Offshore Knowledge Base
In the following articles You will find detailed reviews on some of the most important topics in relation to offshore companies, jurisdictions and offshore service providers. These articles have been prepared by ourselves, prompted by real-life queries we receive regularly from our clients. Not really a “frequently asked questions”, these articles are our attempt to represent a more in-depth view on the particular subjects. We have tried to keep the wording simple and free of legalese as much as possible. We hope You will find this material useful.
An offshore company is a flexible business instrument and as such can be integrated into a wide variety of tax planning and asset protection arrangements. Reduced or deferred tax liability and increased confidentiality are just two of the benefits which can be achieved by proper application of an offshore company. The practical implementation of an offshore strategy will of course depend on the anti-avoidance laws that may be in force in the country where the beneficial owner is citizen, is domiciled or does business. Therefore to all potential customers we recommend to obtain a qualified tax advice from a specialist in Your country of residence, domicile or proposed business operations.
The structure of an offshore company
what is it, how it's built and what makes it work?
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
A "company" or a "corporation" is what's called in legal-speak a juridical person, or a corporate body. A corporation can have and do much of the same as any private individual – it can own assets in its own name, enter into contracts, acquire rights and obligations, be liable for its actions. So, same like an adult human being, a corporation normally has it's own legal personality. Even a corporations' life is somewhat 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).
There are several components in every corporation, each with its own purpose. As this article primarily deals with what is popularly known as "offshore company", a question may arise: what is the difference between an offshore company and an "ordinary" company? Structurally – there is no substantial difference! An offshore company will quite simply be the same sort of corporation, just created outside the usual domicile country of its owner(s).
So, as far as semantics go, "offshore" for an American can be Canada, or Russia ... or British Virgin Islands. Quite simply, offshore is something that is NOT onshore. However, for quite some time, the term "offshore" has been used in a much narrower sense – pointing to a company, which is not only formed outside the normal domicile of its actual owner, but is also enjoying a number of cool extra benefits. For instance, it can be free of taxation. Free from onerous reporting and book-keeping requirements. Free from burdensome capitalization rules. Free from the necessity to register its owners on a public file. Fast and easy to register. Simple to maintain and operate. That's what most people would deem as an "offshore company". However, structurally, this offshore company still retains most of the components of a "regular" company.
Following is a description of the main elements and components of an offshore company, in particular, as applicable to a British Virgin Islands Business Company.
All offshore jurisdictions require that their international business companies (non-resident companies, offshore companies, Business Companies, etc.) have an address within the country. This is called the Registered Address. Formally it can sometimes be a PO Box, but usually it will be a full street address - for reasons, explained below.
Most offshore jurisdictions also require that a company has a Registered Agent within the country. Usually the Registered Agent is located in the Registered Address of the company and is licensed to provide company formation, administration and management services in a professional manner. So, the Registered Agent would usually be a fully staffed, equipped, qualified and regulated firm, which provides those services to a considerable amount of clients and their offshore companies. Fidelity Corporate Services Ltd is such a licensed Registered Agent in the British Virgin Islands.
The name and address of the Registered Agent of every offshore company is filed with the Registrar of Companies. Therefore, these particulars are publicly accessible to anyone. This is in fact the main purpose of having a Registered Agent and Address – so that any person could know where the legal address of a particular company is, and which professional firm acts as a Registered Agent for this company. In essence, the Registered Agent acts as an "intermediary" between the Government and the offshore company, or between any third parties and the offshore company.
In British Virgin Islands, according to the BVI Business Companies Act 2004, Registered Agent is required for ALL companies, regardless of their type of ownership or area of operation. In this regard there is no distinction between an on-shore and off-shore company.
