Offshore Companies and Their Uses
“No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow – and quite rightly – to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer’s pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue.”
– Law Lord Clyde, (Ayrshire Pullman Motor Services v Inland Revenue Comrs [1929] 14 Tax Cas 754, at 763,764).
“There is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; all do right. Nobody owes any public duty to pay more than the law demands; taxes are enforced exactions not voluntary contributions!”
– US Judge Learned Hand –
We act for a wide range of clients from large multinational companies to family businesses to private individuals. Our clients are engaged in their own country or internationally in many areas of activity.
Apply the principles to yourself or your company to appreciate how we can help you.
By utilizing an offshore company, it may be possible for the owner (or beneficial owner) to secure a number of advantages, mainly revolving around taxation but could be useful for the protection of assets etc. In the following notes, we outline some of the structures which are available and give examples of uses which may be made of offshore companies. This is not intended as an exhaustive demonstration of offshore possibilities and we would always remind Clients that the tax and other benefits which can be obtained by use of offshore entities usually depend upon the country of residence of the beneficial owner and its anti-avoidance legislation. Regard has to be had, too, for the requirements of any other country with which the offshore entity might carry on its business.
Typical uses to which an offshore company might be put, and a few actual examples (read between the lines for ways of how you might adapt these for your own use, but always remember, there is a very fine line between tax avoidance and tax evasion) are:-
| TRADING | HOLDING |
Trading Companies
An importing or exporting company might establish itself in an offshore area. The offshore company would take orders directly from the customer, but have the goods delivered directly to that customer from the manufacturer or place of purchase. The profits arising out of the difference between purchase price and sales price would then be accumulated in either a tax free or low tax area. With such trading companies, it is important to choose an offshore area, or at least an operational base, which has good communications as shipping and other documentation may be critical to the scheme.
For European Union transactions, the Isle of Man and Madeira have become very popular locations for conducting cross border trading activities. Both the Isle of Man and Madeira are able to obtain VAT registration, which is imperative for transactions within the European Union. As an example, if an Isle of Man company wished to source products from France for sale to Germany, the Isle of Man company would inform the French company of its VAT number so that it could zero rate its sales invoice. The French company would not have to charge VAT to the Isle of Man company. The Isle of Man company would then obtain the German company’s VAT number so that it could zero rate its sales invoice.
This type of transaction would not normally be possible through other jurisdictions without the requirement of either establishing a branch office or appointing a tax agent within the European Union which can be a complicated exercise and may give rise to taxation implications.
Factoring trading debts of a company resident in a high tax jurisdiction through a company established in low tax jurisdiction may assist in transferring funds to the low tax jurisdiction.
Another common use of an offshore entity is for bulk purchasing. Such a structure is typically established by a group of associated or un-associated companies to benefit from economies of scale and reduced administrative costs. Moreover, such a structure may be more tax efficient than an onshore arrangement.
The Publisher of a number of collections of rare classical books had a ‘product’ which had a very high perceived value and a high demand. Naturally he was concerned that when he sold his business, which he intended to do a couple of years later, there would be substantial capital gains – how could he avoid paying tax on them. What was the solution? Simple but brilliant even though we say so ourselves.
1. Firstly both an offshore company and an offshore discretionary trust were set up, with the trust owning the shares in the company. Nominees were used throughout.
2. Secondly the Publisher placed an advert in a national newspaper saying that he required equity finance to expand his business. Co-incidence, one reply, the one he accepted, was from the offshore company which stated that it had some experience in rare book publishing and, although not able to inject a great deal of capital, could actively assist in worldwide marketing as part of the deal.
3. Thirdly, this company paid our Publisher a modest sum (enough to satisfy the tax authorities and on which tax was paid) for a 50% share in the business – it was after all just a small publishing business wasn’t it, how were the tax authorities to know its potential? Over the next couple of years the business expanded rapidly as our Publisher knew it would and 50% of the trading profits went off-shore quite legally into the trust account.
4. Finally, when the time came to sell the business on the open market, a sum in excess of 100 times its value two years before was realized. 50% of that sum (over US$2 million) went straight, tax free, to the offshore equity partner whilst our (pretty) honest Publisher duly paid tax on his share of the profits.
