We want to share our knowledge about offshore incorporations with You.
The following articles address some of the most important topics in relation to offshore companies, low-tax jurisdictions and offshore service providers.
These reviews are based on the countless real-life queries that we`ve been receiving from our clients. These articles are our attempt to represent a comprehensive, in-depth view on the particular subjects. We have tried to keep the wording simple and free of legal slang as far as possible. We hope You will find this material useful.
If You believe there is another important theme we should write about, please tell us! Here at Fidelity Corporate Services we believe that a well-informed client is the best client, therefore we will be happy to extend this virtual library.
Uses of offshore companies
An offshore company is a very flexible corporate entity. As such it can be integrated into a wide variety of business arrangements. Reduced tax and increased confidentiality are just two of the main benefits which can be achieved by a proper application of the offshore company. However, it would be erroneous to believe that an offshore company incorporated in a no-tax jurisdiction “flies above” all the complicated tax regulations in force in the high-tax jurisdictions. Contrary to a popular belief, having an offshore company in itself does not relieve its owner from all personal tax liabilities in his home country. A clever use of an offshore company, however, can reduce, defer or completely eliminate some tax that would otherwise be payable by his business. The ability to accumulate revenues in a tax-free and hassle-free environment of an offshore jurisdiction is especially helpful to start-up businesses, allowing them to grow faster and be more competitive.
Nevertheless, the practical implementation of an offshore strategy will almost always have to confront some of the anti-avoidance laws that may be in force in the country where the beneficial owner resides or where he does his business. For this reason we recommend that anyone, who considers an offshore incorporation, starts by taking some advice from an accountant or tax advisor located in the clients` country of domicile and in the country where the proposed business operations are due to take place. In case with offshore companies, the laws in the offshore jurisdiction will often have to be considered in conjunction with the laws and regulations of other countries, in particular the countries where the offshore company will have its sales, contracts and assets.
how to utilise an IBC to its maximum potential?
An offshore company may act as a trading intermediary - distributor, import/export, procurement or sales company. The offshore company would typically buy directly from the manufacturer and arrange the goods delivered directly to the end-customer from the place of production. This can be of particular interest where goods originate in one country, are sold in another, yet the principal owner of the trade is located in a third country. An offshore procurement company can be used by a domestic importer to source goods abroad, or an offshore sales company can be used by a domestic producer to distribute the goods abroad. The trading profits from the difference between purchase and sales prices accumulate in a tax-free offshore environment, resulting in quicker growth and more funds available for reinvestment and development.
A free-lance international contractor or a professional consultant can reduce his tax burden by incorporating an offshore company, which would then enter into professional services contracts with all interested customers. While receiving a fixed level of taxed remuneration (salary) from his offshore company, the principal owner of the company would be able to accumulate the rest of the fees income in the name of his IBC, in a no-tax and no-hassle environment. Designers, authors, consultants and entertainers may assign to an offshore company the right to receive fees due under a contract for services. A further advantage of a professional services company is that potential liabilities, which might arise while carrying out a contract, would fall upon the company, not the individual.
Private funds pooled and accumulated through an offshore investment company can be invested or deposited throughout the world, and the returns would accumulate in a tax-free environment. Using a private offshore investment company would provide additional confidentiality for the investors and tax benefits for the investment returns. While investments in many high tax countries would be subject to withholding tax or capital gains tax at source, there are still plenty of investment instruments where no such taxation would be applicable. Returns accumulated in a tax-free area would add flexibility to their distribution and re-investment.
An offshore company can purchase or be assigned the right to use a copyright, patent, trademark or know-how by its original holders, with a power to sub-license and subsequently exploit the intellectual property right in various countries. Such arrangements must be properly planned, as many high-tax countries impose withholding tax at source on royalty payments. An existence of a double-tax-avoidance treaty between the countries involved may reduce such withholding tax.
An offshore company can be used by internet-businesses to hold domain names and operate websites in a tax-free environment. An offshore company may be especially useful for businesses selling any non-material products through internet. In fact, operation of a high-tech, global, internet-based business through an offshore base is probably the best application of an offshore company, ever.
The use of offshore shipping companies can eliminate direct or indirect taxation on shipping services. Such companies may own or charter ships and accumulate the profits from these activities in a tax-free environment. Ships, yachts and aircraft may be owned by an offshore company and registered in an offshore jurisdiction which can prove a cheaper and more tax efficient method of ownership.
