The offshore company
In recent years, offshore companies are treated as a pariah and the legitimate use of offshore structures has been defamed as aggressive tax planning, base erosion and profit shifting. However, cross-border structures do not need the applause of the masses but the recognition by experts and, as a consequence, offshore companies play more than ever a vital role for sophisticated tax planning and a tax-driven value creation chain optimization. Many offshore schemes remain hidden behind the curtain, in the wings, although they are perfectly legal and do not need to fear the day light. Others are Panama Papers.
How to tax-efficiently offshore the key business value-drivers
Regularly, an offshore structure is just a part of a cross-border business concept which covers onshore structures as well. Therefore, the value-creation-chain has to be split into an onshore and an offshore segment. This separation follows the usual tools and modules of international tax planning. Risks, assets (especially IP), tasks and functions and – as most inflexible value-driver – human resources have to be tested on their offshoring capabilities. Properly accomplished and in-line with transfer pricing considerations and controlled-foreign-company-rules, the tax-optimized offshore structure will be perfectly legal.
Offshore tax planning follows the golden rules of tax planning: Profits follow risks, risks follow functions, functions follow assets and persons. The arm’s-length standard governs how related parties value product sales and services between entities. The business purpose doctrine says a business transaction should have some purpose other than tax reduction. Tax planning without appropriate economic substance is under big pressure. Sophisticated tax advice is the key to success.
It is a misunderstanding that the offshore industry aims to mask onshore business as offshore, and, as a result, tax evasion is inseparably linked with the decision to outsource business tasks to an offshore jurisdiction. Such wrong allocation is generally an industrial accident and an offshore structure makes perfect sense from a tax planning perspective, even if the onshore tax legislation is taken into consideration and prudently observed.
How to identify the best offshore jurisdiction
The decision which offshore location to choose is not a “one size fits all” approach. There is no offshore jurisdiction that is most preferable for each and any business purpose. Instead, the best offshore location has to be identified on a case-to-case basis, although most offshore provider will recommend only the solutions they have available for immediate delivery. It is a good idea not to trust such marketing-driven approach and to look for independent advice.
Most offshore locations are governed by Anglo-American common-law principles which are favorable for trust structures, typically requires a company secretary and are developed by judges and individual court cases. Civil law jurisdictions have their own advantages and in Labuan, a Muslim law jurisdiction even provides Sharia compliant Islamic offshore services. There is an offshore solution for everyone.
One of many aspects is the question whether the company register is public or private and which entries are required. For certain reasons, many offshore investors prefer a non-public register. It might be even more beneficial if there is no legal requirement that the names of shareholders, beneficial owners and directors are registered. Bearer shares seem to be the perfect solution, but in some jurisdictions, they must be held by a licensed custodian or listed in an unpublished document identifying the true owner – and there are certain reasons that bearer shares do no longer play an important role in offshore structuring considerations.
Anyway, the criteria to chose the right offshore jurisdiction has various other parameters and the investor should request a comprehensive lineup before he makes his decision. If offshore companies are marketed like bulk freight in a discount supermarket, it is no bad idea to better look for a boutique store.
How to select the best offshore service provider
To set-up an offshore entity is typically not a do-it-yourself task. The help and support by an offshore service provider is meaningful and unavoidable. There is a wide selection of agencies, law firms, as well as middle-men and financial intermediaries. Experience shows an astonishingly wide range from the offshore magic circle law firm till the backyard print shop. Offshore service providers may be governmental licensed, e.g. to set-up a BVI company, or they act as middle-man.
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Offshore companies are typically not custom made. Their bylaws and corporate structure do not depend on the specific needs of the investor – offshore company formations are different from a highly regulated onshore jurisdiction where a simple company set-up might not be good enough for complex and high-value business activities. Although it depends on the specific jurisdiction, as a general statement all offshore companies have the same product on sale – one size fits all.
The purchase price respectively the professional fee typically does not make a big difference. But the offshore service provider itself makes the difference:
- Does the offshore service provider have the best right to remain silent available in that jurisdiction?
- How will he react if he is approached by your domestic tax authorities?
- How can he guarantee that the company formation is done in reality and not just photoshopped on some pdf-documents?
- How strong is the evidence that the shareholders’ list is really correct and there is no hidden clause in the corporate documents which gives the offshore service provider certain unapproved rights?
The dependency of an offshore investor from the chosen offshore service provider is largely underestimated.
- “Every day some sucker gets off his or her cruise liner at some offshore center, walks over to the nearest offshore service provider and says ‘I want a trust and a secret bank account’ and then hands them the money. And, about once a month, a publication such as Offshore Alert or a scam site somewhere will run a story about how an offshore service provider disappeared with their clients’ money.” -Jay Adkisson
An offshore jurisdiction is defined as a country with low standards regarding taxation, low licensing requirements, low business regulations – and low foreigner protection in case the offshore service provider does not cooperate and acts not only unprofessional but dishonest. In such cases, it’s unlikely that any misuse could be pursued in a criminal court.