Offshore
Offshore solutions
An offshore company is a corporation established in a jurisdiction that offers either a very low tax rate on non-domestic income, or a flat fee in place of tax. Such jurisdictions are usually based outside the world’s main commercial centres. Offshore companies tend to be established in common law jurisdictions (notable exceptions are Luxembourg and Liechtenstein), including Bermuda, the British Virgin Islands, the Cayman Islands, Jersey, Guernsey, the Isle of Man and St. Vincent and the Grenadines.
Tax benefits
The most obvious advantage of offshore companies is their favourable tax treatment. In most offshore jurisdictions companies pay a low fee. In some sophisticated jurisdictions, such as Guernsey, it is now possible to choose a percentage tax rate.
In many onshore jurisdictions, however, the tax authorities have introduced sophisticated controlled foreign corporation rules. This means that they tax the income of offshore vehicles as if it had been earned in the jurisdiction of the parent company, unless it can be shown that real management and control is taking place in the offshore jurisdiction or elsewhere outside the parent company’s jurisdiction of incorporation.
Added advantages
There are also many other reasons to use an offshore vehicle:
- To act as an offshore holding vehicle or as a nominee for third parties
- As a special purpose vehicle as part of an asset financing when SPVs make sense
- To hold assets on behalf of a trustee in countries where directly holding the assets by the trust could be subject to equivocal treatment under local law
- To insulate the risks and rewards of particular transactions
- As a way of preserving confidentiality
- To avoid local transfer taxes on assets by transferring the shares of the asset holding entity
- As an instrument for estate planning
Disclosure and filing requirements
Disclosure requirements vary from location to location. In offshore jurisdictions in Europe, and some in the Caribbean, the local formation agent or law firm is required to know the client. In some cases the beneficial owner must be disclosed on a confidential basis to the local regulatory agency. This information is kept strictly confidential. In some jurisdictions the company is required to keep accounts, but is not usually obliged to file them.
Regulatory issues
Offshore jurisdictions normally have detailed regulatory regimes that regulate local trust companies establishing and managing trusts and companies under their laws.
Setting up offshore companies with bearer shares
In a number of jurisdictions offshore, companies may be established with bearer shares although it is usually necessary for these shares to be fully paid up. We do not encourage this however. Why we do not recommend bearer share companies.
Control of the offshore company
The offshore company is controlled on a daily basis by its directors and/or agents. Subject to home jurisdiction constraints, there is no objection to officers of the parent company being directors and having direct signature and representative powers on behalf of the company for contracts and the banks. In practice, however, Rosetrust usually provides directors as part of its services to clients. These directors remain under the client’s general direction, but preserve anonymity and enable the offshore company to operate cost-effectively and efficiently.
The future for the offshore company
The future of offshore companies is far from clear. Offshore jurisdictions are under attack from organizations such as the OECD and the European Union. This was initially because they were regarded as providing vehicles for money laundering, but it is increasingly due to the favourable fiscal options they offer. This has often meant that they are monitored very closely and are required to operate standards of regulatory control that can be more stringent than for onshore jurisdictions.
Due to the absence of double taxation treaty protection, in certain circumstances offshore companies can only deliver restricted benefits due to the application of withholding taxes and CFC rules in onshore jurisdictions. On the other hand, these companies can work efficiently as part of an onshore structure (we call these “tandem” solutions) and can often be very useful within a non-tax-based asset holding strategy.
We believe that well-regulated and independently operated offshore companies will continue to have a role in international corporate structures, but in the medium term will no longer offer 0% tax options.