An offshore holding company can be used to hold the shares of subsidiaries located in high tax countries. Most high tax countries impose witholding tax on dividends paid to non-residents. In these situations the availability of a double-tax-avoidance treaty between the country where the subsidiary is located and where the holding company is established may help avoid some or all of the witholding tax.
Many of the difficulties and expenses associated with investment in overseas property, such as holiday villas, may be avoided through the use of an offshore company to hold the title of the property. Re-sales of the property can be accomplished quickly and easily by simply selling the shares in the underlying offshore holding company. This may also save on some legal fees, transfer taxes and duties levied by the state.
As offshore companies are not subject to capital gains taxes at home, they can be used to hold investment assets with high appreciation value.
Where an individual owns assets (for instance, real estate) located in a foreign country, such assets may be protected against inheritance tax and higher rates of taxation by holding the assets through an offshore investment company. A high net worth individual with properties or other assets in a number of countries may wish to hold these through one personal holding company so that upon his demise the need to obtain probate in each country is avoided. This saves legal fees and avoids publicity.
If a holding company is registered in a suitable offshore jurisdiction with appropriate double-tax avoidance treaties in place with the owners` home jurisdiction, such holding company may be used to hold shares in various offshore trading companies owned by the same owner. Such layout would solve one of the most acute problems with offshore arrangements - repatriation of offshore profits. By properly utilizing an offshore holding company, overseas profits can return to the owner for his enjoyment and consumption with minimum or no tax liability at home.
The structure of an offshore company
how an IBC is built and how does it operate?
Anyone who has ever come across the concept of a "company" or "corporation" will know that it is a legal concept, aimed at creating a new, distinct, separate "legal person". The purpose of creating such a new corporate body is to legally allocate and put some assets into a new "body", which would then have its own existence and continuity. A corporation can own and can do much of the same as any private individual. A corporation can own assets in its own name, enter into contracts, acquire titles, rights and obligations, be liable for its actions. So, same like an adult human being, a corporation has it`s own legal personality. Even a corporations` life is quite similar to that of a human being.
A corporation is "born" (by a fact of registration in an official Registrar) and it can "die" (by being dissolved or liquidated). In between, the corporation can go on pursuing its aims, which are usually ones of doing business and making profits.
Every corporation consists of several components. Each component has its own purpose. As this article mainly deals with "offshore corporations", one may ask what is the difference between an offshore company and a "regular" company? Structurally - there is practically no difference! An offshore company is quite simply the same sort of corporation, only it`s created outside the usual domicile country of its owner(s). So, for example in the wider sense of the word, "offshore" for a French individual can be Spain, Australia ... or Seychelles. Quite simply, offshore is something that is NOT onshore, NOT nearby the home. However, for quite some time, the term "offshore" has been coined in a much narrower sense - pointing to a company, which is not only formed outside the domicile jurisdiction of its owner, but also has a number of attractive benefits. For instance, incomes of an offshore company can be legally free of tax! Offshore company is free from onerous reporting and book-keeping requirements. It is free from burdensome capitalization rules. A offshore corporation is not required to register its owners on a public file. It`s fast and easy to register, simple to maintain and operate. That`s what most people would deem as an "offshore company". However, in terms of internal structure, an offshore company still retains most of the components of the "regular" corporation.
The following is a description of the main structural elements of an offshore company.
All offshore jurisdictions require that all international business companies (non-resident companies, offshore companies, etc.) have an address in that country. This is called the Registered Address. The formal purpose of this address is to have an exact whereabouts of the company for the purpose of official correspondence or inquiries from the government. Most often these are just some annual report forms and the annual government fee notices that get sent to the Registered Address. Nevertheless, all companies must have such address, in their country of registration.
Most offshore jurisdictions also require a company to have a Registered Agent within their territory. Usually the Registered Agent is located in the Registered Address of the company. The purpose is again the same, to have some person (or, usually, a professional services firm) who acts as an "intermediary" between the government and the particular offshore company.
The name and address of the Registered Agent are on public file in the Registrar of Companies, so this information is accessible to anyone who cares to ask.
Provision of the Registered Address and Registered Agent are standard domiciliation services, provided to all their clients of Fidelity Corporate Services Ltd at a competitive fixed annual fee.
