Believe it or not, lots of countries are actively wrestling for your business. A quick Google search for an ‘offshore company’ reveals that the United Arab Emirates and the Cayman Islands, among others, are paying top dollar to show up in your results. They’re dying for you to open your offshore company with them. And if you’re looking to decrease your tax burden and stop paying 30-50% in tax per year so that you can invest that money back into your business instead, you need to read on. Opening an offshore company, in many cases, is simple and quick, and it definitely is not reserved only for multinational giants such as Apple, Amazon, and Starbucks. Some might call it tax avoidance, but we call it tax optimization. If it’s legal, why shouldn’t you do it? In this article, we will discuss the following:
- What is an Offshore Company?
- Reasons to Set Up Offshore
- Decrease Your Tax Burden
- Improve Your Banking Structure
- Create a Solid Legal Foundation
- Protect Your Money from Potential Litigation
- Steps to Opening an Offshore Company
- Identify Your Offshore Goals
- Consult with a Tax Specialist
- Incorporate Your Offshore Company
- Open an Offshore Bank Account
- Comply with Ongoing Requirements
- Low Tax Rates vs. No Tax Whatsoever
- The 10 Best Countries to Open an Offshore Company
- Challenges with Offshoring to Keep in Mind
- The Moral of the Story
What Is an Offshore Company?
Essentially, an offshore company is a business that is located outside of the home country where the main office and the operations of the business take place. For example, a British investment company could have an offshore branch in the British Virgin Islands and account for a vast amount of their profits in the tax-free jurisdiction instead of in the UK. You get the idea. For decades, offshoring has been a go-to technique for companies wanting to decrease their tax burden. The wider public doesn’t get it and it’s often regarded as trickery and deception. Why wouldn’t you just pay the tax that’s due and move on? Well, not all of us like paying the government for the ‘privilege’ of doing business in a country where we just happened to be born. Contrary to popular belief, opening and running an offshore company can be done in mere minutes and there are very few hoops to jump through in some jurisdictions too. Sure, there are revenue thresholds in some places that can get quite high, but offshoring is for all sorts of businesses. Are you a digital nomad running your own location independent company? Offshoring can help. Are you a trader or a crypto investor looking for a more favorable abode for your profit-generating personal business? Offshoring can help.
Reasons to Set Up Offshore
There are very few things in life that truly work as one-size-fits-all. You wouldn’t want to pick a universal size suit to go to that formal dinner party with a potential client, would you? No. You’d want a nicely tailored one, and you’d be willing to splurge to present yourself well. Investing a little more money now will probably mean you secure the client and a financial windfall will be coming your way real soon. Cha-ching! It’s the same with international tax law. You must be willing to do the homework so that you can pinpoint the exact reasons as to why you want to set up your company offshore. Based on that, you’ll be able to pick an offshore jurisdiction (read, foreign country) that will be that perfect fit. And just a quick note, you’ll want to avoid all companies that say they have got the ‘secret offshore formula’ to help solve everyone’s business woes. That simply doesn’t exist. At best, such spammy sounding companies could turn out to be a scam that takes your money and skips town. At worst, they could leave you with a set-up that’s illegal and leaves you non-compliant. You’ve been warned!
Decrease Your Tax Burden
Let’s not dance around this. The most likely reason you’re reading an article on how to open an offshore company is because you want to pay less (or no) tax on your business. And that’s a legitimate reason. You don’t owe your government anything, especially if you don’t live there, don’t draw upon the social system, don’t have kids that go to school there and so on. Decreasing your business tax can be done by setting up an offshore entity in a country that features no (or low) taxes on foreign profits. This means that if you have an offshore company in Hong Kong, for example your foreign profits will be taxed at 0%. If you happen to make any local revenue or decide to live there too, you’ll be taxed at a relatively low 16.5% for profit tax. There are plenty of other countries in which you can open an offshore company with the sole purpose of decreasing your tax, more on that below.
Improve Your Banking Structure
Not every country can brag about their banking systems. Some are highly limited in what they can achieve on an international scale. If you’re looking into setting up an offshore company in a highly obscure jurisdiction, say Labuan (a territory in East Malaysia) or the Marshall Islands, we have bad news: you’ll quickly realize that no bank in the world wants to do business with you. There really is no easy way to move money to and from places with banking structures that are lacking. Thus, another reason for wanting to set up an offshore company is to gain access to better banking infrastructure that would leave you worry-free. It might not be in a country that’s tax-free (e.g. Bulgaria or Hong Kong), but the tax will be low enough to justify the benefit of having a world-class bank account that works everywhere.
