on nationality or tax residence of directors or shareholders. But an offshore company must comply with the laws of the country where it effectively conducts business.
For example, under a number of EU Directives, doing business in any EU country via an offshore company may be qualified as doing business via a permanent representative office with all the ensuing consequences and procedures. If certain types of business need to be licensed or obtain a special permit, then the offshore company will, of course, have to apply for this.
How to choose the most suitable offshore company?
When choosing a jurisdiction for an offshore company that would best suit your business needs, you should take into account:
- the tax and corporate law of the country of incorporation, the laws of the country of business, and international norms;
- the nature of the proposed business in terms of licensing in the country where the business will be conducted. For example, if the company proposes to conduct banking or insurance activities or become a professional trader on the securities market etc.
Needless to say, you should always think of the reasonable business benefit and economic feasibility of registering your own offshore. You should also keep in mind that the ‘reliability’ of the jurisdiction is often inversely proportionate to the level of confidentiality, and the high reputation of the jurisdiction will directly affect the costs of having a company there.
But first, it is better to determine what you need the company for and only then determine the level of confidentiality required as well as the costs for registration and annual upkeep of your corporation.
Do I have to travel to the offshore zone to incorporate a company?
The laws of most offshore countries do not require a director or shareholder to be present in order to set up a company, as its constitutive documents are signed by so called subscribers. Subscribers are normally employees of a registered agent. They apply to the relevant authority for incorporation of a company and appoint the initial director.
So, you do not have to fly over to the offshore zone, you simply have to make a request to a firm that offers these kinds of services in your home country and cooperates with registered agents worldwide.