Every IBC files a copy of its Memorandum of Association and Articles of Association, or "M&A" with the Registrar of Companies upon incorporation. These documents can be brief or very detailed, this depends on the law in the particular jurisdiction and on the practices of the particular incorporation agent. These documents lay out all the general information about the company. Usually these documents describe the type of company, its address, operational objects, authorised capital, the procedure for appointing and dismissing directors and officers and their scope of competence and responsibility, the procedure of share allocation, how shareholder`s meetings are called and the competence of such meetings and how it should be executed, the procedures of keeping accounts, liquidation and similar administrative matters that are characteristic to any corporate entity. The Memorandum and Articles of an offshore company are usually signed by a person called "Subscriber" or "Incorporator". The Subscriber is simply a person (or, more often, a dedicated offshore services firm) closely associated with your offshore service provider. The Subscriber essentially incorporates the company for you and acts as the first shareholder on your behalf. Otherwise you would have to travel to the offshore jurisdiction and sign the documentation personally. The Subscriber usually subscribes for the legally acceptable minimum amount of shares in the company. After the registration of the company, the initial Subscriber may remain registered on public file as the (nominee) shareholder, or the minimum amount of shares that he usually holds can be transferred to the actual client.
This document represents a number of resolutions carried out by the Subscriber after the company is incorporated. These resolutions shape the exact internal structure of the offshore company. The First Minutes contain information about the name, registered address and registration number of the company and also establish who is the secretary (registered agent), first director or directors of the company and how the company shares are being allocated to the shareholders. In some jurisdictions this information may also be "scattered" into several separate documents or resolutions. The First Minutes are usually signed by the Subscriber of the Company and the Secretary. The First Minutes is usually the best document to look at if you wish to quickly get to know all the important information about the given company. Depending on the legal requirements, all or part of the information that the Minutes contain will also be part of the public record available in the offices of the Registrar of Companies.
Obviously, when the company starts to operate any further changes may be effected by separate resolutions. Such can be carried out by the shareholders or by the directors of the company, depending on the character of the change. If the particular change is such that requires to be registered in the Registrar of Companies, it should be put to the notice of the registered agent or resident secretary, for further filing with the Registrar.
A company director is charged with making all material decisions about the IBC and its business. Directors are initially appointed by the first Subscriber, and then elected by shareholders. Quite often the Director of an offshore company is elected for an open term "until his successor is elected and qualifies". If there is more than one director, all the directors together comprise the company`s Board of Directors. In this case they may actually have a rather complex system of decision-making process. Offshore companies are required to have at least one director, sometimes more. Seychelles International Business Companies are required to have a minimum of one director.
Many offshore jurisdictions, including Seychelles, permit the director to be a corporation. This may sound weird, but just imagine a management firm comprising of a team of highly competent management specialists who would take the duty of managing the company`s regular business. Nevertheless, utilizing a corporate director may blur the clear structure of a company and make it difficult to comprehend, especially for people who live in countries where "corporate directors" are not a common practice. More often than not the existence of a corporate director will also indicate that the company is most probably an offshore entity.
An individual director makes the whole structure more straightforward, just because we are more used to the fact that a director of a company must be a living, breathing person. There are not many drawbacks for an offshore company to have an individual director, apart from the fact that the services of individual directors would usually be more expensive than corporate. Another aspect, distant as it may sound, is the possible complication when such individual director falls ill, goes away for vacation or, as it may happen, dies. In case of a corporate director there will always be some person who will be empowered to sign or act on behalf of the company. In case of an individual director, there might not be. In such case the company would have to go through a lengthy process of registering a change of director in its file before the new director can act. Electing an alternate in the first place would therefore not be a bad idea. Just as well, a company may have one or several addition officers to fill various managerial and administrative roles within the company. The most common officer categories include President, Vice-President, Treasurer and Secretary. Some jurisdictions require that some or all of these roles be filled at incorporation.
The company directors may sometimes appoint managers or attorneys of the company, granting them certain powers to manage the affairs of the company. The manager may, for example, have a signing authority on a bank or securities account, or the powers to negotiate certain types of contracts for the company or do anything else that may be written in his power of attorney. Company shareholders or beneficial owners are quite often appointed as managers of the company for such purely practical reasons.
For further details on company directors and management, please also see the chapter Company Management.
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 often depends on the size of the authorised capital of the company. Usually there is a pre-set minimum of the government duty. However, in Seychelles the registration duty for an IBC (International Business Company) is $100 for any company with any amount of authorised capital. This means You can have the authorized share capital of Your IBC to be $1 or a few billions US dollars, and this will not affect the registration duty at all. The $100`000 amount will normally be registered as "standard" by the offshore service provider. This amount of authorized share capital is taken as default purely for the sake of convenience. Any deviations from it are possible with no extra cost.