Of course, we couldn’t possibly say that the Publisher owned both the trust and company could we, or that by this simple manoeuver over US$800,000 in tax was ‘saved’ on the sale proceeds alone, or that our Publisher then suddenly went on a long overseas holiday returning with a US$2 million windfall made during his holiday, which was, oh dear, just one day longer than required to be non-tax resident – and hence a non-tax payer on earnings during that period – in his home country!
The owner of a small family boat building and yacht broking business was looking to retire (at all of 45!) in the near future – could he ‘sell’ his business tax free but still ‘run’ it? This wasn’t so easy but our Boat Builder wasn’t averse to ‘sailing close to the wind’, so, after a particularly bad trading year – there were an awful lot of ‘write downs’ and land values had dropped hadn’t they, and good customers were looking to go elsewhere – it’s not difficult to find a good accountant who can turn even a substantial profit into a whacking tax loss – our Boat Builder advertised the business for sale in an international boating journal.
Surprisingly the offer he accepted from an offshore company in the boating industry was low, but his accountant did say that it was probably the best he could get given the ‘poor’ state of the books. As a ‘softener’ though, the buyers did ask that he stayed on for a couple of years, at a very good salary, to run the business for them. A small amount of tax was paid on the sale profits after all allowances and our Boat Builder is still running the business, although all invoices, orders etc originate from an offshore office which even has its own ‘phone and fax number (isn’t communications technology good these days!).
Need we say much more? If the tax authorities had investigated the company which bought out our Boat Builder they would have found it was registered some 10 years before – couldn’t possibly have been ‘our’ man could it? – and all contact with their offshore office would have had prompt, efficient and courteous replies to the effect of ‘mind your own business’. But of course they never did. Fully legal? Well… let’s say that there could be gray areas.
Investment Companies
Funds accumulated through investment companies set up in offshore areas can be invested or deposited throughout the world and whilst generally returns or interest payable in respect of these funds will be subject to local taxation, there are a number of offshore areas in which funds may be placed either in tax free bonds or as bank deposits where interest is paid gross. Similarly, in many offshore areas no capital gains taxes are applicable. Use of an offshore company incorporated in a suitable country allows the possibility of investing tax efficiently in a high tax country where there is a concessionary tax treaty in respect of investments made by companies incorporated in the off-shore country.
A Stockbroker was making very substantial personal profits on trades on the international equity markets and despite ‘bed-and-breakfasting’ to try to gain tax relief decided to move part of his investments offshore.
As our Stockbroker sold various investments over a period of months, the sale proceeds somehow found their way into an offshore company account! Once a sufficient amount had accumulated, this company then decided to start trading on the markets. Perhaps you won’t be surprised to hear that their investment strategies were an exact replica of those used by our Stockbroker, and as his personal ‘onshore’ holdings and profits reduced, those of the offshore company increased! And perhaps it was a sheer co-incidence that the Stockbroker suddenly started using cash a great deal more, making frequent visits to assorted ATM machines around his country. Of course, when our Stockbroker eventually dies, his family will mysteriously inherit some bearer shares for an offshore investment company together with strict instructions on how to keep their mouths shut!
Hint. Remember well what we’ve already said about not letting anyone know about your offshore involvements, especially if they’re ‘iffy’!
Holding Companies
Use may be made of an offshore holding company which would fund the operation of subsidiaries in various countries so that the subsidiaries obtain the benefit of tax deductions on interest paid.
If the holding company is situated in an offshore area where there are no income or corporation taxes and no requirement that dividends must be paid, then the profits which are accumulated in the tax free climate can be used to fund the requirement of subsidiaries or reinvested as business convenience suggests.
Probate and Privacy
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 or trust so that upon his demise probate would be applied for in the country in which his company or trust were incorporated rather than in each of the countries in which he might hold assets. This saves legal fees and avoids publicity. Again, not everybody wishes to advertise wealth and an individual may wish to hold property through an offshore entity simply because of the privacy which the offshore arrangement gives.
The owner of a substantial country estate and several allied ‘country’ businesses was concerned over the amount of estate and inheritance taxes his son and family would have to pay on his death, which, although unknown at the time was fairly imminent.