To incorporate itself officially, a company files one original of its Memorandum of Association and Articles of Association with the Registrar of Companies. These documents can be brief or very detailed, depending on the applicable corporations law, on the standards adopted by the particular company formation agent and on the particular requirements of the client. The Memorandum and Articles provide the legal "skeleton" of the company, by setting forth all the general parameters of the company. Usually these documents describe the form and type of the company, state its Registered Address and Registered Agent, list the operational objects of the company or state that the operation of the company is not limited to any particular objects, determine its authorised capital, if any, and how it should be paid up and how the shares should be issued and allocated, what types of shares the company will have, and what sort of rights will be attributed to any particular type of shares, how the directors and officers will be appointed and how they can be replaced or dismissed, what are their rights, obligations and responsibilities, how the shareholder's meetings are called and held, the acceptable quorum for such meetings and how corporate resolutions shall be adopted, which resolutions will require what type of majority to be approved, the procedures of keeping accounts, how the company can enter into liquidation, etc. The Memorandum and Articles of an offshore company will usually signed by a person called "Subscriber" or "Incorporator", or by the Registered Agent of the company, or it's affiliated entity. The Registered Agent essentially incorporates the offshore company for the client and signs the formation documents on clients' behalf. This relieve the client and actual owner of the offshore company from the necessity to travel to the particular offshore jurisdiction in order to sign the incorporation paperwork. In fact, in British Virgin Islands signature of the incorporation documents by the actual owners would accomplish little, because new Business Company incorporations would anyway only be accepted by the Registrar through and from licensed Registered Agents.
The initial 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 and act as nominee shareholder, or the amount of shares that he holds can be transferred to a different shareholder, as required by the client.
This document, or a set of documents, represent a number of important official decisions carried out by the Subscriber or by the Registered Agent after the offshore company is incorporated. These resolutions shape the internal structure of the company. The First Resolutions would contain information about the name, Registered Address and registration number of the new company and they would establish who is the Registered Agent of the company, who are appointed director(s) of the company, how many shares are being issued to the shareholders, and who are those shareholders. Sometimes, as the case may be, the First Resolutions would also deal with appointing a Secretary to the offshore company, appointing accountant, auditor, attorney or any other consultant or advisor to the company, resolving to open a bank account with a particular bank and appointing the account signatories to such account, appointing someone to act as Agent for the company, etc.
The First Minutes or First Resolutions are ordinarily signed by the Subscriber or by the Registered Agent of the company. The First Minutes is generally the best document to look at if you wish to quickly get to know all the important particulars of the company. Usually, the First Resolutions themselves are not getting filed onto a public registrar (unlike Memorandum & Articles), but some of the information contained in those Resolutions can be filed. The BVI Business Companies Act requires that the Register of Directors of each company must be filed to the Registrar not later than 21 days after the appointment of the first director. The information about the directors is available for public inspection through the BVI online registry system. The Register of Shareholders can also be filed and made publicly available, if the beneficial owners wish so, however, it is not compulsory.
Obviously, when the offshore company commences operations, there may be further changes in its structure. Resolutions on such changes may be carried out by the Directors or by the Meeting of Shareholders of the company, depending on the weight of the decision and on how the Memorandum and Articles prescribe such decisions to be carried out.
Normally, all Resolutions as to any structural changes or replacements in a company must be kept on file with the Registered Agent of the Company. If such resolutions are not carried out by, or in the presence of the Registered Agent, they must be submitted to the Registered Agent for due filing and registration on the (internal) file of the Company.
A company Director is normally the entitled to make all decisions as regards the day-to-day business of the company. Directors are initially appointed by the first Subscriber or by the Registered Agent, and thereafter elected by the Meeting of Shareholders or, sometimes, by the Board of Directors, if such exists and is permitted to elect Directors by the Articles. Usually the Director of an offshore company is elected for an open term "until his successor is elected and qualifies", but a fixed term can also be provided by the Articles, if desired. If there is more than one director, all the directors together comprise the company's Board of Directors, in which case there would be a more complex system of decision-making process, involving certain especially important decisions passed only by qualified majority. In most offshore jurisdictions, companies are required to have at least one director, but may elect to have several directors. In British Virgin Islands, Business Companies need to have a minimum of one director, which can be either a private individual, or a corporate entity.
Indeed, many offshore jurisdictions, like BVI, permit the director to be a corporation. This may sound strange, but just imagine a management firm comprising of a team of highly competent business specialists who would take the duty of managing the regular business of Your new startup. That's a perfect example of a "corporate director". While there are several practical reasons why a corporate director is actually a wiser choice, having it may sometimes make the structure of the offshore company a bit difficult to comprehend. This especially true for people from countries where only live private individuals may act as company directors. Sometimes the existence of a corporate director may serve as an indicator that the company is probably an offshore, tax-free company.
An individual director makes the whole setup look more straightforward, just because we are more used to the fact that a director of a company must be a living, breathing person. The services of individual directors would usually be more expensive than using a corporate director. Another aspect, quite realistic, is the possibility that an individual director falls ill, leaves for vacation, decides to quit the job, or, as it happens with all people, 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 complicated process of registering a change of director in its file before the new director can be elected and can act. Electing an alternate in the first place would therefore not be a bad idea. In fact, the BVI Business Companies Act 2004 provides for an option that if a Business Company has only one member who is an individual and that member is also the sole director, such sole director may appoint a "reserve director" to act in his place in the event of his death.
