Onshore vs Offshore company: What are the differences?

If your business is growing domestically and internationally, then understanding the difference between onshore companies and offshore companies is important as it may affect your decisions on how to trade globally or in different countries.

Running an onshore company means that your business activities, whether that's running a company or holding assets and investments, takes place in your resident country. Setting up an offshore company means that you undertake these business activities in another country or jurisdiction.

In this blog we look at the difference between an onshore company and an offshore company and the advantages and disadvantages of both options.

Difference between onshore and offshore Companies

An onshore company is a company that is incorporated in the same country that you are a resident. For example, if you live and reside in the UK, your onshore business will be a UK company and will be subject to UK regulations.

An offshore company is a legal entity incorporated in a jurisdiction outside of the owners home country.

Onshore companies are often set up in countries with strong financial markets, whereas offshore companies are often set up for cost savings and tax benefits, so set up in countries that offer lower tax regimes, lower cost of living or simpler company regulations.

Onshore company advantages

There are attractive advantages to running an onshore company in the UK included:

• Simple incorporation process.
• Potential for easier rules and regulations.
• Preferential tax options.
• Ease of hiring employees with the availability of skilled talent and labour.
• Quality of infrastructure.
• No time zone differences.
• No currency issues or fluctuations.
• Potential for less cultural differences.

Onshore company disadvantages

• Simple incorporation process.
• Higher compliance costs for UK companies compared to other countries.
• Higher tax compared to some other countries.
• Higher staffing costs (with higher cost of living and minimum wage legislation in UK).
• Expensive property costs.
• Stricter regulations.
• Less privacy.

Offshore companies' advantages

There can be multiple reasons for individuals to form an offshore company and you can achieve numerous advantages from incorporating a company in another jurisdiction overseas.

Low taxation/favourable tax benefits

In many countries, offshore jurisdictions provide special taxation to non-resident companies. 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.

Where the company is engaged in international trade, it can be incorporated in a country where benefits can be claimed under a double taxation agreement therefore reducing or avoiding taxation in the country in which the trade is conducted.

However, for UK permanent tax residents setting up an overseas company, tax advantages are decreasing due to increased anti-avoidance legislation, making the company more transparent for tax purposes so that the individual is taxed on the company’s profits. In addition, where overseas companies are controlled and managed from the UK then they are generally treated as UK resident, therefore fully subject to UK tax. You should seek professional UK tax advice from accountants such as dns accountants before setting up and offshore company.

Payroll savings

Individuals employed in an offshore company may be able to be paid less than those in the UK, due to lower living costs and no requirement to comply with UK minimum wage regulations. Hiring fees can also often be substantially reduced in many countries, compared to the UK.

Confidentiality

A higher level of privacy can be achieved as the disclosures required in many countries, are less rigorous than the UK.

Cheaper running costs

Often costs such as property, admin, and compliance reporting requirements are less in other countries than the UK. This means that the ongoing costs of running and maintaining a company offshore can be lower.

Simple reporting requirements

In order to attract more foreign investments, offshore jurisdictions create simplified laws and less bureaucratic red-tape to attract foreign investment. Some typical policies include no need for an audit or less strict financial reporting.

Asset Protection

A separate entity provides a layer of protection as it can separate you and your UK from your assets.

Legal Protection

Having a separate entity in another company can offer greater legal protection. The offshore company will be governed by a separate legal system and set of laws. This helps to protect some companies from lawsuits as well as protect their assets in legal disputes.

Investment returns

Company funds can be invested in offshore banks or investment vehicles, these could offer higher investment returns paid either free of tax or with lower tax.

Find out more about benefits of offshore company formation here.

Offshore company disadvantages

There can also be several potential disadvantages associated with offshore companies. These will depend on specific circumstances of the individuals, companies and countries involved.

Offshore fees and regulations

Normally, offshore companies are subject to fees on an annual basis. In order to be qualified as a legal offshore company, the company must also satisfy certain requirements of which its business activities should not fall into some “restricted” categories for conducting business as per the rules of the offshore jurisdiction.

Proving ownership

As anonymity is an advantage that comes with offshore companies, it can also cause some problems to all the beneficial owners. Because of the absence of public registers, proving ownership of an offshore company can sometimes be difficult.

Remitting income back to the UK

One of the main drawbacks is in the area of remittance and distribution of the assets and income of the offshore company. Once your assets and income reach the resident country, they are all subject to taxes. This can eliminate the benefits of a favourable tax system that an offshore jurisdiction provides.

Stability within the offshore jurisdiction

Economic and political stability in many foreign countries are less predictable than others, meaning increased risk from potential economic and political instability. It can therefore be beneficial to look at setting up an offshore business in more developed economies and developed countries that offer better political and economic stability.

Other disadvantages

Physical distance, lack of knowledge of local culture, government requirements, and information on the local market can undoubtedly increase the risks of setting up an offshore business in some countries.

Summary

In today's global business world, offshore companies have a place in many business owners strategic planning. They can offer cost savings and potential tax benefits. They can also aid individuals in increasing, preserving and protecting their wealth in a low tax environment. Offshore companies are capable of providing a degree of anonymity for their owners and can provide simpler corporate regulations.

However, this does not mean that offshore company formations are advantageous over incorporation here in the UK, it will depend on individual circumstances and your own specific financial environment.

The ownership of offshore and onshore companies are not mutually exclusive and many individuals own both an onshore and offshore company or indeed hold multiple onshore and offshore companies.

Your individual circumstances, objectives and financial status will ultimately determine your decision consider conducting business offshore.

For more help and advice on offshore company formation, offshore benefits and disadvantages, contact dns accountants today on 03300 886 686, or email on enquiry@dnsaccountants.co.uk.

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.