The terms “offshore business” and “offshore company” have no precise legal, tax or general business meaning. The term “offshore” usually refers to the physical location of the person using the word. For example, if A lives in India, any place outside of India is “offshore” to him.

In the context of ‘offshore business’ and ‘offshore company’ the words refer to matters relating to the structuring of international business, family wealth management, asset protection and tax planning. Specifically, the term “offshore companies” traditionally refers to companies incorporated in offshore jurisdictions. Such jurisdictions usually offer all or any combinations of the following;

i)      separate but more favourable corporate legislation to non-residents,

ii)     favourable tax treatment for business activities with non-residents;

iii)    confidentiality treatment for offshore companies;

iv)    government support and encouragement;

v)     “ring fencing” or the prohibition of business dealings between domestic companies and offshore entities;

vi)    liberal exchange control policy;

vii)  availability of tax minimization vehicles;

viii) strong or majority reliance on financial services

A few examples of such jurisdictions are Labuan, Mauritius, Brunei, British Virgin Islands, Bermuda, Jersey and the Isle of Man.

In addition to “offshore companies” incorporated in these jurisdictions, there are also entities popularly known as “International Business Companies” or “IBC”; “International Trading Companies” or “ITC”; “Exempt Companies”; “Limited Liability Companies” or “LLC”, etc. Regardless of their descriptions, these companies usually share all or some of the above benefits.. However it should be noted that the traditional definition of offshore companies is no longer applicable. For example, companies incorporated in the American states like Delaware, Nevada, Wyoming, etc. where none of the above features seem to be offered.

Types of offshore companies

Typically, the following types of companies are used for tax planning and international business;

1) International Business Companies or IBCs[1],

These are very low or zero tax offshore companies incorporated in jurisdictions often described as tax haven islands such as the British Virgin Islands, Belize, Bermuda, Bahamas, Nauru and the Seychelles.

2) Offshore companies

This traditionally refers to companies incorporated in jurisdictions which offer both offshore companies and onshore companies but the offshore companies may benefit from favourable tax and corporate regimes. For example, Labuan has two types of companies, namely local “Sdn Bhd” companies and “Labuan offshore companies”. The “Labuan offshore companies” enjoy specific tax, regulatory and confidentiality advantages over the “Sdn Bhd” companies. Fiscally, the Labuan offshore company may be categorized as either offshore company carrying on an offshore business activity which is an offshore trading activity or an offshore company carrying on offshore business activity which is an offshore non-trading activity. The former, either alone or in conjunction with a Malaysian domestic company is used as a tax planning vehicle to access Malaysia’s numerous Double Taxation Treaties. The latter is a zero tax company which may be used more or less in the same manner as the Business Company in BVI or the Brunei IBC.

Mauritius has two types of companies that are used for offshore business and international tax planning. The Mauritius Global Business Company II pays zero tax and is effectively a tax haven company, similar in many respects to a BVI Company, while the Mauritius Global Business Company I is tax resident and typically utilised for double tax treaty and international tax planning advantages.

3) Limited Liability Company (LLC) and the Limited Liability Partnership (LLP).

LLCs and LLPs are hybrid companies which 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 respective lands. In most cases, if all the members or partners of LLCs and LLPs are non tax resident in the domicile of the LLCs or LLPs and no business is conducted in that country, neither the LLCs or LLPs nor members or partners will be taxed in the company's country of establishment. Such companies are said to be "fiscally transparent" and examples include the LLCs in the U.S. states of Delaware or Nevada, LLCs in the Isle of Man and LLPs in the United Kingdom.

4) Onshore company[2]

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 to conduct 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".

While almost all countries offer tax regulations of one kind or another to encourage inward investment, successful implementation of such companies is dependent on a wide variety of issues. Such issues are anti-avoidance provisions, double tax avoidance, controlled foreign company, management and control tests, transfer pricing, thin capitalisation, participation exemptions, capital gains tax and a myriad of other ever-changing tax regulation.

The above issues are often complicated, requiring cross-border tax planning knowledge and experience. Expert implementation is certainly required to create structures domiciled in high tax, onshore countries as diverse as the UK, Portugal, Singapore, Greece, Belgium, Austria, Spain, Switzerland, Luxembourg and the Netherlands.