The company directors may sometimes appoint managers or attorneys of the company, granting them certain powers to manage the affairs of the offshore 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 or attorneys of the company for such purely practical reasons.
For further details on company directors and company management options, please also see the Company Management section of this site.
Offshore companies, like onshore corporations, use shares to reflect their ownership. Shares are in essence units of internal accounting, which represent a participation of an owner 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, or intellectual rights or property into the company. When he does so, he acquires the right to participate in the profits of the company, in proportion to his share. In addition to the right to receive dividend, the shareholder would also usually have the right to participate in the decision-making process of the company – although this may not be the case with non-voting shares. There are a few different types of capital.
Authorized share capital. This is the total amount of money that the company has been allowed (by its Memorandum of Association) to cash in from the prospective shareholders in return for giving out its shares to them. In theory the authorized capital is supposed to be just that amount of money which the principals of the company have decided to pool together in order to get the business going, until the company breaks even and it's revenue stream is sufficient to support its operations. Most offshore jurisdictions have a minimum required authorized share capital, and the share capital selected usually affects the fixed government fees payable.
In British Virgin Islands, a more flexible alternative have been introduced, whereby the Business Company may elect to state only the number of shares it will issue, but it does not have to determine the monetary value of its capital. Thus, the company may issue its shares at a "market value", or rather at a value that its first owners deem fit, depending on the capitalization requirements of the company. Thus, a company with the same 50'000 shares may decide to issue its shares at 1 US cent, or 1 hundred euros, or 5 thousand pounds sterling each, and thus raise substantially different amounts of capital from its would-be shareholders, depending on its capitalization needs and plans of the shareholders. Indeed, in this time and age it should be recognized that a company may not need a single dollar of capital, if it has a super-original business idea – or may need to be highly capitalized for a cash-intensive project. Flexibility on a structural level, as provided by the BVI Business Companies Act, is therefore very useful.
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 remaining shares stand by, unissued and idle. Thus, if company ABC has an authorized share capital of 50,000 shares and John agrees to take 1000 shares, then the company's subscribed share capital is 1000 shares. Regardless of the fact that he only took 2% of the authorized capital, John would still own the company fully, until another shareholder comes in. If the company also issues 1000 shares to Mary, the company's subscribed share capital is 2000, and each of John and Mary would own 50 percent of the company (1000 shares each of the total issued 2000). The exact procedures and methods of accepting new shareholders, subscribing to and issue of shares are usually determined in detail by the Articles of the offshore company.
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 paid some cash into the company. Usually, only when the shares are paid-up, the shareholder acquires the right to receive profits from the company and to vote in the shareholders meeting. Again, the terms and procedures of paying-up the company capital, and the corresponding shareholder rights 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. For instance, in many European countries, 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 must all be paid-up at incorporation, or shortly thereafter. The somewhat out-of-date logic behind these rules is that a company in, say, Germany, would be unable to pursue any business without a substantial money available.
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. In BVI, the Business Company is not even required to state its authorized capital – it just need to state the amount of shares it will issue, and there is no minimum to that, either. Consequently, there are no requirements to have a any amount of paid-up capital, or to pay it in by a certain deadline. Therefore an offshore company can easily be autorised to issue 5 shares, or to have an authorised capital of 1 US dollar, or whatever its owners deem fit. The reverse is also true – the owners of an offshore company may decide to state in the Articles of Association of their company that it will have 100 million shares, and thereafter decide to issue each share for 100 dollars – so, in case this is really carried out by the supporting monetary transactions, the authorized and paid-up capital of such company would be 10 billion dollars. (There would usually be a higher Government registration fee payable in such case as compared to the minimum-capitalization company.)
So, this flexibility of offshore company laws allow 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 paramount feature here, and not many countries in the world can rival the flexibility of the British Virgin Islands Business Companies Act.
In most offshore jurisdictions there is a Government registration fee payable at incorporation (and annually thereafter) by each offshore company. The amount of this duty depends on the size of the authorised capital of the company – or, as in the BVI, the amount of shares a company is authorized to issue. There is a pre-set minimum of the Government duty. In BVI, it's $ 450 for a Business Company that is authorized to issue 50'000 shares or less. If a company has more than 50'000 shares, the fixed Government fee is $1200. In many other offshore jurisdictions, the amount of the Government registration fee would be tied to the monetary value of the authorised capital, and not to the number-amount of its shares.