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.
Which is the best offshore jurisdiction?
With around 50 countries in the world offering tax benefits to offshore business, it is only logical to ask which offshore country is the best to incorporate in. Some of those countries are very popular and have an inherent image of offshore tax havens – like British Virgin Islands, Panama or Belize. It is less known that some attractive tax benefits are on offer to some types of non-resident businesses in places that do not ring the bell as “tax-havens” – for instance, UK, US, Holland, Iceland or Denmark.
There can be no standard reply as to which is the best offshore jurisdiction. That answer really depends upon the intended use of the offshore company, upon the personal and business circumstances of its owners and upon the various tax regulations in force in the countries where the offshore company will engage in business.
Before going into the particular detail, it would however be useful to define what is a tax haven, anyway?
this question will never go out of fashion...
The OECD - Organisation for Economic Co-operation and Development (well, these are the guys who think high and uniform taxes are good for everyone) describes the tax haven as a jurisdiction which actively makes itself available for the avoidance of taxes which would otherwise be paid in a higher tax jurisdiction. The term "tax avoidance" should be noted, because there are ways of avoiding taxes without breaking the law, whereas the opposite term is "tax evasion" - which is generally classified as a crime.
Offshore, in its broadest sense of the term, means simply a jurisdiction other than your own. The country next door can be offshore for you. Offshore is anything that is not "onshore", not at home.
In a more practical context offshore usually means a country or territory which offer specific benefits or incentives to foreigners. The most obvious ones are tax concessions. These come in different forms. It may be a complete tax exemption for all international business operating outside the contry of registration (Belize or Seychelles International Business Companies), an ultra-low income tax for international businesses, a complete exemption from income and capital gains taxation for all companies, regardless of their ownership or place of operation (British Virgin Islands), local no-tax or low-tax liability on all investment income regardless of the residence of the investor (Bahamas, Cyprus, Cayman Islands); local tax exemption for non-residents of that jurisdiction (Gibraltar, Channel Islands); tax holidays for certain types of investment (Portugal, Netherlands Antilles, Iceland); favorable tax treatment through treaties and agreements with the investor's home country (Cyprus, Barbados, Netherlands, USA).
In addition, some foreign countries may afford better legal protection from creditors and other potential litigants who might attempt to seize an individual`s wealth. This is the second most important aspect why offshore jurisdictions are so popular - asset protection. It may even have nothing to do with tax, although usually both are intertwined. It`s just safer to be offshore. Except in the event of proven criminal activity (excluding so-called "fiscal offences" such as tax evasion or other money collection disputes), most offshore governments uphold strict confidentiality laws for banks, corporate registries, and trust companies. These laws protect offshore investors from third parties, including both private and governmental authorities.
Before considering a particular offshore jurisdiction you should first consider it in the light of your intended business. Will your prospective customers be concerned that their new supplier or service provider is registered in a particular offshore territory - or won`t they care? Have your prospective market countries imposed any restrictions against transfers of funds to the particular offshore jurisdiction? How will your partners, suppliers, customers or investors react when asked to transact their business with an offshore company? Will it pose any problem for them? Many high-tax countries have extensive blacklist regulations in their tax system, imposing tax surcharges or financial penalties on business carried out with known tax havens. Can it influence your business?
Perhaps, Your business partners already have their own offshore companies? If so, where are they registered? Nowadays, a considerable part of international trading business is completely transacted through offshore companies. The money never actually leaves the "low-tax zone", as both parties to a deal would have their businesses registered in tax havens. According to some estimates, up to 60% of the total global mass of money at any given moment actually sits tax-free in offshore accounts, and not in the highly invasive, highly taxed financial systems of the big jurisdictions.
The offshore jurisdictions qualify into treaty jurisdictions and non-treaty jurisdictions. The treaty jurisdictions have an extensive network of double-tax avoidance treaties (DTA`s) with other countries. A double-tax avoidance treaty basically removes or reduces levels of taxation on certain transactions, taking place between residents of both member countries. The most common and tangible benefits granted by a double-tax avoidance treaty are usually the reduction of withholding taxes on the payment of dividends and royalties between the contracting states - thus, great for a targeted establishment of offshore holding companies. It may sound surprising, but there are actually many DTA`s between tax-haven jurisdictions and distinctly high-tax jurisdictions.
