Questions and Answers
The following is a list of our most Frequently Asked Questions. Click on a subject heading below to view questions and answers relating to your selection. Should you not find the answer to your question listed below, then please send your question using this contact form.
What is an offshore company ?
The English term “offshore” denotes something that is away or far from the shore. An Offshore Company is an enterprise which only carries out economic activities outside the country in which it is registered. So, an Offshore Company can be any enterprise which doesn’t operate “at home”. At the same time, according to public opinion, an Offshore Company is any enterprise which enjoys tax-free or low-tax status in the country of registration. Theoretically, an Offshore Company may exist in any country in the world but it is by no means certain that any kind of tax benefits will be attached to this status
What is a tax haven ?
In everyday language a tax haven is a state or territory which provides a remarkably wide range of tax benefits for the offshore companies registered therein (the original ENGLISH term - tax haven - means tax refuge). That is, an Offshore Company can operate under favorable tax conditions only if it is registered in a tax haven territory (in accordance with the principle outlined above, the company must, of course, operate outside the territory of registration).
On traditional tax haven territories the operation of companies is supported by a thoroughly-regulated legislative mechanism. This means that in the given country the legal code provides favorable taxation status for the offshore companies. It is necessary to stress this because it is not that the company pays no tax illegally, but, on the contrary, it is exempted from the payment of tax or a part thereof as provided by law.
What is the purpose of the establishment of an offshore company ?
This is one of the most important issues concerning the establishment of companies. There may be a number of goals and objectives, in the same way that the business relations evolving in a market economy may involve an infinite number of combinations. Therefore, to a certain extent, the client himself should find the answer to the above question because nobody knows his business activities better than the client himself. We can only briefly outline the purposes for which offshore companies are most frequently used.
Offshore trading companies : Trading companies may be used to reduce the profit of parent companies located in high taxation areas and to pass those profits on to an Offshore Company. Having registered an Offshore Company the parent company presents it with an invoice for the sale of goods at a uniform, minimum price, for example. Then the Offshore Company concludes contracts for the sale of the goods at a higher price. In this case the parent company derives a much smaller profit based on the minimum price of the goods sold and as a result its taxes on profits are reduced considerably. The Offshore Company, as a result of the transactions, earns a healthy profit after selling the goods at the higher price.
Offshore investment companies : The use of offshore investment companies makes it possible to have more options for choosing objects for investments, which enables the investor to concentrate on the most advantageous projects or to select areas that offer potentially high incomes. Moreover, it makes it easier for transactions concluded between the company and its clients to be kept in confidence. Making investments on terms advantageous for an Offshore Company merely provides an opportunity to transfer spare currency resources abroad without violating currency and tax legislation.
Offshore finance companies : The ownership of an offshore finance company gives an opportunity to pursue the most advantageous credit policy considering minimization of taxes on granted credit and borrowed funds, and improves the ability to offer different financial and credit services to clients. Besides, granting credit to a firm located in a higher taxation area through an Offshore Company at a high rate of interest provides an opportunity to transfer currency resources to a third country without violating the currency and tax legislation, and to greatly reduce or even acquire exemption from tax on profits made in a country where taxation is higher. Offshore companies may be very conveniently used for the minimization of taxes related to joint-venture activities. In this case the same citizens own and manage both the domestic and foreign (offshore) companies which set up the joint venture. It makes it possible to transfer to a third country the share of the profit which belongs to he foreign company in the form of non taxable dividends. At a later date the money (in the form of privileged investments or credits) may be returned to the country in which the joint venture is registered.
Offshore holding companies may be used for financing the activities of their subsidiary enterprises under different jurisdictions by offering them the opportunity to reduce taxes due to interest payments on loans granted to them by parent companies. In this case a holding company is formed in an offshore area, in which neither tax on profit, nor other types of corporate taxes are collected from it; all the profit made by the above-mentioned method may be used for financing further activities of a holding group or for reinvestment for other purposes.
Offshore insurance companies formed by a company registered in a high taxation country or by a group of such companies may be used for insuring risks of a parent company or a group of parent companies on more advantageous terms than those traditionally offered by insurance companies. The form of an offshore reinsurance company may be used by insurance companies for insuring their own risks.
Offshore banking companies that have licenses of a limited or unlimited type may be formed by banks for the purpose of accumulating profit in countries with reduced or so-called “zero” taxation as well as by groups of companies for a pooling of financial resources and a facilitation of money flow within a group. An offshore bank may also be used to finance the international operations of its founders in order to avoid problems of currency limitation.