In BVI, therefore, the amount of 50'000 shares would be the maximum possible amount of shares that you can get registered by still paying the minimum duty. Therefore this amount will usually be registered as "optimum configuration" by the offshore service provider, unless there is a different requirement from the client. Choosing a bigger amount of shares is possible, but will involve higher duty. Choosing a smaller amount of shares is also possible, but needless, as the duty will not decrease anyway. This concept of "maximum authorised capital to which minimum duty applies" is repeating itself virtually through all offshore jurisdictions, and is usually termed as "optimum capital".
Another distinct feature of offshore companies is registration of shareholders on the public file, in the Registry of Companies. Many offshore tax havens, including British Virgin Islands, do not require mandatory filing of the shareholders' data of offshore companies in the Registrar. Thus the ownership structure or a company remains on the internal file of the company. The law in BVI requires that the shareholder information (Registrar of Shareholders) must be kept on file with the Registered Agent, where it is confidential and accessible only by the members of the company. However, the law also allows for the shareholder information to be filed with the Registry of Companies as an option - if the shareholders so want.
Direct registration of the shareholdings on public file can actually be attractive to those company owners who wish to acquire the extra peace of mind by knowing that their private holdings are properly registered in a Government registry. This becomes especially important when the company is owned by several owners. However, obviously, this is attractive only to those shareholders, who are not concerned about their loss of confidentiality.
Keeping shares registered onto a nominee is another way of putting in just another layer of confidentiality. Apart from shielding the name of the actual owner from all sorts of Registers, the nominee shareholder also keeps the names of the actual owners secret in various real-life situations. For instance, when the shareholders would need to act in order to replace a director, or to increase the capital – any "real" shareholders would reveal themselves to third parties by means of carrying those resolutions. The same resolutions executed by nominees would keep the confidentiality in many cases intact.
When using the services of a nominee shareholder, the actual owner of the shares should not be concerned even if the shareholders would be registered on public file, because his name would not appear there anyway. The appropriate proof that he is the actual owner of the company would be in the shape of a declaration or an agreement between the nominee and the actual owner.
All in all, the corporate structure and elements of an offshore company are just the same as they would be for a typical domestic business company in any country. The difference with offshore companies is that all these elements are made simple, with minimum government regulation and maximum flexibility available. This quite often makes the offshore company just a more practical vehicle through which to transact business, especially an international business. And, yes, those companies are also free from tax…
Uses of offshore companies
now that You've got it, use it!
An offshore company may act as a trading intermediary – sales, distribution or import -export company. The company would typically buy directly from the manufacturer or wholesaler and arrange the goods delivered directly to the end-customer from the place of production or purchase. This can be of particular interest where goods originate from one country, are sold in another, yet the principal 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. The profits arising on the difference between purchase and sales price may be accumulated in a tax-free environment. Such profits can be re-invested into further development of the business, without incurring any excess tax liability.
A freelance international contractor, consultant, designer or other professional individual working for a fee can reduce his tax burden by incorporating an offshore company, through which the fees for his contracts are routed. While the professional himself would receive a fixed level of taxed remuneration (salary) from his company, the bulk of the fee income would accumulate in the name and accounts of the offshore company, in a tax-free environment. Designers, authors, consultants and entertainers may assign or contract with 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, associated with a professional services contract, would fall upon the company, not the individual.
Private funds pooled through an offshore investment company can be put into investment instruments throughout the world, accumulating the returns and capital gains 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 at source or a capital gains, 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.
A 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 rights 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.
The use of offshore shipping companies can eliminate direct or indirect taxation on shipping. Such companies may own or charter ships and accumulate the profits from these activities tax-free. Ships or yachts may be owned by an offshore company and registered in an offshore jurisdiction, in a cheaper and more tax efficient method of ownership.
A holding company can be established and used to hold the shares of subsidiaries located in high tax countries. Most high tax countries require tax to be withheld on dividends to be paid to non residents, so attention should be paid to the availability of the double-tax-avoidance treaty between the country where the subsidiary is located and where the holding company is established.
Where a person is domiciled outside a territory and owns assets located in that territory (for instance, property), then 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 the medium of a 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.
