Legitimate Reasons for Forming an Offshore Company
A few decades ago, several insular states that lacked both natural resources and skilled workers used to offer attractive conditions to foreigners registering business companies on their territories.
This was a way for them to attract some money from abroad. A considerable portion of those states were former British colonies and their financial difficulties were quite understandable.
When a colony becomes an independent country, it loses support from its ‘parent state’ and has to make money on its own. Newly independent countries located on small islands became known as offshore zones.
Offshore zones used to offer foreign investors two valuable incentives. First, the foreigner registering an offshore company was exempt from many local taxes, sometimes even from all local taxes.
It did not mean that maintaining an offshore company cost nothing at all: instead of taxes, the company owner had to pay an annual company registration fee or a state duty.
However, these fees and duties were rather low and thus the offshore company maintenance costs were quite affordable.
The second important advantage that offshore zones offered to foreign entrepreneurs was a high level of privacy of their business operations as well as confidentiality of the company ownership information.
If you had an offshore company in the 1960s or 1970s, you could easily conduct business operations in secrecy. Nobody would know that you had made a deal and obtained a profit.
Offshore companies didn’t have to do any reporting. Lack of the reporting requirement was justified by lack of taxes: if the company is not liable to taxes in the jurisdiction, why should it file any financial reports?
This may sound reasonable but if you don’t have to report your earnings, you might be tempted to skip some taxes in the jurisdiction where they are payable.
And some international businesspeople did use their offshore-registered companies to ‘economize’ on taxes. Tax avoidance is illegal but it is somewhat more tolerable than two other purposes that offshore companies were used for in the past days.
First, offshore company formation was popular with those who wanted to park their illegally earned capitals in offshore jurisdictions. Drug traffickers in particular were attracted to such offshore zones as Belize, for example.
Now, money laundering is a much more serious offense than tax evasion is and this already made the international community uneasy about offshores.
However, things got even worse when a few offshore-registered companies were found to be used for terrorism financing. Money earned in an illegal way, money laundered in an offshore jurisdiction, money transferred to terrorist organizations.
Not surprisingly, the use of offshore zones for this purpose could not be tolerated and the international community cracked down on offshores.
Collecting less in taxes may be not so terrible for a national government but losing people’s lives to terrorists certainly is.
Therefore, an international de-offshorization campaign was started at the end of the 20th century. The European and the North American authorities have been especially diligent in applying great pressure to offshore countries in an attempt to make them comply.
At some point, banks in all onshore countries stopped working with offshore companies: they stopped accepting payments from their accounts, making payments to their accounts, and taking offshore companies onboard. As a result, the international anti-offshore efforts have not been wasted.
Offshore secrecy is gone. Full stop. It is not possible to conceal the identity of the offshore company’s ultimate beneficial owner any longer. Most offshore countries now have public registers of company owners.
Some of them are trying to resist the international pressure but it’s hard. The Bahamas, for instance, maintain a private (not public) company owners’ register but the information from it will be submitted to the authorities of Great Britain or a foreign country anyway if they make an official request.
Nevis doesn’t have a public register yet but the local administration is currently preparing one so it’s going to be available soon.
So today, an offshore company means nothing else but a company registered in a foreign country. It doesn’t mean an opportunity to evade taxes or to legalize a criminal capital. However, even though registering an offshore company has become less advantageous, it hasn’t become worthless.
You can still reap some benefits if you register a company in an offshore jurisdiction. The essential condition for registering an offshore company is that all your prospective business operations should be legal.
So what can an offshore company be used for these days? First, you have certainly heard about asset diversification.
This concept, however, amounts to more than just diversifying your portfolio by purchasing stock of companies engaged in various spheres of business. Geographical asset diversification is not less important in the global world.
Second, you can still save on taxes in legal ways if you register an offshore company. The small island states traditionally referred to as offshore zones have been able to preserve part of the benefits that they can offer to foreign investors.
For instance, many offshore countries do not levy the capital gains tax or the gift tax. So registering an offshore company might be an opportunity to consider if you are planning to gain some capital or transfer property to somebody by means of a gift.
Third, an offshore-registered company can bring you some investment opportunities that you don’t have access to if your company is registered in your home country.
Joint investment projects often have restrictions on the participants’ nationalities. Thus, you may want to register an offshore company for the sole reason of joining an international investment project.
Fourth, an offshore company can give you access to some offshore banking opportunities. Opening a corporate bank account with a major bank is still problematic for an offshore company but other options are readily available.
First, there are efficient offshore banks that will cooperate with offshore companies. Second, there are payment service providers that will take offshore companies onboard too.
There are other reasons why you may want to register an offshore company but you have to be a law-abiding businessperson in all cases.