A family decision was taken that the entire estate was placed under the ownership of a discretionary trust, and a wholly owned management company was formed to run the estate using the son and his family as local Agents. On the father’s death, the family were thus able to stay on living in the style they had long been accustomed to without paying a cent of tax.
Note. This structure was not ‘off the shelf’ and required very careful planning to be legal in the country where the family live.
Property Owning Companies
There are often great advantages in using an offshore property holding company for the purpose of holding an overseas property. Indeed, we offer low cost specialist schemes, such as the Portuguese Property Ownership Scheme, which we operate in conjunction with lawyers in Portugal.
Advantages of offshore property ownership include avoidance of inheritance tax, avoidance of capital gains tax, ease of sale which is achieved by transferring the shares in the company rather than transferring the property owned by the company and reduction of property purchase costs to the onward purchasers.
We were recently approached by a certain small builder who had spied an excellent investment opportunity which stood to make him some US$500,000 a year for several years. Not wishing to pay tax, an offshore development company was formed, with nominee directors and shareholders of course, which then registered for sales tax in the EU country where our Builder lives. Due to his geographical location it seemed to any casual (indeed to a fairly in-depth) observer that the development company was ‘just another “xxxxx” country company operating over here’. But few, if any, realized that the development profits and on-going income from rentals were not just going to another EU destination to be taxed there, but were in fact tax free due to a unique company structure allowable in the country of incorporation, one which even a company register search wouldn’t reveal.
Taking the example of investment in property in the United Kingdom by an offshore company, use of an appropriate offshore vehicle can offer relief from income tax, capital gains tax and inheritance tax.
It should be remembered, in particular, that when a non-resident company disposes of a property investment, no capital gains tax is charged and holding through an offshore company removes the application of inheritance tax which would apply if a non-domiciled investor held a UK property in his personal name.
Professional Services
Many individuals engaged in the provision of professional services in the professions and in the construction, engineering, aviation, finance, computer, film and entertainment industries can achieve considerable tax saving benefits through the establishment of a personal service company, based offshore.
The offshore employment company may not have to pay tax on its profits which can be reinvested in a tax free climate to generate further income from the offshore company.
The offshore company can contract to supply the services of the individual outside the country in which he/she is normally resident and the fees earned can accumulate offshore, free from taxation in the offshore centre. Payments to the individual can then be structured in such a way to minimize income tax.
One example in this regard in respect of an overseas employment is to increase subsistence expenses as against fees as such which would be paid to the individual.
We have incorporated several offshore companies (one company per Consultant) for a small group of Management Consultants who are very active in their field of Computing and allied management activities. Contracts are entered into by the offshore company, through its Gibraltar office, for work to be carried out in other EU countries. This work is then subcontracted to the members of the Consultancy Group we work with, who are paid by the offshore companies on a time spent basis, at a rate substantially less than the ultimate invoice charges. The resultant profits accumulate offshore, perhaps they might even find their way to paying for the long and frequent holidays our Clients seem to take!
In structures such as this, because they frequently operate in legal ‘grey’ areas, it is important to diversify the sources of offshore income, admixed with some from onshore. If the tax authorities do ever undertake an audit, it can be demonstrated that the overseas incomes are not just from one, could be suspicious looking, source, but several. Again it is important to be seen to be ‘doing things right’ and ensure that copies of all correspondence between parties, onshore and offshore, are kept filed – for heavens sake use different type faces on different letters and ensure that ‘offshore’ mail is indeed posted from where it ‘should’ be if you are evading tax! More than one person has been caught for lack of such attention to detail.
Shipping Companies
The use of offshore shipping companies can eliminate direct or indirect taxation on shipping. Shipping companies may own or charter ships, the profits from which activities can be accumulated tax free.
Tax and legal requirements generally dictate that the offshore company owning a shipping vessel should be incorporated in the jurisdiction whose flag the ship flies.
The historic havens for these purposes have been Panama and Liberia. Latterly, the registries of other nations have expanded and consideration might be given to registrations at British Ports of Registry such as those in the BVI, Delaware USA, Isle of Man and Gibraltar.