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. Sales of the property at a future date can be dealt with quickly and easily by the sale of the company shares to the purchaser. This also saves legal fees and overseas transfer and value added taxes levied by certain foreign countries. It can also be used to successfully avoid capital gains and inheritance taxes.
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 provide for fully or nearly tax-free repatriation of offshore trading profits directly to the beneficial owner of the companies.
Which is the best offshore jurisdiction?
indeed, this one will never go out of fashion...
According to a formulation by the OECD (Organisation for Economic Co-operation and Development), a tax haven is a jurisdiction which actively makes itself available for the avoidance of taxes which would otherwise be paid in a higher tax jurisdiction.
The keyword here is "tax avoidance". There is another one: "tax evasion". From purely legal point of view, tax avoidance is legal, while tax evasion is a crime. Basically, tax avoidance is structuring ones' business affairs in such a way that minimum possible amount of tax is payable, without still breaking the law. In principle, the whole international offshore financial services industry is about tax avoidance, not tax evasion. An offshore jurisdiction, therefore, is one that offers certain attractive instruments or opportunities for tax avoidance, and for asset protection.
In its broadest and historical sense, offshore also means simply a jurisdiction other than your own. So, for a Canadian, United States is technically "offshore", because it's on the other side of the border.
However, it's the practical meaning that usually prevails. There, offshore means a country or territory which offer specific benefits or incentives, mostly tax concessions. Such benefits can be available to (A) foreigners and non-resident businesses, or (B) to all businesses registered and situated in that country, regardless of their ownership and area of operation. Increasingly, option B becomes more popular amongst the more advance offshore tax havens.
The concessions and benefits may come in different forms. It may be a zero income tax for all (British Virgin Islands Business Companies), a complete tax exemption for all international business operated by non-residents (Seychelles or Belize International Business Companies), an ultra-low income tax for international businesses (Seychelles Special License Companies pay 1.5% tax), local tax exemption for non-residents of that jurisdiction (Gibraltar, Channel Islands); zero tax on receipt and distribution of dividends (holding companies in Cyprus, Denmark, Netherlands), tax holidays for certain types of investments (Portugal, Iceland); favorable tax treatment through treaties and agreements with the investor's home country (Cyprus, Netherlands, Malta).
In addition, some countries offer superior legal protection from creditors and potential litigants who might attempt to seize an individuals' wealth. This is the other most important reason why offshore jurisdictions are so popular – asset protection. Sometimes, asset protection may not even have a tax motive, although most usually both are related. It's just safer to be offshore. Confidentiality provisions for trust and company management firms, minimum information on public file, provisions against confiscation are only some of the reasons why someone's assets are often better protected offshore than at home.
So, what are the most important questions that need to be evaluated before the choice of a particular offshore jurisdiction is made?
Before considering an offshore jurisdiction you should first consider it in the perspective of your business. Will your prospective clients be concerned that their new contractor or supplier is registered in an offshore territory – or won't they care? Have Your own country, or the countries where You intend to sell, imposed any restrictions against transfers of funds to the particular offshore jurisdiction? How will your business partners, suppliers, customers or investors react when asked to transact their business with an offshore company? Will it pose any problem for them?
Perhaps, Your business partners already have their own offshore structures in place? If so, where? Nowadays, in a considerable part of international trading business the money never actually leaves the "low-tax zone", as both parties to a deal would have their businesses registered offshore. According to some estimates, up to 60% of the whole mass of money circulating in the world at any given moment is actually in offshore accounts, and not in the highly-stressed, high-tax financial systems of the worlds' superpowers.
In response, many high-tax countries have 'blacklists' of offshore territories, imposing tax surcharges or financial penalties on those, who carry out business (read: pay money to) known tax havens. Can such blacklists influence your business?
The offshore jurisdictions qualify into treaty jurisdictions and non-treaty jurisdictions. Treaty jurisdictions have a network of double-tax avoidance treaties concluded with other countries, inclusive many high-tax 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. 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. Malta is a typical treaty jurisdiction.
Non-treaty jurisdictions are "classic" in the offshore sense. They would usually have zero corporation and income taxes anyway, so there is not much to reduce and no interest for any other countries to negotiate a double-tax avoidance treaty anyway. British Virgin Islands is a typical non-treaty jurisdiction.
It is for you to decide whether your intended business requires the tactics of the "offshore stepping stones" through treaty jurisdictions, or the clear-cut approach through a classic offshore tax haven.
