By utilising an offshore company, it may be possible to secure a number of advantages. In the following notes, we outline some of the structures which are available and give examples of uses which may be made of offshore companies. 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.
Our professionally qualified staff will be pleased to advise you on all aspects and an initial consultation is always free of charge.
Typical uses to which an offshore company might be put :
An importing or exporting company might establish itself in an offshore 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 offshore area which has good communications as shipping and other documentation may be critical to the scheme.
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.
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.
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 so that upon his demise probate would be applied for in the country in which his company was 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.
There are often great advantages in using an offshore property holding company for the purpose of holding an overseas property. Indeed, we offer low cost specialist schemes, such as the ICSL French Property Ownership Scheme and the ICSL Portuguese Property Ownership Scheme, which we operate in conjunction with lawyers in France and our office in Portugal. 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. Taking the example of investment in property in the United Kingdom 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 nonresident 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.
Individuals who receive substantial 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 profits which can be reinvested in a tax free climate to generate further income from the offshore company. Payments to the individuals concerned can be structured in such a way as to minimise their tax liabilities. 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 and Liberia. Latterly, the registries of other nations have expanded and consideration might be given to registrations at British Ports of Registry such as those in the Isle of Man and Gibraltar. A certain prestige attaches to the registration of a ship or indeed a yacht at a British port of registry and the vessel can be surveyed at most ports throughout the world by a surveyor recognised by the UK Department of Trade and Industry. The British flag has always been regarded as one of the world's most dependable.
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 sublicence. 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.
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Many offshore banking institutions have been established in tax havens in recent years. Many of these institutions are subsidiaries of major international banks. Such institutions pay interest free of withholding tax and engage in international financing from offshore bases which are free from exchange controls. Such banking institutions and their associated trust companies are able to provide a wide range of financial services to their international clientele. Offshore banking institutions are also used by the smaller business Organisation and indeed in some cases by individual owners to act as offshore cash management centres.
In the past, certain offshore centres such as Montserrat and Anguilla have lacked the supervision which should accompany the setting up of smaller banking institutions. Indeed the British Government introduced a moratorium on the setting up of banking institutions in its Caribbean dependencies until such time as adequate legislation had been brought in and bank supervisors appointed. Of these jurisdictions one of the first to meet British Government requirements was the Turks and Caicos Islands. Under its banking regime two types of licence are available, namely, a national and an overseas, the latter only permitting banking activities outside the Islands. In either case a bank would have to maintain a physical or representative presence in the Islands. A combined licence can be granted. The management of the proposed bank would be required to display a sound knowledge of banking with evidence of ability and experience and no less than two directors must be appointed. In respect of those banks wishing to deal with the general public without restriction, substantial capital resources would have to be demonstrated.
One jurisdiction which does permit the setting up of the smaller banking institutions, whilst at the same time providing a supervisory regime, is the Republic of Vanuatu (formerly known as the New Hebrides). Another Pacific jurisdiction favoured by smaller institutions is Samoa.
There are a number of offshore havens which are keen to encourage the establishment of insurance companies which like banking companies bring employment and investment to the country of incorporation and generally enhance its reputation and its range of financial services. In a number of offshore havens it is possible to incorporate insurance companies which pay no tax in respect of their premium or investment income.
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 favoured as domiciles for the incorporation of captive insurance companies with countries such as the Isle of Man and the Turks & Caicos Islands competing for a share of this growing market.