Treaty jurisdictions often portray a non-offshore image - usually offering reduced levels of tax instead of a complete exemption. This obviously may provide a better "image" of the jurisdiction. Cyprus is a typical treaty jurisdiction. Seychelles has concluded a number of useful DTA`s, in particular with China, South Africa, Thailand, Cyprus, Belgium and several other countries. The treaty benefits in Seychelles are accessible to resident companies only.
Non-treaty jurisdictions are "classic" in the offshore sense - they would usually have complete absence of corporate taxes on the profits of the company and only a fixed annual license fee. In respect of IBC`s, Seychelles is a non-treaty jurisdiction.
It is for you to decide whether the circumstances of your business requires the tactic of "offshore stepping stones" through treaty jurisdictions, or the clear-cut approach through a classical offshore tax haven.
If you can find positive answers to these issues, the biggest part of choosing the right offshore jurisdiction is already done.
The most important condition for those who want to establish their business interests in an offshore financial center is to select a jurisdiction that provides both political and economic stability, so that business can be conducted with certainty, confidence and corporate security.
A good offshore jurisdiction should not be subject to violent political swings or the likelihood of military coup or invasion. A historically bad example was the African state of Liberia, whose well intentioned offshore legislation was overrun by a military conflict and political turmoil. Most of the offshore tax havens, though, have good track records as regards their political and social stability.
A similarly important factor is economic stability. The ideal offshore jurisdiction should have transparent economic policies, a sound economic system, a stable currency with no restrictions on investment repatriation, low inflation and the main economic liberties strongly protected by the rule of law and an independent judiciary.
One should avoid any offshore jurisdiction that has an image of corruption, dictatorship, social tension and economic instability.
Another very important factor is that the legislation is modern, flexible and well proven. Some jurisdictions have introduced new and modern suites of corporate legislation, specifically designed for international business whilst others have amended existing domestic legislation to cater for offshore requirements. That being said, for quite many offshore jurisdictions the relevant pieces of legislation are practically carbon copies of each other. For instance, quite a number of jurisdictions have taken the IBC Act of the British Virgin Islands and adapted it to their circumstances without much of a change. Fairly often the legislation of relatively new offshore centres, such as, for example, Seychelles or Saint Lucia, tend to be very well thought out and put together, having taken care of all the shortfalls and errors of the earlier laws in other, more mature offshore tax havens. All in all, if the total number of IBC`s registered in a given country is in five figures or more (you can usually tell by the current registration numbers), it means that the system is working fairly well.
A successful offshore financial centre must also have a reliable, independent judiciary system with a proven track record of defending offshore interests, especially against claims and requests originating from abroad.
Many offshore jurisdictions have made efforts to ensure that their company law provides features such as minimal or optional statutory filing obligations, availability of bearer shares, non-disclosure of beneficial ownership, minimum number of directors, minimum information on public file, ability to hold directors meetings anywhere in the world, lack of requirement to file audited records, flexibility in regards the amount and paying-up of the authorised capital, and similar. It is for you to decide if any of those special features (which will usually be widely advertised by the agents in the respective country) are of any particular interest for you.
Apart from that, an offshore company is an offshore company - generally they are very similar to each other. Virtually all entities that are known as "offshore companies" in the narrow tax benefit sense will have the same distinct feature. Such company is essentially relieved of any substantial tax obligation and all the reporting that usually comes with it, insofar as it stays out and away from the country where it has been registered. Hence, they will also be free from the requirement to prepare and file the financial declarations for income tax reporting. At the same time there are particular types of entities, subject to what is called "designer taxation", which pay minimum rate of tax. An example of that is a Seychelles Special License Company, which pays between 1.5% and 5% of tax, and, consequently, is also supposed to file tax returns.
The infrastructure of an offshore jurisdiction is important. You would not like to place your corporate nest-egg in a country which takes ages to get through by telephone. Factors such as quality of telecommunications and internet, physical access to the country, language, work ethics, legal system, confidentiality culture, exchange controls, quickness and variety of administrative and financial services available all can influence the smooth running of your business. You should be able to travel to the particular offshore jurisdiction easily, safely and without visa.
Take time zone into account - dealing with a jurisdiction on the other side of the globe may constantly make you lose a day while communicating via email, or to make calls in the middle of the night.
