Typical uses to which an offshore company might be put, and a few actual examples however, 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 and regard has to be had, too, for the requirements of any other country with which the offshore entity might carry on its business.
An importing or exporting company might establish itself in an off-shore 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 off shore 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 Cyprus have become very popular locations for conducting cross border trading activities. Both the Isle of Man and Cyprus are able to obtain VAT registration, which is imperative for transactions within the European Union. As an example, if a Cypriot company wished to source products from France for sale to Germany, the Cypriot 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 Cypriot company. The Cypriot 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.
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 center. 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.
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, Liberia, Marshall Islands and Cyprus. Latterly, the registries of other nations have expanded and consideration might be given to registrations in the BVI, Delaware USA, Isle of Man and Gibraltar.
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 sub-license.
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.
Dave came to us a couple of years ago as a (then) struggling inventor, although his full time business was running a small engineering company. Dave 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 ‘Dave’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 ‘Dave’ 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!
Investment and Financial Services 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 offshore country.
A Trader 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.
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 any tax.
Property Owning Companies
There are often great advantages in using an offshore property holding company for the purpose of holding an overseas property. Such 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 €700,000 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 observer that the development company was ‘just another 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 London 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.
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 favored as domiciles for the incorporation of captive insurance companies.