Uses of Offshore Companies


Shareholding structure

Offshore corporations, like onshore corporations, use shares to reflect their ownership. Shares are units representing a participation of a person in the company. Taking (or buying) a share in a company means simply that a person has agreed to invest some of his personal money or assets into the company. When he has done so, he acquires the right to participate in the profits and the decision-making process of that company in proportion to his share as in the total amount of the capital of the company.

There are a few different types of capital.

At first, there is the authorized share capital. This is the total amount of money that the company has been allowed (by its Memorandum) to take in from the prospective shareholders in return for giving out its shares. In theory the authorized capital is supposed to be the total amount of money that the principals of the company have decided to be enough to get the company`s business going until the company makes its own revenue. Most jurisdictions have a minimum required authorized share capital, and the share capital selected usually affects the government fees payable.

At this time and age the offshore tax-haven jurisdictions have been first to recognize that some new businesses might not need any capital at all, for instance, if they have a super-original business idea. At the same time, other companies may need to be highly capitalized for a cash-intensive project. A comprehensive International Business Companies Act should accommodate both of these cases easily and without discrimination.

Then there is the subscribed capital. This is the amount of money that the prospective shareholders actually agree to invest in return for their shares. The subscribed capital can quite often be less than the authorised capital. This would simply mean that the company has actually issued (or sold) only a part of its shares to the shareholders, whereby the other part remains unissued. Thus, if company XYZ has an authorized share capital of 50,000 shares and Joe agrees to take 1000 shares, then the company`s subscribed share capital is 1000 shares. Joe would own 100 percent of the company. If the company also issues 1000 shares to Mary, the company`s subscribed share capital is 2000, and each of Joe and Mary would own 50 percent of the company (1000 shares each of the total issued 2000).

There is also the matter of the paid-up capital. The subscribed capital becomes paid-up capital when the subscriber (the prospective shareholder) actually honors his part of the deal and pays for his shares to the company. In the most trivial case it would simply mean that the shareholder has made a payment into the company. Usually, only from this moment the shareholder acquires the right to take part in the decision-making process of the company, that is, to vote in the shareholders meeting. The dependence of the voting powers on the fact of paying-up for the shares would usually be set forth in the Articles of Association of a company.

There is a substantial difference in how the various aspects of share capital are treated in most high-tax countries and in the offshore financial centres. In the "first world" countries, especially in Europe, the legal requirements for minimum authorised, subscribed and paid-up capitals for a domestic company are quite high, often in tens of thousands of euros. There are also strict rules that these capitals should all be paid-up at or shortly after the registration of the company. The logic behind those rules is apparently that a company in, say, France, can not realistically commence any business without a substantial money available for this purpose.

In most offshore havens it`s radically different. Mostly, the size of the authorised capital of an offshore company does not have a legally prescribed minimum. If it does, the minimum is really small - think 2 US dollars or equivalent. Consequently, there are no requirements to have a substantial amount of paid-up capital. Thereafter, the law does not require that the subscribed capital be paid-up in a certain timeframe. Therefore an offshore company can have an authorised capital of 10 US dollars, of which the amount of 2 US dollars is subscribed for (by a nominee company), but remains unpaid. At the same time, this flexibility allows the owners of the company to choose any amount of capital they wish, and to be very flexible with the rules of how and when the capital has to be subscribed for and paid up. Flexibility is the keyword here.

In most offshore jurisdictions there is a government duty or capital tax payable at incorporation (and often annually thereafter) of the offshore company. The amount of this duty depends on the size of the authorised capital of the company. However, usually there is a pre-set minimum of the government duty. As in Seychelles, the registration duty for an IBC (International Business Company) is $100 for any company with an authorised capital of $100`000 or less. The $100`000 is therefore the maximum possible authorised capital that you can get registered by still paying the minimum duty. Therefore this amount will usually be registered as "standard" by the offshore service provider. Going to higher capital is possible, but will involve higher duty. Going lower is also possible, but needless, as the duty will remain the same anyway. This concept of "maximum authorised capital to which minimum duty applies" is repeating itself virtually through all offshore jurisdictions. It is sometimes also called "optimum authorized capital".

Another distinct feature of offshore companies is registration of shareholders on the public file, in the Registrar of Companies. Many offshore territories, like Seychelles, do not register the shareholders of offshore companies in the Registrar. Thus the ownership structure or a company is remains an internal matter of the company. In such case the shareholder information (Registrar of Shareholders) will usually be kept on file with the company secretary or the registered agent, or by the director of the IBC. Obviously, in such event each individual shareholder should take care to receive appropriate proof from the company confirming his shareholding interest in the company. Such proof can be a share certificate.

Some offshore territories do keep shareholder information on the Registrar`s file. It does not influence shareholder confidentiality very much, because the shares can be registered in the names of nominees, or left registered in the name of the initial Subscriber. In this case, again, it is up to the shareholder to keep the appropriate proof that he is the actual owner of the company. Such proof can be an appropriately drafted declaration or an agreement between the nominee and the actual owner.

Direct registration of the shares on public file can, however, be attractive to those company owners who wish to be completely assured that their private holdings remain protected by being properly registered. This becomes especially important when the company is owned by several owners.

All in all, the corporate characteristics and structural elements of an offshore corporation are just the same as they would be for a typical business company in any country. The difference is in the fact that with offshore companies, all these elements are made extremely simple and flexible, with minimum government regulation and red tape involved. This in turn makes an average offshore company just a more practical vehicle through which to transact business, in particular, a business spanning over several countries and being international by nature. On top of that there are, of course, the substantial tax benefits that offshore companies enjoy and domestic companies only dream of.