Nowadays, using an offshore jurisdiction to register a company is a legal method of organizing international business activities. Offshore zones, including classical ones, are widely sought after by foreign investors, entrepreneurs, and affluent individuals for asset protection, tax optimization, and expanding business horizons.
Furthermore, an offshore company can be established not only in distant island nations but also in respected jurisdictions. For example, you can open an offshore company in USA in specific states and avail yourself of all the advantages offered by the world’s leading economy.
Is offshore company legal?
In 2023, the use of offshore companies is legal and completely legitimate in all countries worldwide. Due to measures implemented to combat tax evasion and terrorism financing, there is a common belief that offshore solutions have become disadvantageous and unlawful.
However, the reality is somewhat different. An offshore company established in any jurisdiction, including classic ones with zero tax rates on global profits, must comply with all relevant local and international standards. This includes corporate structure requirements, reporting obligations, and tax planning.
To ensure compliance with the law and obtain the desired benefits from an offshore entity, it is recommended to study the internal legislation of the jurisdiction of incorporation and the tax residency country of all parties involved (shareholders, beneficial owners, partners). By making the right choices, you can take advantage of the banking sector in Europe, onshore zones, and other offshore locations, as well as utilize the provisions of Double Taxation Avoidance Agreements (DTAAs).
Offshore solutions for businesses and affluent individuals
Depending on the objectives at hand, offshore solutions can be utilized to reduce tax burdens, protect assets, expand businesses, and more. The most popular solutions, which remain legal and continue to be employed by foreign entrepreneurs, include:
- Offshore bank account
This question is most relevant for legal entities that aim to diversify their company’s capital or preserve personal funds, including through investments. The most optimal way to open an offshore account is through company registration or the purchase of a ready-made company.
In this case, entrepreneurs address several objectives simultaneously:
- They gain an additional business presence abroad, which opens up opportunities for expanding operations in other countries worldwide.
- They reduce taxes on global income.
- They receive a secure bank account that enables asset preservation, future growth, and accumulation.
Popular offshore jurisdictions where you can open a company, enjoy exemption from financial reporting, benefit from low tax rates, and establish a bank account include Panama, Dominica, Seychelles, and Belize.
- Investments
Investments are the most popular niche in offshore activities, aimed at achieving stable profits, including passive income, as well as obtaining citizenship or residency in a foreign country. One of the options where investments yield positive results is real estate. The involvement of an offshore company is particularly important in this case.
- Import/export and trading in offshore jurisdictions
The most popular way to utilize an offshore company is through international trading activities, including importing and exporting goods/services. Thanks to low tax rates and the existence of double taxation agreements between countries, offshore entities become part of a group of companies and act as intermediaries in transactions.
Entrepreneurs have the opportunity to sell or purchase goods/services within their corporate group, regulate pricing policies, and accumulate profits in a tax-free zone. This approach remains within the bounds of the law, with taxes only being paid when funds are transferred to any recipient resident.
The most popular countries for imports, trade deals, and service provision include BVI, Belize, Seychelles, Panama, the Isle of Man, and others.
- Registration of an offshore holding company
A holding structure is established in a jurisdiction with low tax rates on profits, with the intention of creating a subsidiary in another country (based on the tax residency of the founder). In this case, the advantage lies in the payment of dividends from the subsidiary to the foreign investor, utilizing the tax rates provided by the offshore jurisdiction’s laws (ranging from 0% to 5% or more).
To achieve the desired benefits, the company is registered in an offshore zone that offers low dividend and interest tax rates, as well as has a double taxation avoidance agreement with the founder’s tax residency country.
- Asset management in offshore jurisdictions
This is a method to reduce taxes on capital growth, inheritance, and the transfer of property rights. The most relevant approach for handling financial and asset assets is the registration of a trust and subsequent transfer of assets into trusteeship.
How else can an offshore company be legitimately utilized?
There is a lot of talk about popular offshore patterns that are completely legal. Let’s focus on the most relevant ones that continue to be used in international business planning today:
- Protection against hostile takeovers, which involves multiple owners or a single offshore company purchasing shares of a target company.
- Construction, as a means of generating profits from the price difference between the contractor (offshore company) and subcontractor.
- Purchase of vessels.
- Royalties through the sale of trademark rights, allowing for reduced tax rates on gross profits.
No government is interested in money outflow from their national treasury to foreign jurisdictions. However, the government also cannot prevent businesses from registering in another jurisdiction due to the lack of legal grounds. One protective measure in place is the MLI/BEPS, which aims to prevent illegal financial transactions at the international level.
The registration of an offshore company remains relevant even after the introduction of restrictions on indicators such as beneficial owner confidentiality, confirmation of economic substance, changes in the norms of double taxation agreements between countries, expansion of blacklists, and so on.
An offshore company today is not a method to go into the shadows and hide income from tax authorities. It is an option to expand businesses, protect assets, change tax residency and domicile, or choose multiple jurisdictions for tax planning.