Offshore companies formed for owning a property give an opportunity to reduce or even eliminate inheritance taxes and capital gains tax. Besides, if the owner of any property is a company, it is possible to simplify considerably a process of this propertyé's sale: in this case only the shares of the company are sold and transferred to another owner, but the company remains the owner of the property. In this way it is not necessary to pay the state duties imposed when a property is sold or given as a gift.
Offshore companies engaged in rendering services (in advertisement, management, marketing, consulting etc.): People and companies gaining large incomes conducting activities in the field of service provision may reduce taxes greatly by assigning the rights to obtain remuneration for their activities to an Offshore Company. In the future the remuneration, or a part of it, will be paid to an adviser by an Offshore Company, but payments will be structured in such a manner that taxes will be minimalized.
Offshore companies dealing with personnel recruitment are used by employers actively for the purpose of reducing taxes on their employeesé' salaries. In this case the money to be used for the employeesé' salaries is transferred to accounts of the Offshore Company, in which the employees actually work and its sum may be considerably greater than that paid to the personnel in the country of residence. The difference is accumulated in the employeesé' offshore accounts and therefore no tax is imposed on their real income.
Offshore companies formed to hold intellectual property (patents, trademarks, copyrights, techniques etc.): Such companies may acquire any property from its original owner. An Offshore Company may patent a property or conclude contracts for transferring it into use, thus getting a non-taxable profit by using it.
Offshore ship-owner companies may be formed to reduce taxes on ship-owner and shipping activities by means of the purchase or rent of ships, and the profit earned from their activities may be accumulated in areas of reduced taxation.
Offshore private funds for the ownership and confidential management of private property may be formed in Liechtenstein and Panama. The use of funds provides for either partial or total reduction in taxes on incomes, capital and inheritance. Furthermore, it guarantees that the distribution of income earned by the property or by its inheritance be carried out according to the will of the property owner.
Offshore investment funds are fully recognized by the international investment community. Usually they pay neither taxes on profit nor extremely high organizational and legal duties. Besides, dividends and interest are either taxed at a decreased level or are exempt from taxes in general. The pooling of small investors of capital in a fund makes it possible to participate in more expensive projects, and means savings on research of the market, commission and managerial expenses. A founder (manager) enjoys the greatest advantage; he has the flexibility to carry on activities abroad, since it makes it possible to attract investors from a huge number of jurisdictions by means of an unrestricted sale of shares; he can also make investments in many jurisdictions without taxation and can conduct foreign trade activities.
What are the advantages of using an offshore company ?
We list the advantages related to offshore companies registered in tax havens in two distinct groups :
- Direct taxation advantages / benefits
- Additional benefits independent of the favorable tax status
See also the article : 5 things you can do with your offshore company
Directors taxation advantages / benefits
These advantages do not require specific explanation. The amount of revenue generated is taxed in the country of the Offshore Company. Taking advantage of the fact that these countries provide a wide range of tax benefits for enterprises of this kind, we may secure considerable tax savings.
This other group of advantages is composed of benefits independent of taxation which are not to be ignored by certain types of businesses in certain situations. Some of these benefits are listed below, though the list is by no means exhaustive :
- Full anonymity : Full anonymity is provided by law in certain tax havens because neither the directors, nor the owners of the companies are recorded among public corporate details. As a result, the personal details of the owners and directors are hidden from the public and this can be used favorably.
- Lack of bookkeeping obligation : In a number of tax havens offshore companies are not required to keep books. This, too, results in a considerable saving since, if we look at the data of a domestic (non-offshore) company of a similar size, the annual bookkeeping fee alone usually amounts to several hundred - or even thousand dollars.
- Enforcement of prestige-related considerations : It may happen that in certain business situations a foreign company may offer more advantageous terms and conditions. The participation of a “foreign investor” in a domestic enterprise sometimes creates considerably more trust and confidence in a potential business partner, or it may even provide exemption from customs duties in certain cases, etc...
Where should you set up an Offshore Company ?
In most serious offshore zones the operation of the companies, the security of foreign investment and the protection of secrets are guaranteed by a code of laws. When encountering this topic for the first time it appears extremely difficult to differentiate between the advantages and disadvantages offered by the many small and possibly unknown countries. There are, however, a few factors which may help you find orientation. Please do not hesitate to contact us with more details concerning your needs. We will be happy to answer you, analyze your situation and send you our suggestions.
