September 28, 2014 Leave a comment
An offshore company is a corporation or other type of legal entity which is incorporated or registered in an offshore financial centre or “tax haven”‘.
The extent to which a jurisdiction is regarded as offshore is a question of perception and degree.Classic tax haven countries such as Bermuda, British Virgin Islands and the Cayman Islands are quintessentially offshore jurisdictions, and companies incorporated in those jurisdictions are invariably labelled as offshore companies. Then there are certain small intermediate countries such as Hong Kong and Singapore ,sometimes referred to as “mid-shore” jurisdictions, which, while having oversized financial centres, are not zero tax regimes. Finally, there are industrialised economies which can be used as part of tax mitigation structures, including countries like Ireland, the Netherlands and even the United Kingdom, particularly for corporate inversion.Also, in federal systems, states which operate like a classic offshore centre can result in corporations formed there being labelled as offshore, even if they form part of the largest economy in the world ,for example, Delaware in the United States.
Similarly, the term “company” is used loosely, and at its widest can be taken to refer to any type of artificial entity, including not just corporations and companies, but potentially also LLCs, LPs, LLPs, and sometimes partnerships or even offshore trusts.
Historically, offshore companies were broadly divided into two categories. On the one hand were companies which were statutorily exempt from taxation in their jurisdiction of registration provided that they did not undertake business with persons resident in that jurisdiction. Such companies were usually called International Business Companies, or IBCs. Such companies were largely popularised by the British Virgin Islands, but the model was copied widely. However, in the early 2000s the OECD launched a global initiative to prevent “ring fencing” of taxation in this manner, and many leading jurisdictions ,including the British Virgin Islands and Gibraltar, repealed their International Business Companies legislation. But IBCs are still incorporated in a number of jurisdictions today including Anguilla and Panama.
Separately from IBCs, there are countries which operate tax regimes which broadly achieve the same effect: so long as the company’s activities are carried on overseas, and none of the profits are reptriated, the company is not subject to taxation in its home jurisdiction. Where the home jurisdiction is regarded as an offshore jurisdiction, such companies are commonly regarded as offshore companies. Examples of this include Hong Kong and Uruguay. However, these tax regimes are not limited to conventional offshore jurisdictions: the United Kingdom operates on broadly similar principles in relation to taxation of companies.
Then there are offshore jurisdictions which simply do not impose any form of taxation on companies, and so their companies are de facto tax exempt. Historically the best example of these countries were the Cayman Islands and Bermuda,although other countries such as the British Virgin Islands have now moved to this model.
Offshore companies are used for a variety of commercial and private purposes, some legitimate and economically beneficial, whilst others may be harmful or even criminal. The press often carries allegations of offshore companies being used for money laundering, tax evasion, fraud and other forms of white collar crime. However,offshore companies are also used in a wide variety of legal commercial transactions ranging from generic holding companies, to joint ventures and listing vehicles. Offshore companies are also used widely in connection with private wealth for tax mitigation and privacy.
In the Western world,the use of offshore companies, particularly in tax planning, has become controversial in recent years, and a number of high profile companies have ceased using offshore entities in their group structure as a result of public campaigns for such companies to pay their “fair share” of Government taxes.
Detailed information about offshore companies is difficult to come by because of the opaque nature of much of the business and because, in many cases, the companies are used specifically to preserve the confidentiality of a transaction or individual. Most uses of offshore companies are driven by tax mitigation and/or regulatory arbitrage.Other common legitimate uses of offshore companies include use as joint ventures,financing SPVs, stock market listing vehicles, holding companies and asset holding structures, and trading vehicles.
Intermediate uses of offshore companies ,ie. uses which might be considered legitimate or illegitimate depending upon a particular person’s view of legitimacy of globalisation and tax planning,include uses as investment funds and private wealth holding vehicles.
A nifty way of quickly researching suitable offshore locations to register business, is to use the tool here:Link