Create a Solid Legal Foundation
Another non-tax reason to set up an offshore company is to avoid uncertainty in terms of a country’s political, governmental or bureaucratic situation. There might be businessmen and women out there that have their businesses set up in places with acceptably low tax rates. Yet, running things might be a bureaucratic nightmare or the political situation might be unstable, with leaders being toppled or incarcerated. Or worse. Whereas the situation in any given country should be evaluated as a whole, there are definitely situations when running your business from offshore is an attractive solution. And not for tax reasons at all.
Protect Your Money from Potential Litigation
Life is complicated. Even though everything might be smooth sailing right now, there might be people coming after your money later in life. You can never know what will happen next. Angry ex-spouses, distant relatives, attorneys, plaintiffs… Everyone seems to be trigger-happy, especially in the United States. And we’re not saying these people might not have legitimate claims. Yet, sometimes you just want to have a bit more of the protection that a foreign corporation can offer. We’ll leave the moral issues of this reason for offshoring with you.
Steps to Opening an Offshore Company
Weeks and months spent buried under piles of paperwork, expensive stamp duties, multiple flights to the country in question… Forget about all of that. In many cases, incorporating offshore is all done online and takes mere hours. In other words, you can go back to sipping on your old fashioned, pronto. Here are the five essential steps that everyone wanting to open an offshore company should complete.
Identify Your Offshore Goals
As we spoke about at length above, there are different reasons for incorporating abroad. As there is no one standard approach that will be ‘the best’ for all types of businesses, you must do your due diligence before taking any actual steps. And let’s just get this straight – tax evasion by way of hiding your money and not reporting on it anywhere is illegal. We definitely don’t recommend that as one of your goals; even if many others are doing it, doesn’t mean you should too.
Consult with a Tax Specialist
You’ve identified your goals for your future offshore entity – congratulations! You’re on the way to a brighter tomorrow and we’re not just being cheesy. Taking control of your tax feels liberating and we’re sure you’ll agree real soon. Yet, before you get going, you should find a trustworthy tax specialist that can help you get there. It’s extremely important to keep things 100% legal and someone who knows all the ins and outs of offshoring and reporting back to your home country (if applicable) will be invaluable to your journey. We don’t condone creating illegal workarounds and dabbling in shady business. There is no reason to get yourself into hot water. Do everything legally and you’ll never have to ask yourself whether the next step in your offshore strategy is on how to avoid jail time. International tax law is highly complicated, and it takes years of experience and practice to suss out the best solutions for each specific business. Leave it in the hands of professionals and overpay them ever so slightly too. This will create a good rapport and they’re more likely to go the extra mile for you.
Incorporate Your Offshore Company
This is THE step to get yourself set up offshore. By now, you will know your reasons for wanting to be offshore, you’ll know where you’re wanting to incorporate (we have a list of good countries for this below) and which legal entity you’ll go for. If you can’t decide if you should open an LTD, LLC or an IBC, or something else altogether, then clearly you need professional guidance. Yet, if you’ve followed our steps, you’ll be ready to incorporate just about now! Pick a name The rules will differ per jurisdiction. Yet, the most common ones are along the lines of picking a name that wouldn’t imply any ties to a governmental agency, i.e. no ‘trust’, ‘municipal’, ‘royal’ and the like. The name must not be obscene, rude and sometimes must be in the local language only. Prove your identity This will normally be done by sending a copy of your passport and a copy of a document that proves your residential address. Certain jurisdictions will ask for additional documents in relation to your identity, and sometimes these must be remitted via a third party and certified. Plus, if you want to stay anonymous offshore, that’s possible with nominee services. Many of the jurisdictions that we will name later in the article have no records of companies that are available publicly. So, essentially, it’s a double layer of protection if you’re concerned about your privacy, which can be a legitimate concern when incorporating offshore. Complete the required paperwork Depending on the jurisdiction, there will be requirements that you must fulfill in order to finalize the incorporation. If you have a business plan or some other document detailing the type of business you run, who the director is, and how you can be contacted, this should suffice. Don’t fret – this paperwork is not extensive, because the countries are highly used to foreigners opening their offshore companies there. This is a mere formality, usually, because they want your business and they want your dollars, no matter if they are US or Australian ones. Heck, they’ll even take your euros and pounds!
Open an Offshore Bank Account
After you’ve sent the documents off to incorporate your offshore company, the next logical step is to open a bank account. This is necessary because no business can run without one these days – pretty logical. You can use online banking services to manage the cash flow, put money into the company as well as draw income out of it. You will normally be able to access this bank account from anywhere in the world so make sure the bank has a solid online platform. We’re looking at you, obscure Labuan with bank accounts that are pretty worthless everywhere else in the world… That said, some foreign banks have become increasingly unlikely to open accounts for foreigner offshore companies. It’d be wise to seek out a tax expert that has a relationship at some local bank and solicit his/her help in getting you a bank account in this case.