A certain prestige attaches to the registration of a ship or indeed a yacht at a British port of registry and the vessel can be surveyed at most ports throughout the world by a surveyor recognized by the UK Department of Trade and Industry. The British flag has always been regarded as one of the world’s most dependable.
Offshore Simple Inc are now able to register yachts in the BVI offering considerable savings on both purchases taxes (VAT) where applicable and annual registration fees. If you, or anyone you know, has a yacht which could benefit from being registered offshore, please contact us for more details.
Patent, Copyright and Royalty Companies
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 sublicence.
Upon acquisition of the intellectual property right the offshore company can then enter into agreement with licensees around the world who would be able to exploit the intellectual property right in various countries.
It is thought preferable to acquire, for example, a patent at the patent pending stage before it becomes very valuable so that the capital payment for the acquisition of the patent can be set at a lower amount.
Often royalties paid out of a high tax area attract withholding taxes at source.
In many cases an interposing holding company may allow a reduction in the rate of tax withheld at source.
‘John’ came to us a couple of years ago as a (then) struggling inventor, although his full-time business was running a small engineering company. John had several good ideas in mind which he wished to pursue and, being foresighted, had thought through the tax implications if any of his ideas did make him a great deal of money.
We set up an offshore company on ‘John’s behalf, to which he subsequently sold the rights to any and all ideas he may develop, in return for a guaranteed payment regardless of success. OK, so ‘John’ pays income tax on money, which as far as we know just recirculates round and round to make it seem like a constant supply (only speculation of course), but a couple of his projects have been taken up by large manufacturing and marketing companies, each for six figure sums.
These royalties are of course paid to the holder of the rights, the offshore company, so they are totally tax-free and in theory John only receives his flat-rate guarantee sum, but there is a nice little six figure cash sum, growing substantially with accruing royalties, that the ‘true’ owner of the company will one day retrieve. We wouldn’t be at all surprised if it turned out to be ‘John’ himself!
Banking Companies
Click here for more detailed information on banking licenses
Many offshore banking institutions have been established in tax havens in recent years.
Many of these institutions are subsidiaries of major international banks. Such institutions pay interest free of withholding tax and engage in international financing from offshore bases which are free from exchange controls.
Such banking institutions and their associated trust companies are able to provide a wide range of financial services to their international clientele.
Offshore banking institutions are also used by the smaller business Organization and indeed in some cases by individual owners to act as offshore cash management centres.
In the past, certain offshore centres such as Montserrat and Anguilla have lacked the supervision which should accompany the setting up of smaller banking institutions.
Indeed the British Government introduced a moratorium on the setting up of banking institutions in its Caribbean dependencies until such time as adequate legislation had been brought in and bank supervisors appointed.
Of these jurisdictions one of the first to meet British Government requirements was the Turks and Caicos Islands.
Under its banking regime two types of license are available, namely, a national and an overseas, the latter only permitting banking activities outside the Islands.
In either case a bank would have to maintain a physical or representative presence in the Islands.
A combined license can be granted. The management of the proposed bank would be required to display a sound knowledge of banking with evidence of ability and experience and no less than two directors must be appointed.
In respect of those banks wishing to deal with the general public without restriction, substantial capital resources would have to be demonstrated.
Insurance Companies
There are a number of offshore havens which are keen to encourage the establishment of insurance companies which like banking companies bring employment and investment to the country of incorporation and generally enhance its reputation and its range of financial services.
In a number of offshore havens it is possible to incorporate insurance companies which pay no tax in respect of their premium or investment income.
Captive Insurance
Captive insurance companies have been created by many multinational companies to insure and re-insure the risks of subsidiaries and affiliated companies.
Captive insurance companies are particularly suitable for the shipping and petroleum industries and for the insurance of risks which might be insurable only at prohibitive premiums.
Bermuda and Guernsey have long been favoured as domiciles for the incorporation of captive insurance companies with countries such as the Isle of Man and the Turks & Caicos Islands competing for a share of this growing market.
These are just a few examples of both the different uses to which offshore entities can be put and even fewer examples drawn from real life situations. We’re sure that, with a little imagination, you could find a circumstance and a situation which could reflect your own, then use it to go offshore yourself. If you’re stuck, do ask us and we’ll try to offer a few suggestions.