Someone ask a simple, yet interesting question: “If offshore incorporation is so beneficial, especially in the taxes department, why startups are still incorporating in popular jurisdictions, such as the Eurozone and the United States?”
The short answer to the question is as follow: You should incorporate based on your plan – e.g. your target market, business operations, business plan and access to resources. Offshore incorporation can be beneficial for your startup, if it's playing an important role in your overall business plan.
Here's the long answer.
If you are, say, a US citizen and your startup's target market is US-based, there's no reasonto incorporate offshore, for several reasons, namely: Potential troubles with the IRS, as well as extra expenses in maintaining offshore operations, when it's actually not needed to do so (read: marginal tax benefits and marginal upsides on the overall profitability due to expensive legal and accounting fees).
There are some exceptions, though - companies like Apple, Google and the likes can be headquartered in offshore jurisdictions due to numerous factors, such as considerable tax liabilities, which make a good sense to operate from an offshore jurisdiction which offers tax benefits – and more.
With those said, who will benefit from offshore incorporation, then? Virtually all startups that target overseas market. Online startups, for example, will benefit the most from an offshore setup if the majority of their business is from overseas.
Offshore incorporation benefits
So, what kind of benefits will startups enjoy by getting incorporated offshore?
1. Some offshore jurisdictions are the best for raising venture capital from investors
Some offshore jurisdictions, enable you to do more complex shareholding – which is beneficial for startups that raise capital from VC investors.
2. Easier financial reporting
Startups should focus on growth, rather than sweating over annual reports and accounts that are often required when you incorporate onshore. Many offshore jurisdictions don't require registered companies to do annual report filing and audited accounts, allowing you to focus on growth – at least in the first few years or so.
3. Protect assets and identity
Startups need to go through a stage of growing pains. Along with the unfavorable fact that most startups fail before one fiscal year ended, founders need as much protection as they can get.
Incorporating your startup offshore can give you the necessary protections that you need. Here's one example: If you are incorporated in Belize, you are bound by the local rules and regulations, which are often more favorable when it comes to asset protection. If you are unlucky enough to deal with a lawsuit, you are 'protected' by the local laws that are more likely to be more lenient than, say, your home country's laws.
If you are after extra protection, opening an offshore bank can multiply your asset protection efforts. Learn more about offshore banking here.
One more aspect that is protected by an offshore company is your identity. Some offshore jurisdictions allow you to stay anonymous by hiring a director and shareholder (called nominees) to act on your behalf formally. Here's more info on nominee services.
4. Enjoying tax advantages
Perhaps this is one of the most well-sought-after benefits of offshore incorporation, often for the wrong reasons, which can put startups in a legal trouble.
Depending on your home country's tax regulations, you may enjoy certain tax advantages when taking your business to an offshore jurisdiction. Unlike what many assume about offshore jurisdictions, you may enjoy tax advantages that you may not be able to access when you incorporate your startup in your home country – legally.
Please note that tax advantages don't always mean “pay no taxes” - that's simply the wrong assumption that people make that causes confusion and misunderstanding. Let's take a look at some examples.
If you incorporate in Seychelles or Belize for example, you can be exempt from all local taxes. But in Hong Kong, there is a different tax system that you should be aware of – e.g. You will need to pay taxes if you are doing business with local businesses, but exempt from taxes when you are not doing business locally.
There's also one “offshore” jurisdiction that may offer you tax advantages, namely the United Kingdom. Not necessarily your typical offshore jurisdiction, if your startup is headquartered in the UK, you will enjoy a competitive local tax rate at 20 percent, plus tax benefits when doing business with other countries that have special tax treaties with the UK.
As you can see, tax advantages come in several different forms, and one jurisdiction may be more ideal for you than the other, depending on your plan.
Setting up your company offshore is not the ultimate winning decision. It can be very well a wrong decision if you do so without properly understanding your startup's specific needs.
As mentioned early in this article, startup incorporation follows a cliche: It depends - on how you run your business, what your target market is and what the plan is for your business. There is no right or wrong answer - incorporating your startup offshore can be very beneficial to some but not to some others. The same thing goes to 'onshore' incorporation.
To find out what's best for your startup, we'd suggest that you should consult with a trusted tax attorney who is specialized in International tax laws. Alternatively, you can also consult with us for general insight on the benefits offered by offshore company formation.