An extremely important condition for those who want to establish their business or private interests in an offshore financial center is to choose a country that provides both political and economic stability, without a record or potential of any crisis.
Any offshore jurisdiction worth considering must not be subject to violent political swings or the likelihood of military coup, civil disturbances, war or invasion. Here, a particularly bad example was the African state of Liberia, whose well intentioned offshore legislation was ruined by an ongoing civil war and political turmoil.
A similarly important factor is economic stability. The ideal offshore jurisdiction should have a transparent economic system, a sound economic policy, a stable currency with no exchange and investment repatriation controls, low inflation and the main economic liberties strongly supported by the law and the judiciary.
Quite often, the most positive results in both political and economic stability are achieved by those countries, who have retained certain dependency on their former colonial powers, like Gibraltar (formally part of the UK), British Virgin Islands (also a British Crown dependency), Hong Kong (formerly part of UK, now an administrative region of China), Netherlands Antilles. At the same time, many of the offshore tax havens are completely independent democracies, with proven, good track records – like, for example Seychelles or Singapore.
Another very important factor is that the offshore and corporate legislation is solid, yet modern and flexible. Some countries have introduced new and modern suites of offshore corporate legislation, specifically designed for the international business. Others have amended existing domestic legislation to provide benefits for offshore investors. For quite many offshore jurisdictions the most important elements of the offshore legislation may seem virtually copied from each other. For instance, quite a number of jurisdictions have taken the (now former) British Virgin Islands IBC Act 1984 of the British Virgin Islands and adapted it to their circumstances without much of a change. These adaptations – as in case in Seychelles or St.Lucia - are often better than the originals, having taken care of all the shortfalls and errors of the earlier laws in the other, more mature offshore tax havens. The most competitive older tax havens still stay on top by introducing new replacements, as was the British Virgin Islands Business Companies Act 2004, and the frequent modern amendments to keep the legislation abreast with the global trends and contemporary requirements. All in all, if the total number of offshore companies registered in a given country is in five figures or more (you can usually tell by the current company 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.
Most offshore jurisdictions have ensured that their company law provides attractive features such as fast and easy incorporation, minimum information on public file, minimum or no obligation to file any returns or reports, minimal number of directors, availability of corporate directors, ability to hold directors' meetings anywhere in the world or by electronic means, lack of requirement to file audited records, flexibility in regards the amount of authorised capital and minimum or no capitalisation requirements, etc. It is for you to decide if any of those special features (which will usually be clearly emphasised by the Registered Agent in any particular offshore jurisdiction) are of any particular interest for you.
All entities that are known as "offshore companies" in the narrow tax benefit sense will usually have the same distinct feature – no or minimal tax. Such company is essentially relieved of any obligation to pay corporation tax or income tax to the country where it is registered. Hence, there is also no requirement to prepare and file the financial declarations that are usually associated with 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, that 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 – in a wider sense of this notion. You must be able to communicate with the country easily – preferably without language barrier, and certainly through modern and reliable lines of telecommunications. While less important, it may also help if You are able to travel to the particular country easily, quickly, safely and without the necessity to get a visa. The country must have a modern and reliable banking and financial system, as You probably don't want Your money get lost. Perhaps the most overlooked factor of them all – work ethics. All people are not the same. Some regions of the world tend to be more laid back and relaxed in their attitudes to work than others. This might become a crucial factor when You need something done quickly and without error. Some countries are historically indoctrinated with a work culture of diligence, confidentiality and prudency. 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 huriccane 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.
More in the offshore industry than anywhere else – cost is NOT everything. But it still is important, and a rather obvious factor.
Throughout the time, offshore financial centres have diversified greatly in terms of cost. There are some, like Liechtenstein, where absolutely first-class service comes at a quite eye-watering price. At the other end of the spectrum there are some jurisdictions where high incorporration volumes and high competition have driven the prices down into the ground.
After the corporate features and legal aspects of the offshore jurisdiction are all taken into the account, price comparison may still yield useful results. One particular position to compare is the minimum possible state duty. This is the fixed amount that the offshore company will pay every year in lieu of tax. As these amounts are fixed and don't fluctuate unless the laws are changed (doesn't happen often), easy comparisons are possible. In this respect, one may indeed prefer a jurisdiction where the minimum state duty is USD 100, as opposed to another, where it is USD 450.
