What are the benefits of an offshore company formation?

Setting up a company in another country can be quite easy.

There are many countries that offer benefits to businesses that are looking to set up an offshore entity. Some of the benefits of an offshore company include tax benefits, privacy and confidentiality, legal protection and asset protection.

In this blog we will look at what an offshore company is, places to consider for maximum tax benefits and also offshore incorporation and set up.

What is an offshore company?

An offshore company is a company that is established and registered in a different country to your country of residence.

An offshore company is an entity that conducts all of its transactions outside the borders where it is incorporated. Because it is owned and exists as a non-resident entity, it is not liable to local taxation, as all of its financial transactions are made outside the boundaries of the jurisdiction where it is located.

How does an offshore company work?

An offshore company works as a corporate entity that trades, holds assets and undertakes business activities legally outside of the jurisdiction where it is incorporated. Many countries offer tax benefits to companies from other countries that move to or are incorporated within the jurisdiction.

Companies that are formed in these offshore jurisdictions are non-resident because they do not conduct any financial transactions within their borders and are owned by a non-resident.

How to set up an offshore company

If you want to set up an offshore company, you should use an incorporation agent, to ensure the paperwork is completed correctly and you get the best advice. The actual procedure of setting up an offshore entity can vary by country, so check with the incorporation agent.

Setting up an offshore company typically involves the following:

1. Choose the country you wish to set up in.
2. Think about the legal entity you want to form. Many offshore jurisdictions will offer different types of company types for example exempt companies, non-resident companies, holding companies, LLPs and LLCs. As with the UK, the difference between these types of entities are normally around filing requirements and potentially the fees involved in running and filing the appropriate returns to the tax authorities.
3. Choose your company name. Check with your formation agent, to ensure you dont break any restrictions in the country you are forming the company in around protected company names.
4. Create the articles of association - check with your formation agent, whether these need to be standard or bespoke.
5. Consider share capital and funding.
6. Consider the types of shares the company will issue. This could be bearer shares, preference shares, Class A & B shares. Again, seek advice.
7. Decide on the directors of the company. You may use nominees as directors or an offshore trust. Seek advice.

The benefits of an offshore company

There can be offshore company benefits of offshore companies. We take a look at these below. Typical advantages are tax savings and use of tax treaties, financial privacy and asset protection, easy incorporation, and cost effective management. Lets look at these in more detail.

Tax savings

One of the biggest benefits of having an offshore corporation is tax advantages offered by various countries. Most countries that act as offshore financial centres offer special taxation status to non-resident companies that are incorporated in the country.

Generally offshore companies are tax exempt or pay little tax in the country of incorporation. For example, many owners use offshore companies as holding companies, to receive dividends.

Offshore business structures may hold a special status that makes them non liable to local domestic taxes or are required to pay taxes on their worldwide income, capital gains or income tax.

If your offshore company is importing or exporting within an offshore location, for example, receiving orders directly from the customer and the purchased goods being sent from the manufacturer. This means the profit from the trade may be either tax free or low tax.

For UK residents, provided no amounts are remitted to the United Kingdom, the capital and income earned by the offshore company remain tax-free.

Tax obligations usually are determined by the country where you have permanent residency in and as beneficial owners of a company you would be liable to be taxed in your country of residence. However, many of these countries appeal to shareholders and directors because of their low administration costs.

Tax obligations vary greatly from country to country so its important to make sure what your tax obligations are before choosing a jurisdiction.

Do offshore companies pay UK corporation tax?

Offshore companies are only subject to UK tax on their profits arising in the UK. Even UK source dividends paid to an overseas company should be free of tax.

Privacy

One of the big reasons people use an offshore entity is that when you use an offshore corporate structure it separates you from your business as well as assets and liabilities. As an entity, it takes on a separate legal identity separate from those who own it.

Financial transactions and business dealings would then be carried through the name of the business rather than a single individual. This can offer financial protection for individuals.

Confidentiality

The need for public disclosure of information can be much lighter for offshore companies than it is in the UK. In many offshore countries few or no records have to be maintained.

Some offshore jurisdictions dont require the disclosure of the Company Directors and Shareholders on public records, therefore keeping the identity of individuals confidential.

In jurisdictions that do require some public information, you can potentially keep the identity of individuals in your offshore company confidential by using nominee Directors, Shareholder and Secretaries.

Most changes made within the offshore company do not have to be reported or disclosed to a centrally maintained register such as Companies House which exists in the UK.

Asset protection

Separating your assets from you as an individual gives you a layer of protection if you are targeted with legal action. Shielding your assets with an offshore structure, makes it much more difficult to tie you to your assets.

Whenever you have an investment or assets, it is important that they remain distinct from you as an individual. This will ensure that they will not be liable to any of the debts that you incur.

Legal Protection

An offshore company separates you from the business entity and because the offshore structure is located in an overseas jurisdiction there is a separate legal system and set of laws that help protect the company should it become targeted with legal action.

Corporate regulations

Many offshore jurisdictions have simplified corporate laws in an effort to attract foreign companies and individuals by simplifying regulations and by lowering the amount of red-tape.

Some of these simplified policies include areas such as simplified auditing and financial reporting requirements and the need for company meetings or company secretaries.

Business perception

If you are a small company and your trading premises are not ideal, incorporating offshore may provide a solution to this problem.

Also, having an overseas / offshore company can lift the perception of your business by giving the impression that you have a business that is located overseas and is larger than it actually is. This may add credibility to your company for trading internationally.

Is operating an offshore company considered tax evasion?

In most European countries, the authorities are attempting to introduce legislation that will curtail tax evasion and money laundering by offshore companies. The main focus of the legislation is requiring companies to demonstrate beyond a reasonable doubt that their underlying activities are truly carried out in their respective offshore centres and that these are normal business activities.

There is still risk being included in HMRC rules here in the UK. For example, if you have a company registered outside the UK and you work as a contractor, you will not be exempt or protected as an individual from UK tax legislation for IR35 (taxation of contractors). This is because it doesn’t matter where a company is incorporated when a contractor is subject to IR35 rules here in the UK.

You should also understand when setting up an offshore company that HMRC have the right to impose retrospective legislation to declare a tax-evasion scheme that was legal in the past as no longer legal now. So, seek professional tax advice before setting up an offshore company.

Offshore companies owning property

Advantages for offshore property ownership may include tax savings, including inheritance tax, income tax, capital gains tax and much more. However, take professional advice before setting up an offshore company for property ownership.

Renowned offshore locations

The following countries are seen as good locations to set up offshore companies:

• The British Virgin Islands.
• Bahamas.
• Hong Kong.
• Singapore.
• Cayman Islands.
• Seychelles.
• Panama.
• Belize.
• Nevis.

Summary

There are a number of benefits of offshore companies as opposed to standard UK limited companies. Offshore companies are capable of providing a degree of anonymity towards their owners and can provide tax savings. Other benefits are around corporate regulations and business perception.

However, this doesnt mean that offshore company formations are better or superior to incorporation here in the UK, it will depend on individual circumstances. You should seek professional advice to consider each option.

The ownership of both an offshore and a UK company are not mutually exclusive and many individuals who own an offshore business also own and control one or more UK incorporated entities.

If you are looking to do business offshore or want advice on corporate structures, then speak to our incorporation and tax specialists to seek bespoke advice for you and your company.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.