Comply with Ongoing Requirements
The very final step and an ongoing one is to make sure you stay in compliance with requirements on reporting. First and foremost, you should determine whether you are responsible for disclosing all of your offshore dealings to your country of residence. For the citizens of the USA, the answer is a resounding yes – every year, you must report on your offshore entities and bank accounts. Otherwise, you risk steep fines. However, a huge advantage here is that you’ll be able to defer your taxes. This is a great way for offshore companies to not only decrease their tax rate, but also do so indefinitely. Basically, the money that you’ll be saving in taxes by going offshore you can reinvest in your company and develop it further. Yet, it’s not just home soil reporting that you should be worried about. Remember annual tax reports? Well, some offshore jurisdictions require those too. In 99% of the cases, things will be so much easier if you simply hire a trusted accountant and let them deal with it. They’re aware of all the local requirements and you won’t need to keep tabs on the accounting side of your business at all. The New EU Regulation to Curb Offshoring There is one more thing you should be aware of. At the end of 2017, the EU implemented their tax haven blacklist that has seen countries added and subtracted over the past two years. The blacklist was initiated after the scandalous Panama Papers, LuxLeaks and the Paradise Papers were leaked, causing a huge uproar within societies that the rich and the famous (and the huge international companies) were doing all they can to avoid paying tax. It denotes which countries have failed to sustain a dialogue with the EU in order to exchange information on which companies are using their offshoring system to decrease their tax burden. Just this week, with Belize being removed from the blacklist, eight countries remain. However, the EU has been criticized as largely toothless as it hasn’t taken any action against the countries they deem to be facilitators of tax evasion. Nonetheless, you should keep an eye out and check whether the jurisdiction you’re wanting to incorporate in is on this blacklist (or they grey list). While it proves nothing with certainty, you can predict with greater ease which countries will be easier to deal with and which might experience trouble in the near future.
Low Tax Rates vs. No Tax Whatsoever
With all the recent developments, including the EU tax jurisdiction blacklist and grey list, the strategies of offshore companies are shifting. Even though a no tax country might sound like the ideal solution, the reality is that a low tax rate country could be a much better option. Think about it: Would you rather go for an obscure island-nation that will promise not to charge your business any tax for the next 10+ years? Or would you rather pay 10% in tax and set your offshore company up in a jurisdiction that’s rock-solid when it comes to its governance, politics, banking and international relations? When it comes to big money – your money – the latter sounds more sensible. If you’re all for taking risks, you might want to take a chance on a jurisdiction that’s black or grey listed and hope for the best. However, for others, a low tax rate strategy might make more sense and save quite a few headaches further down the line too.
The 10 Best Countries to Open an Offshore Company
For as many individuals and business there are in the world, there are just as many offshore solutions. If you’re exporting or importing goods, your offshore solution will be quite different from someone who runs an online programming business from various hubs in Latin America. In this section, we’ll briefly review 10 countries that are conductive to offshoring. We will also highlight the types of businesses and business situations that each jurisdiction is the best for, so that you can quickly glance through the relevant listings only. 1. British Virgin Islands The British Virgin Islands is one of the most attractive jurisdictions for forming an offshore company. It’s a highly modern nation with one of the most cost-effective incorporation processes out there. Plus, if you incorporate there, you will have access to most of the world’s banks, including those in Hong Kong and Singapore. Best for: international traders, investment funds, financial businesses, online businesses 2. Bulgaria Although Bulgaria doesn’t have a zero-tax rate, it does offer pretty good opportunities for both individuals and companies. Part of the EU, with a stable banking system that’s highly regarded and very safe, Bulgaria has lots of untapped potential in terms of its workforce too. Highly educated, Bulgarians could help your business get to the next level if you wish to reduce labour costs and lessen your tax burden. The corporate tax stands at 10% and so does income tax. Best for: online businesses, EU business development opportunities, actual residence 3. Cayman Islands Forever the country to make it to lists of tax havens, the Cayman Islands is the most popular place when it comes to offshore incorporation. Not only does it have no corporate tax, but it also imposes no tax on its residents, thus making it an extremely attractive option for residency. Their banking system is solid, their governance and politics have been stable and the beaches are glorious. There are approximately 40 major banks willing to open accounts in the Caymans. Best for: traditional business, online businesses, investment funds, partnership formations 4. Estonia Whereas many of the other jurisdictions on this list would require some navigating around, setting up ‘shop’ in Estonia is DYI territory. It is a highly stable and forward-thinking nation in North-Eastern Europe and is part of NATO, EU and Schengen – all positive so far. You should know that this land of lakes and forests doesn’t charge tax on foreign made income, so if all the income your company makes is from abroad, you won’t pay a dime. And when you can incorporate online in just a few hours, Estonia