Why is it advantageous for the country of registration to provide tax benefits ?
These locations are usually situated in geographically small countries. The population is usually small. Tourism and various services play the most important role in their economies. Offshore businesses generate considerable revenue for them. On the one hand, concrete employment opportunities are created: various law offices, a state registration apparatus, representatives, banks registered on these territories, etc... are required. On the other hand, through the state duties (registration and re-registration fees) and taxes the population of the country obtains considerable revenue.
What principles of taxation are enforced in the place of registration ?
As already mentioned above, one of the most important purposes of the registration of offshore companies in tax havens is to reduce high tax burdens and to take advantage of direct or indirect tax benefits. At the same time, we should stress that completely tax-free and cost-free companies do not legally exist in any part of the world, in spite of the fact that in a number of countries offshore companies are often referred to as tax-free companies. Fundamentally, the following principles of taxation may be enforced in the locations of registration of offshore companies :
- In countries where the company may only derive revenues from abroad, these revenues will be completely free from the payment of any tax. In this case, the company is required to pay a fixed annual fee which is independent of the turnover and profit of the company. Such locations are the Seychelles, Belize, etc...
- Tax exemption is granted only in respect of revenues derived from abroad. In such countries as, for example, Hong Kong, companies may pursue economic activities within the country, too, and the domestic revenues are taxed on the basis of a linear rate, while revenues derived from abroad are tax-free. In this case (Hong Kong), the company is required to indicate domestic revenues separately in its annual report.
- Taxation on the basis of a linear tax rate . One of the best-known locations is Cyprus where offshore companies pay a 10 % tax on their net profits. (In these locations, without exception, the keeping of books and preparation of annual reports is compulsory.)
Are offshore companies required to keep books ?
Bookkeeping by the companies is an issue closely related to the issues dealt with above. Those who are already owners or managers of a domestic company are perfectly aware of the amount of trouble that the various state bookkeeping regulations may cause. In most countries bookkeeping fulfills two purposes: on the one hand, it should inform the owners, creditors and business partners of the company of the financial and pecuniary position of the enterprise, while, on the other hand, it should satisfy certain, often rather stringent, requirements laid down by the authorities (Tax Office, Customs Authority, etc...). In this respect, offshore companies can be divided into two distinct categories :
- It is provided by law that the company need not to keep books for official purposes. This opportunity exists in those countries where the annual tax or duty is fixed (the Seychelles, Belize, etc...). For the country of registration is not interested in the company's annual turnover and profit because the company's tax (state duty) is a fixed amount independent of turnover and profit. This concept offers extremely interesting and also cost reducing possibilities to a lot of entrepreneurs. This does not mean that if the owners of the company so decide they cannot keep internal books for the purpose of keeping themselves informed. This, however, is an internal matter for the company and no external authority has the right to intervene in the keeping of the books.
- It is compulsory to keep books. Countries falling into this category are Ireland, Cyprus, Uruguay, etc... Of course, in this case, what we have in question is not just bookkeeping of any kind, but accounts of a nature that satisfy and comply with the legal rules of the given country and contain a clause by the local auditor guaranteeing the validity of the accounts. The bookkeeping of most offshore companies is not at all complicated, provided that the company has no tangible assets or real properties and pursues no cash transactions, because then the transactions effected on the company's bank account constitute the majority of the company's business. Although, compared with the situation described in the previous paragraph, the operation of the company appears to be considerably more complicated if books are required to be kept, this does not necessarily entail a permanent bookkeeping obligation. Most offshore companies obliged to keep books carry out their own bookkeeping requirements and have the report audited during the period preceding the submission of the report.
What requirements does the country of registration prescribe in respect of the directors and shareholders of an Offshore Company ?
There are some offshore zones where there are no restrictions of any kind concerning either the directors or the shareholders. These include, for example, the Seychelles, United Kingdom, Hong Kong and Belize. Companies may be set up here with the participation of a single director and a single shareholder of any nationality who may even be one and the same person. Other offshore locations do prescribe certain restrictions in respect of the directors and shareholders of ventures. These restrictions may be divided into two main groups :
- Quantity restrictions : This means that the minimum number of directors or shareholders is defined. For instance, in the case of Panama, a company must have at least three directors.
- Nationality restrictions : This is a provision expressly applying to the directors, the main purpose of which is to create jobs for the citizens of a given country. For instance, in the case of companies registered in Liechtenstein, at least one of the directors must be a resident of Liechtenstein.