Work ethics is an important factor. Some regions of the world tend to be more laid back and relaxed than others - not helpful if You need something done fast.
Some countries are historically blessed with diligence, confidentiality and prudence. Some are less so. Take the time zone into account - dealing with a jurisdiction on the other side of the globe may constantly make you lose a day while communicating via email or fax, and it`s certainly more convenient to make calls during Your normal business hours.
Last but not least - You might like to check the weather record. Some popular offshore financial centres are located in hurricane areas. While these countries generally have their infrastructure ready for such events (backup power generators, stringent building rules, etc.), a violent tropical storm may still take out the business for several hours, or maybe even days.
A rather obvious factor. However, in the offshore industry, same as anywhere else - price is not everything.
Offshore financial centres have developed a considerable variety in terms of cost. There are some jurisdictions, like Liechtenstein or Bermuda, where paying premium fees is inevitable, and not always the level of service is up to par. On the other side there are some jurisdictions where high incorporation volumes and lots of competition have driven the prices down to the bottom. Often, unfortunately, at the expense of quality.
After the corporate features and legal aspects of the offshore jurisdictions are all compared, price still remains an interesting variable. One particular position to compare is the minimum possible government duty. This is the fixed amount that an offshore company will pay every year instead of income tax. As the government fees are fixed and don`t fluctuate unless the laws are changed (that does not happen often), easy comparisons are possible. In this respect, one may indeed prefer a jurisdiction where the minimum state duty is USD 100 (Seychelles), as opposed to another, where it is USD 350 (Bahamas).
The level of professional fees are even more important, as these constitute most of the annual maintenance cost of an offshore company. What is the incorporation fee and what are the continuing management fees? What are the reporting and statutory compliance requirements and how much will it cost to comply with them? Generally, the level of the professional costs will depend on (A) how much competition there is in the market (B) how old and reputable is the jurisdiction (C) what is the general cost of living and business operation in the country (D) how old, successful and reputable is the offshore service provider (E) how much does the offshore service provider wants to attract new business - some of them are not very eager to take on new clients.
A combination of all these factors may yield a victory for one or another offshore jurisdiction, BOTH in terms of service quality and price! Similarly, inside one jurisdiction, some offshore service providers will definitely be more competitive than others, again BOTH in terms of price and service quality. Given that an offshore company will essentially be the same product, regardless of who is the provider, going for the most expensive offer will not buy a guarantee of quality, speed and reliability - in fact, very often the opposite will the case! So, it definitely pays to do some prudent research before committing to a particular firm.
For more insight on selecting an offshore incorporation agent, please read the other article in this chapter: How to choose the right offshore service provider?
Which is the best offshore service provider?
because You really don't want to fall for a bad one...
Being in the offshore incorporations business for many years, we sometimes ask this question to ourselves, in hope that we might like the answer. For your benefit and consideration, here are some thoughts of what is a good offshore service provider.
To start with, what is an offshore service provider, anyway? Well, they come in all shapes and sizes, but generally they all do the same job.
The "product" or, more precisely, the "service" offered by an offshore service provider is the formation and official registration of an offshore company or an offshore trust. These services are custom-provided at order of the client, who is also known as the "beneficial owner" of the offshore company.
The offshore corporate service provider also takes care of the administration tasks necessary to maintain the offshore company in good legal health (also known as "good standing") in the country where it is registered. Offshore administration usually includes the provision of the Registered Address and Registered Agent for the company and dealing with the annual renewal formalities of the company. In this respect, the Registered Agent essentially acts as an official go-between the Government and the owner of the offshore company. The offshore service provider is also engaged in preparing and filing the mandatory annual returns and reports (if any), keeping and updating records of the company as the law prescribes or as the beneficial owner requests. Similar support and administration services are provided to offshore trusts.
The offshore service provider also offers a number of optional services to enhance the confidentiality and functionality of the offshore company. Among such services are the provision of individual and corporate directors, provision of nominee shareholders, mail and fax forwarding services, document custody and re-mailing services, telephone call handling services, bank account introductions and assistance with offshore bank account openings. In some offshore jurisdictions the corporate service providers also assist the client through the more complicated matters of licensing the company for some of the specifically regulated activities, like offshore banking, offshore insurance, offshore mutual funds. Finally, some offshore service providers offer legal assistance and tax advice.
Overall, the offshore corporate service providers fall into two general groups - the specialized offshore formation agents, and the universal providers.
