Many people are familiar with using corporate entities for business or holding personal assets. From a legal perspective an offshore company is very similar to an onshore company. So why go offshore?
Offshore companies may be used for various purposes and may secure a number of advantages not available onshore. Persons wishing to utilize these benefits need to ensure they comply with applicable onshore laws and should obtain professional tax advice if necessary. The list below sets out examples of uses of an offshore company. In practice the modern day use of the corporate entity is endless.
1. Trading Companies
An importing or exporting company might establish itself in an offshore jurisdiction. The offshore company would take orders directly from the customer. Goods would be delivered directly to that customer from the manufacturer or place of purchase. The profits arising out of the difference between purchase price for the offshore company and sale price to the purchaser would be accumulated in a tax free or low tax area. With such trading companies, it is important to choose a jurisdiction that has good communication infrastructure as documentation may be critical to the arrangement. Certainly it is important for any investor in that situation to seek onshore advice on tax legislation from an expert in the onshore country to ensure that all local laws are complied with, as the taxing of offshore activities varies from country to country.
2. Investment Companies
Investment companies set up in offshore jurisdictions may invest throughout the world without capital gains, dividend or other income being subject to tax in Vanuatu. As above, domestic tax legislation in the shareholder's country of residence or domicile is important and appropriate advice should be sought.
One of the main advantages of an offshore jurisdiction is flexibility and limited regulatory regimes. As a result, transactions that may require regulatory approvals onshore may be achieved relatively easily offshore.
4. Finance Companies
Use may be made of an offshore finance company that would fund the operation of subsidiaries in various countries. The subsidiaries would obtain the benefit of tax deductions on interest paid. If the finance company is situated in an offshore area where there are no income or corporation taxes and no requirement that dividends be paid, then the profits can be accumulated in a tax-free climate. These funds can be used to further finance the requirements of subsidiaries or reinvested, as business convenience suggests.
5. Probate and Privacy
A high net worth individual with properties or other assets in a number of countries may wish to hold these assets through a personal holding company. This approach could possibly save legal fees and avoid publicity. As well it may be more efficient and cost effective than onshore probate procedures.
6. Property Owning Companies
There are often advantages in using an offshore property holding company for the purpose of holding an overseas property. Advantages of offshore property ownership include avoidance of inheritance tax, avoidance of capital gains tax, ease of sale that can be 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.
7. Professional Services
Individuals who receive fees in respect of their professional services in capacities such as designers, consultants, authors or entertainers, may assign or contract with an offshore company the right to receive those fees. The offshore employment company may not have to pay tax on its income that can be reinvested in a tax-free climate to generate further income from the offshore company.
8. 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 intellectual property rights the offshore company can then enter into agreements with licensees around the world who would be able to exploit the intellectual property right in various countries. In some cases it may be 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.
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9. Insurance Companies
There are a number of offshore jurisdictions that encourage the establishment of insurance companies. In a number of offshore areas it is possible to incorporate insurance companies that pay no tax in respect of their premium or investment income. Similarly, captive insurance companies have been created by many multinational companies to insure and re-insure risks of subsidiaries and affiliated companies. Captive insurance companies are particularly suitable for industries that might be insurable only at prohibitive premiums, or risks that would otherwise be uninsurable.
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