is really attractive option to the tech- savvy millennials running their businesses from anywhere in the world. Best for: online businesses, digital nomads 5. Gibraltar It remains largely unknown as to how Brexit will affect the status of Gibraltar, but it’s long been a tax haven for offshore companies. There is no tax on capital gains in Gibraltar, which is why many corporations have considered setting up there. In other words, if you’re a non-resident company, you won’t be liable to pay any corporate tax. Plus, its favourable location means that you have all the standard EU regulations, a world-class banking system, a solid governmental foundation and more. Best for: financial corporations, international trading, shipping registry 6. Hong Kong One of the few countries on our list that is great for doing offline business, Hong Kong has long been the ultimate access point to Asia, and especially China. Although it’s technically a Chinese territory, it’s has its own set of laws governing taxes, which is why it’s so attractive to foreign capital. All non-Hong-Kong income will be exempt and that’s in addition to no VAT, import, property or income tax on dividends. That’s all great news for an offshore business. However, there is an annual audit requirement, which might be something that you’re simply not ready to comply with. Best for: import/export businesses within Asia, e-commerce, estate planning 7. Panama One of the absolute faves when it comes to opening an offshore company, Panama recently figured in the Panama Papers, which caused the EU to launch more stringent controls over tax havens. Nevertheless, it’s high stability, exceptional banking system, and long-standing reputation as being friendly to foreign capital all make Panama a great choice. Plus, it reportedly offers a high level of privacy (a shadow of doubt has been cast by the aforementioned Panama Papers, of course). All of your foreign income will be exempt from tax in Panama and you’ll also get to take advantage of its highly developed banking system. Best for: international investment, intellectual licencing and property, a holding company, residency 8. Singapore Singapore is the Asian powerhouse when it comes to business development, innovation and keeping up with the times, it’s at the forefront of it all. A long-standing hub for fintech and cryptocurrency businesses, venture capital is relatively easy to come by in Singapore and the regulatory sandbox is highly welcome as well. If you want to take part in the exemption of corporate tax for qualifying start-ups, then Singapore is the way to go. Best for: fintech companies, cryptocurrency businesses, online businesses, intellectual property 9. Switzerland Long known for numbered bank accounts that wouldn’t reveal the identities of their holders and for their precious metal vaults, Switzerland is not an obvious country that you’d think of when you consider an offshore company. However, if your capital is large enough (approximately $50,000 required at the time of incorporation), you should seriously consider it. A highly stable country with one of the best banking systems in the world, Switzerland outperforms any and every other country on this list. The consideration, then, is whether the rest of the puzzle fits your situation well. Best for: e-commerce, cryptocurrency exchange, intellectual property, investment funds 10. United Arab Emirates/Dubai We have specifically set Dubai apart here, because it’s the biggest city in the UAE. It doesn’t just have the oil-rich prowess and pomp, but it also has plenty of excellent business incorporation opportunities. The UAE is highly pro-business and nearly guarantees 100% protection to all investors. Creditors would have to go through multiple layers of the court system and provide bonds to get ahead. All the business and financial records are private in Dubai, so if you’re looking for the privacy, this might be your best choice. You’ll be up and running in a matter of 1-2 business days. Best for: asset protection, intellectual property, investment companies, traders The List Goes On Although we’ve tried to list the top offshore incorporation companies in this article, the reality is that there are many, many more. Latvia, Mauritius, Malta, Malaysia, Vanuatu and many others could be considered as legitimate places where you could incorporate your business. As with everything, there are pros and cons to each, and you should really consult a tax professional before you proceed.
Challenges with Offshoring to Keep in Mind
We’re pretty certain that we have you convinced – why should your modern business be limited by the ancient ways of doing business that are purely geographical? Forget about it. The world’s laws surely haven’t caught up with today’s realities, which is why you should look into opening an offshore company sooner rather than later. You stand to gain so much and there’s not much to lose. However, there are some moral considerations, or challenges if you will, to opening an offshore company that we wanted to highlight here.
The Moral of the Story
Everything that we do in relation to offshore businesses and decreasing our tax burden is done in legal ways. Of course, laws can be interpreted differently, and some offshore companies get a smack on their hand for seemingly avoiding tax and not paying ‘their dues’. Mostly, the hate is geared towards giant international companies, much like Apple, Amazon and Starbucks that we mentioned at the beginning of this article. So, as a business owner or an entrepreneur, you shouldn’t be overly worried. And even though all the techniques and jurisdictions we mentioned in this article are, the moral consideration lies wholly with you. Should you be sticking to your ‘home’ country and paying whatever corporate tax rate that they have set, seeing as you yourself are a product of the place? For some, the answer is yes. ‘Offshore companies’ as a concept isn’t purely a financial or a tax issue – it has to sit right with you as a person and a business owner to make sense long-term too.