What further restrictions might exist regarding the company activities ?
- Restrictions relating to the holding of the annual meeting of directors. Some locations prescribe, on a compulsory basis, that the directors of the company meet at least once a year and that the meeting be held in the given location. Locations of this kind are, for instance, the Cayman Islands and Bermuda. In these locations, the requirement that the compulsory annual meeting of directors be held in the territory concerned is for the purpose of encouraging tourism in the area. However, in the locations proposed by ICO Services there are no restrictions of any kind and the directors may hold their meetings in any country.
- Restrictions on the opening of bank accounts. In the case of certain countries, it is a legal requirement that part or all of the company's bank accounts be opened in the banks of the given country. However, the legislation of the offshore zones proposed by ICO Services enables companies to open bank accounts in any country in the world.
What kind of details are entered in the companies register ?
This is an extremely important question since, in the course of a number of business transactions, the owners and directors of a company do not wish to reveal their identity. In some Jurisdictions the details of a company are completely public and anybody may gain access to them at the office of company registration, referring to any alleged or real interests. From this respect, we can divide offshore companies into three categories :
- Full anonymity. The details of neither the directors, nor the owners are available in the public company register since these details need not even be reported to the authorities in these countries. Countries of this kind are the Seychelles and Belize
- Partial publicity. For instance, in the case of United Kingdom, the owners of a company are not entered in the companies register, whereas all the details of the directors are public.
- Wide publicity. A number of details concerning the company are accessible in the companies register. For instance, in the case of Cyprus, the details of the owners and directors are available (name, nationality, passport number, date of birth, residence, etc...).
When and why is it practical to use the services of the nominee shareholder and the nominee director ?
The use of nominee shareholder is most useful in the case of locations where the details of the owners are openly available to the public; that is, on the basis of the company register, anybody may become familiar with the identity of the owners. For exemple Hong Kong, where owners' details are entered in the company register. If, therefore, you wish to remain anonymous in these locations, it is necessary to use the nominee shareholder service, entered in the company register.
Nominee services provided by ICO Services work with the highest level of integrity and confidentiality.
And another important rule: the use of nominee directors is, in most cases, recommended but by no means compulsory.
What annual maintenance fees are involved in the operation of an Offshore Company, and why is it important to pay them ?
It is very important here to dispel the widespread belief that offshore companies can be operated not only tax-free but also totally cost-free. Although exemption from the payment of taxes is usually granted, exemption from costs is not. The maintenance of the company as an organization, even if it is only formal and nominee maintenance, does result in some costs, a fact which should be taken into consideration prior to incorporation. In this section we would like to look at the costs which are typically incurred in more detail.
- Annual state duty / tax : this is either a fixed annual amount, a linear rate or a banded linear rate, depending on the method of taxation.
- Fees payable for the registered address and the registered agent. In the offshore zones, almost without exception, it is a legal requirement that the company should have a seat registered in the given country and, in the majority of cases, also a so-called local representative (agent, secretary, etc.). In general, these two are not separated because the compulsory seat address is also the address of the local representative and is usually a law office. This law office provides the address (seat) for the companies registered by it and undertakes to represent them against the payment of a set annual fee. The maintenance fees are payable annually. If the Offshore Company does not pay this amount, the company registrar will suspend the legal activity of the company and the office of registration will delete the company from the companies register.
- Remuneration payable to the nominee directors and shareholders. Nominee directors and shareholders are used if the actual owners and directors of the venture do not wish to be named formally in the legal documents of the company. In return they receive a fixed annual fee, plus a small fee for each and every service performed on behalf of the company.
- Mail forwarding costs. If the company requests its partners to send all mail to the address of registration, a fee is, of course, payable for the forwarding thereof to the actual place of operation. This amount may be a fee set annually or an actual fee per item.
- Fees payable for the (re-)issue of various documents. For instance, if the company subsequently needs a new certificate of incorporation, or, e.g. if the documents of registration of the company are destroyed (burnt, lost etc.) and need to be re-issued.
Of the above costs, the first two items are compulsory in the case of every company, while the other items are optional (may be opted for as required). In this general information material we have only outlined the most frequently incurred cost elements, in addition to which, however, a number of other additional costs may arise, according to the needs and requirements of the owners and directors.
Where should the Offshore Company open a bank account ?
