When most people think of an offshore company they think of shady dealings and suitcases of cash being deposited in the Cayman Islands. This is because Hollywood and the media in general have portrayed “going offshore” in this way to sell cinema tickets and newspapers. After all a newspaper headline reading “Individual legally opens business in overseas jurisdiction” doesn’t exactly grab your attention but the truth is that’s all opening an offshore company really involves.
Due to this often misleading representation given of going offshore. You may think that the main reason people start offshore companies is to hide their money. Again this isn’t usually the case so in this article we will look at 3 of the main reasons you may want to consider an offshore company.
What Exactly Is An Offshore Company?
Well it’s actually as simple as the name suggests. If you operate your U.K business using a company structure and that company is registered outside of the U.K then you are operating using an offshore company. This means that if a U.K based business registers a company in Australia, France, the United States or the Bahamas then it is most likely utilising an offshore company.
In reality everyone’s situation and business needs are different which means that structures can become a little more complicated than this. An international tax advisor will help you to decide on an appropriate structure. It may be in your interest to form multiple companies in multiple jurisdictions. You may be better off with a simple parent and subsidiary that have a pricing agreement in place to move profits offshore.
Any business that operates in the U.K will still need to adhere to local laws and regulations but as the business itself and usually the business assets are registered offshore it may benefit from different reporting requirements and taxation rules. Working between 2 rule sets of course increases the compliance burden but has the potential to bring great benefits, especially when you take the time and do the research by shopping around between jurisdictions.
Below are 3 common reasons U.K businesses may want to incorporate offshore.
#1 – Taxation
Of course paying less tax is one of the main reasons a business may want to operate through an offshore company and is probably the first reason that springs to mind for most people. Company profits are usually taxed in the tax jurisdiction that the company is registered so a company formed in Cyprus but trading in the U.K may be able to calculate it’s tax liability using Cypriot tax rates. If the Cypriot corporate tax rates are considerably lower than the comparative U.K rates then you can see why this may be appealing.
This provides businesses with an opportunity to “shop around” when choosing where to form their offshore company for jurisdictions that have comparatively low tax rates.
When choosing where to incorporate offshore it’s not just the lowest rate of tax you should be considering. In the past there have been plenty of “tax havens” where companies were able to enjoy rates as low as 0% and have very little in the way of reporting requirements as well. Unfortunately over time these once popular locations have become less and less attractive for U.K businesses.
Those low rates of tax still exist (usually in exchange for paying an annual fee locally) but most reputable banks around the world are now very reluctant to open accounts for companies incorporated in these known tax havens, primarily due to the lack of due diligence in the company formation process and the potential bad reputation that may come from working with them.
It’s usually best to settle for a happy medium. Rather than just seeking out a jurisdiction that offers the lowest possible rate of tax which usually comes with a certain stigma attached. There is a balance to be found between low taxes and strong international reputation. Singapore for example may have lower corporate tax rates than most countries but still maintains a strong international reputation.
#2 Asset Protection
By setting up an offshore company you are able to add an additional layer of protection to your businesses assets. This is particularly true and important for businesses who trade in countries where litigation is common. The United States is one country that springs to mind as it is very common and very easy to take legal action against a business or an individual.
Where a business is operating via an offshore company this helps to put some distance between would be claimants and business assets. Someone wanting to make a claim against a company registered in Singapore for example would need to do so in Singapore. This will involve more effort, increased time and costs plus increased uncertainty for the claimant.
Ask yourself how likely you would be to take legal action against a company based in a foreign country?
Although this does not rid the business of legal issues entirely and an argument could be made that the business is opening itself up to legal disputes in another jurisdiction by incorporating offshore, providing careful consideration is made when selecting a location for your offshore company and local compliance is maintained then the benefits will outweigh the risks.
#3 Investing In Overseas Assets
An offshore company can also open up new opportunities for your business. Many countries around the world won’t allow foreign nationals or foreign companies to purchase certain assets such as land and property. A company registered within the country will usually be able to purchase these type of assets without a problem.
This could be an important consideration when deciding where to base your offshore company. If there is a particular market you are trying to enter or establish your business in then forming a company there may give you easier access.
If the purchase of overseas assets is the primary goal of your offshore company it is important to really do your due diligence in your target jurisdiction. Your business may need to operate under a specific type of entity, the company may need a local resident to be named as a director in order to purchase certain assets. These are all criteria that should be considered at the planning stage and discussed with an advisor to ensure the best outcome.
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Is It Legal To “Go Offshore”?
Contrary to popular belief operating via and offshore company is perfectly legal. You will just need to stay up to date with reporting requirements and disclosure requirements in each jurisdiction.
Of course governments won’t advertise the fact that you can technically “shop around” for the most attractive jurisdiction to base your company. In particular the governments who impose high rates of corporate tax and stringent reporting requirements as they are likely to lose a lot of businesses and the associated tax revenue that those businesses generate.
Although the process is completely legal it’s not something we would advise to undertake without first seeking advice from an experienced international tax professional. If you start to fall foul of some of the reporting requirements the penalties can really start to rack up.
Those looking to evade tax altogether should think again as any activity with a view to evading tax altogether is illegal no matter where in the world it is done. Learn more with our article tax evasion vs tax avoidance – the great debate.
How To Open An Offshore Company
The process to open an offshore company isn’t as complicated as you might think. Usually there is no need to jet off to a Caribbean Island suitcase of money in hand (unfortunately).
- Sit down with a tax professional and explain your reasons for wanting to incorporate offshore. Let them know what is most important to you and your business whether that’s lower taxes, asset protection or something else
- Decide on a suitable jurisdiction. A tax advisor will help you to identify the best options based on your specific needs and situation.
- Choose what type of entity you will operate under. Again this will usually depend on the jurisdiction you have chosen
- Form the company – in most countries this is a quick and simple process that can be done online
- Open an offshore bank account in your chosen jurisdiction. Depending on the bank and where in the world the bank is, this can either be done in person in branch or online. Just note that if a bank is able to open your account without seeing you in person the process will usually take longer.
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Adam Hill
Practice based accountant with over 10 years experience, specialising in SME's, Freelancers and Personal Tax. "I take pride in proactively recognising tax planning opportunities on behalf of clients to help them operate more efficiently."