Certainly, the professional fees also come into the consideration, as those constitute the bulk of the cost for the annual maintenance of an offshore company. What is the incorporation fee and what are the continuing domiciliary and management fees? What are the audit and other statutory compliance requirements and how much will it cost to take care of 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 the jurisdiction is? (C) what is the general cost of business operation in that country? (D) how old, big and reputable is the particular service provider and how much does it want new business? (E) what's the level of greed and common sense of the particular offshore service provider?
A combination of all these factors often yields a clear conclusion that some offshore jurisdictions are definitely more competitive than others, BOTH in terms of price and quality of service! In a similar fashion, inside one jurisdiction, some offshore service providers will definitely prove to be much more competitive than others, again BOTH in terms of price and reliability of service. Given that an offshore company is for all practical reasons the same, going for the expensive offer will not buy a guarantee of quality, speed and reliability – in fact, very often the opposite will the case! So, some prudent research will usually be worth it.
To gain more insight on this one, You may like to read the other article in this chapter: How to choose the right offshore service provider?
Which is the best offshore service provider?
or how to distinguish apples from lemons.
As we are an international offshore incorporation service provider ourselves, this might perhaps not be the best question to speculate on, for fear of a biased opinion. Nevertheless, just some considerations for Your own judgment.
To start with – what is an offshore service provider anyway? They tend to differ, but generally all do the same type of job. The 'product' or, rather as the name suggests, the 'service' being offered by an offshore service provider is the incorporation and registration of an offshore company or an offshore trust at a request of a client, who would be the "beneficial owner" of the offshore company.
The offshore corporate service provider is also supposed to take care of the administration tasks necessary to maintain the offshore company in good legal health (also known as "good standing") in its country of registration. This support usually includes the provision of the Registered Address and Registered Agent for the company, following up the annual renewal formalities of the company by acting as official intermediary between the Government and the owner of the offshore company, taking care of the mandatory annual filing and reporting requirements (if any), keeping and updating such books and records pertaining to the company as the law prescribes. Similarly, the support and administration services would be provided to offshore trusts.
The offshore service provider would also provide various optional services which enhance the confidentiality and functionality of the offshore company. Such services include 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. In some offshore jurisdictions the corporate service providers also assist the client through the more complicated matters of licensing the company to carry out some of the specifically regulated activities – offshore banking, offshore insurance, mutual funds, online gaming. On top of that, some providers would offer certain legal assistance or tax advice, although not many do that.
Overall, the offshore corporate service providers fall into two broad groups – the specialized providers, and the universal providers.
The specialized providers are narrowly focused on the offshore services available from one particular jurisdiction. As a rule, such providers are physically located in that jurisdiction, are licensed by the local regulatory authority as Registered Agents or International Corporate Service Providers, and, therefore, tend to be experts in everything their particular jurisdiction can offer. The specialized provider (Registered Agent) is usually the one who actually prepares the incorporation documents, goes to the Registry of Companies, submits and receives the paperwork and does all the "grunt" work associated with offshore company formations. Proficient in their field, 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 "own" jurisdiction. So there is really no sense asking them to compare the benefits of different jurisdictions, as theirs' would always come out on top anyway. They may also be unable or unwilling to structure 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 company and services he needs, dealing with a genuine Registered Agent is absolutely the best bet.
The local, specialized offshore service providers are also not all too similar. Here, the distinctions are like in any other business.
The older, more mature Registered Agent firms would tend to be slower, less flexible, conservative and more cumbersome to deal with, as the institutionalization has settled in. Of course, they would be more expensive. On the upside, the "old players" would usually have a solid internal framework, experienced senior staff (if You can reach them), and the implied assurance of being around forever.
The new players in the market would quite certainly be quicker (sometimes also quick to overpromise), 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, friendlier pricing.
All that aside, it is certainly true that all providers in one jurisdiction sell totally the same product. Apart from purely cosmetic variations between two standard packages of documents of, say, a BVI Business Company, there is no other difference, legal or otherwise - regardless whether the package has been provided by a startup Registered Agent or a half-a-century old law firm. From this perspective, it would seem appealing just to look for the lowest possible price. Largely true - but with a word of caution. As in all markets, there will always be an undercutter, desperate for a quick boost. Sometimes, it just does not work out. When rock-bottom fees prove unable to support decent record-keeping and database facilities, adequate internal security and confidentiality controls and dependable staff competence, dealing with an offshore provider may turn into a nightmare – certainly not worth the initial saving of a few hundred dollars.