The specialized providers have a narrow focus on the offshore services available in one particular jurisdiction. Such providers are usually physically located in that jurisdiction, they are licensed by the local regulatory authority as Registered Agents or International Corporate Service Providers. Due to their narrow focus, the specialized providers tend to be experts in everything on offer in their particular jurisdiction. The specialized offshore provider (Registered Agent) is usually the one who actually prepares the incorporation documents, goes to the Registrar of Companies, files and receives the paperwork and does all the grunt work associated with the offshore company formation. Professional in their area of work, fast and cost-effective, the specialized providers are the "source" of the offshore incorporation services.
Downside? The "source" providers would be naturally biased towards their home jurisdiction. When asked to compare the benefits of different jurisdictions, their home country would unsurprisingly be a clear winner. Specialized providers are sometimes also unable or unwilling to set up complex, multi-jurisdictional arrangements as may be necessary for some more complicated business models. But for a client who has done his homework and knows exactly which jurisdiction and what sort of offshore company and services he needs, dealing with a genuine local Registered Agent is clearly the best bet.
The local, specialized offshore service providers are also not all the same. There are distinctions, same as in any other business.
The older, mature Registered Agent firms would tend to be less flexible, conservative, slower and sometimes cumbersome to deal with. They would usually be more expensive, too. On the upside, the "old players" would usually have a solid internal framework, experienced senior staff (if You can cut through the receptionists and secretaries). The older Registered Agent would have the implied benefit of being around forever and "knowing the turf".
The new or smaller players in the market would quite certainly be quicker (sometimes also quick to over-promise), and generally easier to deal with. What they may lack in experience and sheer market presence, is often compensated by better customer support, flexibility and, of course, cost-efficiency.
As far as just incorporating an International Business Company is concerned, it is a fairly standardized service, almost a commodity. Apart from purely cosmetic variations between two standard packages of documents of, say, a Seychelles IBC, there is no legal or practical difference between an offshore incorporation provided by a startup Registered Agent or a fifty ear old law firm.
From this perspective, it would seem appealing just to look for the lowest price, right?
Not really.
When going for the lowest possible cost, the client will usually land with an undercutter, who is desperate for a quick boost. Sometimes, it just does not work out. Rock-bottom fees usually can`t support decent record-keeping and database facilities, adequate internal security and confidentiality controls and a dependable, competent staff at the Registered Agent office. Dealing with a super-low-cost offshore provider may turn into a nightmare - certainly not worth the initial saving of a few hundred dollars. In the rush for volume, an uncsrupulous provider will inevitably make mistakes (very costly and time-consuming to correct), encounter delays and will be unable to provide personalized attention to non-standard requirements. These providers have an industry-nickname: "bucket shops".
As often, the best bet is somewhere in the middle, between the rip-off prices charged by the "brand name" providers and the bargain basement of price-warriors. In any established offshore financial centre there will be a fair number of reasonable, reliable and experienced Registered Agents, who take their work personally and seriously. At Fidelity Corporate Services, we tend to belong to this group.
The universal providers sell offshore companies, too. The difference is that with the universal providers, like in a supermarket, the client is offered a wide variety of products and jurisdictions. Unlike the specialized providers, the head offices of "supermarkets" are often physically located in the big commercial centres of the world, like London, Singapore or New York. Consequently, these providers usually do not register the companies by themselves - they outsource the job to - of course - the same specialized Registered Agent described in the first chapter. Most of the big offshore service providers are essentially middlemen between the actual client and the local Registered Agent. The actual offshore company will be formed, maintained and administered mostly by the specialized local Agent. Some of the management functions may be carried out by the intermediary, who will of course also issue the (much bigger) invoices.
Speaking of the middlemen, there are some really large ones. Think of a 40-jurisdiction offshore supermarket with outlets and representation in all four corners of the world, full page adverts, shiny main street offices, glossy brochures, lots of staff, lots of fuss ... lots of overhead. You will be kindly asked to pay for it, obviously. But that's only part of the story. Big, multi-level systems tend to be bureaucratic, inflexible and slow. They don't do much by themselves, they outsource. You wait.
The arguably good aspect of the big superstores is just that - they will be able to sell you just about anything, with just about any bells and whistles. But don`t expect they will really help choosing the right jurisdiction and configuration for you. As in any shop, the right product for the seller is always the one with the biggest profit margin on top. The truth is, in this area, the best research is the one you have done yourself. In offshore incorporation services, big brand names do not necessarily guarantee the best value.
