An offshore corporation or an offshore company can mean two very distinct things, namely:
- A company or even a corporate entity which takes part in offshore business services or offshore manufacturing, or
- A legal entity such as a corporation or a company which has either been created or registered in either a tax haven or an offshore financial center.
This article aims to deal with the latter description or definition of an offshore company.
Companies located in offshore jurisdictions
There has always been significant debate regarding which jurisdiction can be regarded as offshore. Traditionally, countries such as the Cayman Islands, British Virgin Islands and Bermuda have always been classified as offshore jurisdictions and hence, companies formed in these countries are considered to be offshore companies. Meanwhile, there are also some countries such as Hong Kong and Singapore which are considered to be â€˜mid-shoreâ€™ jurisdictions, boasting large financial centers but without zero tax regimes.
The term â€˜companyâ€™ in â€˜offshore companyâ€™, can be applied to any sort of artificial corporate or entity, which includes not just traditional companies but also partnerships, offshore trusts, limited partnerships and limited liability companies as well.
Classification of offshore companies
Traditionally, offshore companies are generally divided in two categories. The first category relates to companies which have been exempt from taxation in the jurisdiction only if they do not take part in business with the residents in that jurisdiction.
On the other hand, there are countries which have tax regimes which also attempt to achieve the same result; companies are exempt from tax if they carry out their operations overseas while no repatriation takes place as well.
Characteristics of offshore companies
Even though there are a myriad of differences from offshore company to offshore company, which are generally dependent on the law applicable in the jurisdiction, there are some binding characteristics as well, some of which include:
- They are traditionally associated with tax exemptions in their home jurisdiction.
- The regime will be designed in a manner which will promote flexibility in business.
- The regulations related to the activities of the company or the corporate will generally be more relaxed as compared to regulations in a well-developed or first world company.
Of course, it is pertinent to remember that not being taxed at home does not mean that the company will also be exempt from taxes abroad which is generally where most of its activities will be carried out. For example, Michael Kors Holding Limited has been established in the British Virgin Islands but is susceptible to tax in the US, where it is listed on the stock exchange as well.
Another characteristic generally associated with offshore companies is the fact that little to no data is available to the public. This may vary from one jurisdiction to another. While on one end, there is little to no data available regarding companies in the Cayman Islands, annual returns are filed along with details related to directors, annual accounts and shareholders as well. Of course, even in countries where there is little data available publically, law enforcement agencies can, in special circumstances, access relevant data and sometimes, even specific individuals.
Often, offshore jurisdictions will remove regulations such as financial assistance rules and thin capitalization rules as well. Furthermore, many offshore jurisdictions have also made laws, regarding capital maintenance and restrictions on dividend payment, less stringent in order to encourage offshore companies.
Uses of offshore companies
There are a variety of uses associated with offshore companies, including both private and commercial uses. While some of the uses may be economically beneficial and legal, others may cause harm and may even be illegal.
The media often raises allegations regarding the alleged illegal activities of offshore companies, which include tax evasion, money laundering and fraud amongst others. Offshore companies are also generally associated with various commercial transactions with generic companies, listing vehicles and even joint ventures. Offshore companies are also associated with private wealth and are often utilized in order to reduce taxes and increase privacy.
In fact, the involvement of offshore companies in order to reduce the amount of taxes paid has gained notoriety in recent years, leading to several companies abandoning their offshore branches as a result of protests and campaigning asking for such companies to pay their fair portion of government taxes.
As mentioned earlier, details regarding the data of an offshore company are often hard to attain due to offshore companies often being established precisely to increase privacy related to individuals or transactions.
The more legitimate uses associated with offshore companies include financing special purpose companies, holding companies, joint ventures and stock market listing vehicles.
Other uses of offshore companies include being used in investment funds as well as private wealth holding vehicles.
Benefits of offshore companies
While some of the benefits regarding offshore companies, such as the reduction in taxes paid, has been discussed earlier on, there are also further benefits associated with offshore companies which include:
- Offshore companies are often protected from having to divulge information relating to their directors as well as shareholders, offering a high degree of confidentiality.
- Due to reduced legal obligations, the needs for an office or extra staff are greatly reduced, hence allowing for reduced costs.
- If someone has international business interests, an offshore company can often prove to be integral for the holding of assets, including, real estate investments and intellectual property amongst others.
- The process of setting up offshore companies is relatively simple and convenient as well. This is despite the increasing regulations and measures being taken with regards to the prevention of money laundering and terrorist activities. Hence, setting up offshore companies can be an inexpensive and effective process.
- There is generally little capital required for registering an offshore company as compared to registering an onshore company. In fact, in some places, there is actually no capital required to register an offshore company. Hence, if you have budget constraints, establishing an offshore company may in fact turn out to be beneficial for you over a period of time.