As so often, the best bet is somewhere in the middle, in between the rip-off for the "brand name" and the bargain basement of price wars. In any established offshore financial centre there will be a fair number of reliable and experienced Registered Agents, who take their work seriously and professionally. At Fidelity Corporate Services Ltd, we would like to think of ourselves as belonging to exactly this group.
The universal providers also sell offshore companies. The difference is that here, like in a supermarket, the client is offered a wide variety of products and jurisdictions, plus some advice and guidance on the top. Unlike the specialized providers, the "supermarkets" are often physically located in the big commercial centres of the world, like London, Hong Kong or New York. Consequently, quite often, they do not register the companies by themselves – they merely outsource the job to a, You guessed it, specialized Registered Agent. Most of the universal offshore service providers are essentially middlemen between the actual client and the Registered Agent who will be registering and maintaining the clients' offshore company.
Speaking of the middlemen, there are some really big ones. Think of a 40-jurisdiction offshore supermarket with outlets in all major cities of the world, full page advertisements in leading business magazines, TV ads, posh Main Street offices, complex websites, glossy brochures, lots of staff, lots of fuss … lots of overhead. Without doubt, it's the customer who pays for it. But price is only part of the story. Big, multi-level systems tend to be slow, bureaucratic and inflexible. They don't do anything 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 combination of extras and additional services. But don't expect them to really go the lengths of actually thinking and choosing the right jurisdiction and configuration for you – at the end, it's just a "supermarket", where You take Your pickings and proceed to checkout. The truth is, in this area, the best research is the one you have done yourself. Big brands don't help you out here.
Some of the big, multinational offshore services firms do in fact have some of their offices located in the actual offshore jurisdictions, licensed as Registered Agents. In this case, clients can be reasonably assured that the speed of registration and competence of the service will be adequate (the price might still be not). Some of the universal providers, especially the heavily internet-oriented ones, outsource all of their orders to third-party Agents. In this case, there is nothing precluding you from finding the source provider. If a straightforward offshore arrangement is what you are after, then it has good sense to talk to people who will actually go to the Registry and file the paperwork for you. Even more importantly, they will also be the ones who will maintain it for you, hopefully for years thereafter, without the delays and outlays associated with layers of middlemen.
There is, in fact, one particular type of intermediary who may be quite useful to You. It's Your legal advisor and/or Your accountant. Protected by client-attorney privilege, a lawyer can also be Your "offshore service providers" - with the assumed benefit of a competent knowledge in the legal and fiscal circumstances of Your business and Your assets. When going offshore, it is very advisable to take competent legal advice from a specialist, who is located in the country where You live or do business. Just as well, many of such advisors would be in position to outsource the required offshore services from a particular tax haven jurisdiction. However, certainly, an offshore company purchased this way may cost You very dearly, on top of the legal fees. But that's just the way world works…
So, if You are in the market for an offshore company, how to tell a good offshore service provider from a bad one?
If all you have about their business is a cool website with an anonymous "contact us" form and no hint of the real location of the guys, stay alert! Any reputable offshore incorporations provider should at least have a street address and a landline telephone. If there is none, especially after you ask - at best it's an irrelevant internet-business wannabe and at worst it's a scam. Confidentiality is not really an issue here – who hides from his prospective client?
So, internet age or not, a good offshore service provider must have a proper business office, which can be visited personally if required - OK, this may involve several thousands of miles of air travel, but You knew that… Any decent offshore agent must be available to call on office telephone at general business hours in the particular country.
If your prospective offshore service provider can not clearly identify his legal status and the geographical location, walk away.
You 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 $100 and all the wonders of the world. Again, at best it's incompetence or irresponsible marketing, at worst it's a scam. The experience shows that the best offshore service providers are actually very down to earth, they know their limitations, they rarely overpromise. What's even more important, they should be absolutely competent about the product and service they sell. They should be able to give a complete explanation of all fees and charges involved, what happens when and why. Competence is 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, local address, director, manager and all the other accessories of any regular business. Unlike the internet-based middlemen, a real Registered Agent based in an offshore jurisdiction will hold a financial services license. For instance, to provide offshore incorporation services in the British Virgin Islands, the Registered Agent must hold either a Company Management or a General Trust license issued by the BVI Financial Services Commission. In order to obtain such 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 large amount of paid-up capital and a professional indemnity insurance. It is a paradox of the 21st century, but even a small offshore formations provider in a tiny tax haven jurisdiction is 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.
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 Seychelles International Business 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 Fidesta we quite believe that an informed client is the best of them all…