Offshore Company

The terms “offshore business” and “offshore company” have no precise legal, tax or general business meaning. The term “offshore” usually refers to the place of physical location of a person, legal or natural person (i.e. overseas). This is geographical. We however use the terms offshore business and offshore company as terms or definitions used activities or structures in connection with matters such as the structuring of international business and family wealth management or personel and business tax planning. So it is not purely geographical, perhaps geographical, structural and activities.

In our usage, the term “offshore company” traditionally refers to a company incorporated in a jurisdiction or territory that offers at least the following advantages to its non-residents;

1. A separate but more favourable corporate legislation,
2. Favourable tax treatment,
3. Confidentiality only to its non-residents,
4. Tax minimisation vehicles like company or trust,
5. Total or partial exemption of taxes or duties

In addition to the term “offshore company” there are also other terms commonly used such as International Business Company or IBC, International Trading Company or ITC, Exempt Company, Limited Liability Company or LLC, Free Zone Company or FZC, Free Zone Enterprise or FZE, etc. Regardless of their names, they mostly share all or some of the above features. We therefore do not just look at the “label” but rather the contents.

Types of Offshore Companies

Typically, the our clients use the following type of companies for tax planning and international business;

Type 1: International Business Company, Business Company or International Business Company

Very low or zero tax offshore companies incorporated in jurisdictions often described as tax haven islands such as Labuan,  British Virgin Islands, Belize or the Seychelles or Brunei.

Type 2: Offshore Companies

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. For example:

Labuan has two types of companies, trading and non-trading. The non-trading company is a zero tax company which may be used more or less in the same manner with say BVI BC or Brunei IBC. The trading company, either used alone or in conjunction with a Malaysian domestic company is used as a tax planning vehicles to access Malaysia’s numerous DTT.

Mauritius has two types of company that are used for offshore business and international tax planning. The Mauritius GBCII Offshore Company pays zero tax and is effectively a tax haven company, similar in many respects to a BVI Company, whilst the Mauritius GBCI Company is tax resident and typically utilised for double tax treaty and international tax planning.

Hong Kong, although not typically regarded as a tax haven, has a favourable tax regime which effectively means that correctly structured, managed and administered Hong Kong Companies can be utilised for undertaking offshore business and international business without paying tax in Hong Kong provided that any profits arising are not made in Hong Kong. This type of tax regulation is known as "territorial taxation".

Type 3: The LLC or Limited Liability Company and the LLP or Limited Liability Partnership types of company

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. In some circumstances, if all the members or partners are non tax resident in the domicile of the LLC or LLP company and no business is undertaken in that country, neither the LLC or LLP company nor the members or partners will be subject to tax in the company's country of establishment. Such companies are said to be "fiscally transparent" and examples include US LLCs, the Isle of Man LLC and the UK LLP.

Companies incorporated in the many onshore countries which have tax regimes that are by statute tax advantageous for specific international purposes.

In fact, almost all countries offer tax regulations of one kind or another to encourage inward investment.

Type 4: Free Zone Company or FZC and Free Zone Enterprise or FZE

These are companies incorporated in a scheduled or gazetted economic concession zones where most of their activities are required to be conducted in the concession zones. FZC is meant for company with more than one shareholders and FZE is meant for a single shareholder company. The zones offer a lot of facilities normally catered for re-exporting and manufacturing business. These are ports, warehousing, factories, etc. Companies operating in these zones are required to obtained licences. The companies are in return given concessions in the form of total or partial tax and duties exemptions, cheaper utility tariff, more liberal immigration rules for attracting expatriates, one-stop processing and approving agencies, lease of office premises and state of the art communication facilities. These kind of companies are common in the UAE in the emirates of Dubai, Abu Dhabi, Sharjah, Ajman, Ras Al Khaimah, etc.

It should be reminded that these companies are not cheap to establish. Further, these companies are only suitable where substantial and on the ground business activities are to be conducted.

However, successful implementation of the above companies 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 myriad of other ever-changing tax regulation. Further, the availability of top class banking and financial services, competent professionals and state of the art communication all play important roles in deciding the success of their implementation.

Further, in today’s offshore world, the use of the above offshore companies may be combined with the use of specific tax advantageous onshore company or structures domiciled in high tax onshore countries as diverse as the UK, Portugal, Singapore, Greece, Belgium, Austria, Spain, Switzerland, Luxembourg and the Netherlands.

Benefits of Using Offshore Companies

Regardless of the above, the benefits and usages of using offshore companies as a conduit for business are numerous.

Reduced Tax: Most offshore companies are subjected to nil or low corporate tax. Undoubtedly this is one of the most sought after features. Provided that the tax law of one’s country of origin is carefully considered, the use of offshore companies can offer legitimate and significant tax advantage.

Confidentiality: Most offshore companies are shielded by some forms of confidentiality provisions. For example in most cases, and provided the business conducted is a legitimate one, it would be extremely difficult for a third party to inquire into the identity of the owner and the affair or management of an offshore company unless the owner itself consent or disclosure is obtained through a court’s order. This confidentiality feature not only shields the owner from unwanted publicity but also from preying eyes.

Conduct Mobile and Borderless Business: A lot of offshore companies are being used as conduits to conduct borderless and highly mobile business. For example financial advisory, consultancy or investment in the world exchanges.

Cost Saving: Due to this high mobility and with the expansion of virtually activities, often no real or significant physical presence is required. This offers significant cost advantage to using offshore companies.

Asset Protection: Correctly structured, offshore company and offshore trust may be used to enhance protection of assets. An offshore company has in-built confidentiality feature which makes tracing of ownership daunting if not impossible. Assets owned by an offshore company which in turn owns by a trust gives an extra assets protection features. The beneficial owner cease to be connect with his assets and achieves anonymity in relation to his assets.

Liberal Exchange Control Policy: Most offshore centres adopt very liberal exchange control policy which allows free remittance of profits and capital.

Access to Tax Treaties: Double tax treaty benefits may be derived by using companies from jurisdiction that have numerous Double Tax Treaty with other countries. The major benefit is that the Tax Treaty allows claims of tax relief that can significantly reduced withholding tax rates. Example us such jurisdictions are Mauritius, Labuan, Cyprus and the Netherlands Antilles.

Banking Privacy: Some jurisdictions notably Switzerland offers very significant banking privacy benefits. However, other major banking centres like Singapore and Hong Kong are well known and enormously popular.

The Search for Political Stability: There are many investors in the world who live in countries with less than desirable level of political and economics stability. High net worth persons from politically instable countries have often use offshore structures and centres as financial refuge. They take the precaution of transferring funds to offshore location where the funds can be deposited with an offshore bank and invested with greater security. If they invest using an offshore company as a vehicle they can avoid the risk of tax liability on death like estate duties.

Real Estate Holding: Offshore company is frequently interposed to own property to avoid inheritance tax and capital gain tax.

Other common commercial use of offshore companies

The principal commercial uses of offshore companies are many some of which are:

• Trading
• Investment
• Holding
• Financing
• Professional services or consultancy
• Patent, royalty and copyright holding
• Ship management and yacht owning
• Personal and corporate tax planning
• Banking, finance and treasury management companies
• Debt securities issuing companies
• International headquarters and administrative companies
• Brokerage and leasing companies
• Insurance, life insurance and reinsurance companies
• International shipping and air transport companies
• Trading companies
• International joint venture companies for property management
• Property holding and development companies