There is also the sensitive aspect of approaching an offshore company formation agent in your home country. There might be an offshore provider just around the corner in your own town. They are probably nice, competent, reasonable people. You may go to them, have a friendly chat about who you are and what your offshore arrangements might look like. And they might be coerced to report that conversation to your government.
Some of the large multinational offshore services firms do have their ground offices located in the actual offshore jurisdictions, licensed as Registered Agents. In this case, clients can be reasonably assured that there won`t be any problems with the speed of registration and the competence of the staff. The price might still be much to the upside of average. Some of the universal providers, especially the heavily internet-oriented ones, outsource all of their orders to local third-party Agents. In this case, there is no sense to buy from such intermediaries, as all the job will be done by the local Agent anyway.
If its a straightforward offshore incorporation you are after, then it`s only logical to talk directly to the people who will actually run to the Registrar and file the paperwork for your new IBC. Even more importantly, these people will also be the ones who will maintain the offshore company for you, hopefully for years thereafter, without the delays and costs associated with layers of middlemen.
That being said, there is actually one particular type of intermediary who may be worth going to. It`s Your legal advisor or Your accountant. Protected by client-attorney confidentiality privilege, a lawyer can also be Your "offshore service provider" - more often than not he will be better informed about the legal and fiscal circumstances of Your business and Your assets. When considering an offshore incorporation, it pays to take competent legal advice from a specialist, located in the country where You live or do business. Many legal advisors would in fact be able to outsource the required offshore services from a particular tax haven jurisdiction. However, certainly, an offshore company purchased this way may cost You dearly, on top of the legal fees.
The question remains, if You are in the market for an offshore company, how to tell a good offshore service provider from a bad one?
To start with, one should clearly determine which one NOT to choose...
If all the offshore service provider has is a nice website with an anonymous "contact us" form and no hint of the real location of the guys, stay alert! Any reputable offshore formations provider should at least have a full street address, a landline telephone and an identifiable contact person. If the site does not provide such details up front - at best it`s one of the countless internet-business wannabes and at worst it`s a scam. Confidentiality is not really an issue here - who hides from the potential client?
So, internet age or not, a good offshore service provider must have a proper business office, where You can visit personally if required - regardless of the fact that this may involve several thousands of miles of air travel. Any prudent offshore agent will be available to call on office telephone at general business hours in the particular country. Any self-respecting firm should actually have at least two distinct telephone lines. A telephone and fax on one single line is a sign that the whole operation runs from somebody`s kitchen - not a serious proposition.
So, if your potential offshore service provider can not clearly identify his legal status and the geographical location, walk away.
You must have heard this before: if the deal looks too good to be true, it probably is! Watch out for sites promising anonymous accounts, offshore companies for 99 dollars, free this and free that. Again, at best it`s irresponsible marketing or misinformation, at worst it`s a scam.
The best offshore service providers are actually very down to earth. They don`t over-promise and don`t mislead. They are absolutely competent about the services they provide and don`t need a week to come up with an answer. A prudent offshore service provider should be able to come up with a complete explanation of all fees and charges involved, up to the last filing fee and courier charge. They should be crystal clear in their explanations of what happens when, for how much and why. Competence is really the key word in this business.
A bona-fide offshore service provider will be for all intents and purposes a domestic company in the particular offshore jurisdiction, with its registration number, street address, director, manager and all the rest that is pertaining to any regular business. If it`s not just an internet-based middleman but a real local Registered Agent in an offshore jurisdiction, the firm would also usually hold a specific license. For instance, in Seychelles, to provide the offshore incorporation services, an International Corporate Services Providers` license needs to be obtained from the Financial Services Authority. Fidelity Corporate Services (Seychelles) Ltd holds such license (Nr. 004). In order to obtain the license, the Registered Agent must satisfy an impressive list of requirements. The owners, directors and all of the top management of the firm are screened and approved by the Financial Services regulator, same as the firms` internal control and due diligence systems. The licensed provider must also have a substantial amount of paid-up capital. Some may find it extraordinary, but it is a fact that even a small offshore formations provider in a tiny tax haven jurisdiction is nowadays subject to more stringent official supervision that a huge consulting firm located in, say New York or London. Which one to choose - we leave it to You.
Let us help you find the right answer!
If You think there is another important theme we should write about, please let us know! Here at Fidelity we quite believe that an informed client is the best of them all…