A considerable part of the financial transactions of offshore companies is effected through bank accounts. Free access to the financial assets of the company, whether to transfer or withdraw cash, is essential from the respect of operation. At ICO Services we only propose banks selected with the following considerations, which we have identified on the basis of several years practical experience, into account :
- Perhaps the most important consideration is that the financial institution chosen should be a long-standing bank which enjoys a generally good reputation and is also considered reliable within the world of finance.
- The chosen bank should be in an economically and politically stable country where the state guarantees the investments of foreigners by law. It is, however, highly important that these laws should exist not only on paper but also should be enforced in practice.
- The bank should be located in a country where bank secrecy is strictly enforced, in practice, as well as in principle. There is no need to spend too much time explaining the importance of this factor.
- The country in which the bank is located should have a liberal foreign exchange management policy. It is desirable that there should be no restrictions of any kind on the conversion and exportation of currency, the withdrawal of cash and payment, etc...
- Management of the bank account should be simple and convenient. You should find a solution whereby the bank account can be managed not only in person but also via Internet or telephone.
Is it necessary to travel to the place of incorporation when establishing a company ?
It is not necessary to travel to the offshore jurisdiction when establishing a company; the necessary papers can be completed and returned to us by email.
What is a Certificate of Good Standing ?
This is a well-established document usually issued by the company registrar in the given jurisdiction. This is the document which confirms that the company has not been struck off, and does not owe any tax or duties. The content varies from jurisdiction to jurisdiction, depending on the information which is available to the public in the jurisdiction of incorporation. The banks generally ask for proof of existence of the company when the formation documents are older than 6 months. Obviously a company which has not paid its annual fees, fees for its registered office and agent and its annual tax/duty cannot receive a Certificate of Good Standing.
Which is the best offshore jurisdiction ?
The jurisdiction of incorporation is a key question from the point of view of the future operation of the company. Generally speaking there is no one simple best solution. There are always several alternatives to choose from when selecting a suitable company for a given type of financial activity. As many jurisdictions offer almost identical solutions for particular activities, in many cases several jurisdictions may be suitable. In this case, the deciding factors tend to be the cost, the prestige of the jurisdiction, and the ease with which the company can be administered.
Is it possible to change the directors of an Offshore Company ?
Offshore companies are companies just like non-offshore companies anywhere in the world. Therefore, the owners of the company can freely remove or replace the officers of the company, and, in cases where the director(s) resign, the members or shareholders can appoint new ones in their place. Similarly, if a director passes away, the members appoint a replacement. The documents issued regarding a change in directors vary from jurisdiction to jurisdiction, and the actual procedure may also vary. ICO Services will handle this procedure for you.
Can an Offshore Company buy property ?
Generally speaking, according to the laws of the jurisdiction of incorporation, an Offshore Company can buy property on territories outside the jurisdiction of incorporation. For example, an offshore Belize company cannot buy a Property in Belize.
The question is more complicated from the point of view of the laws of the country in which the property is situated. These laws may place restrictions on the purchase of property by foreigners, or may impose special conditions (for example, they may not be able to buy listed buildings or agricultural land). It is worth investigating the question thoroughly and consulting experts and lawyers in the country in which the property is situated before making a decision.
Can an Offshore Company buy cars ?
According to the laws of the jurisdiction of incorporation, an Offshore Company can buy cars. However, if we examine the laws of the country in which the car is to be maintained, the question becomes much more diverse. Generally, the car bought on behalf of the Offshore Company will not be used in the country in which the company is registered, but a totally independent territory. This means that it is necessary to examine the laws of the country in question, to see under what conditions a foreign entity can legally maintain a car in that country, and what tax, customs or other financial requirements are involved in the running of a car. It is necessary to check whether a foreigner has the right to maintain a car in the given country without being registered locally. As with the case of property, it is important to discuss the matter with local customs and tax consultants before deciding to buy a car.
Why are certain words not permitted in the company name ?
Many countries and jurisdictions have introduced restrictions with regard to the use of certain words and phrases. The rules of the different countries vary as to which words and phrases are not permitted and which require special permission. Generally speaking, the restrictions apply to words which may be misleading or deceptive, such as: bank, banking, insurance, reinsurance, fund, investment fund, municipality, chamber of commerce, university, hospital, etc... In many countries, the word "financial" is not allowed. The reason that the above words and phrases are restricted is that companies formed without the necessary financial, personnel and practical background might be capable of misleading clients and practicing fraudulent and deceptive activity through the use of such a name. Furthermore, in the UK the company name may not include words related to the royal family (e.g. Windsor, royal, royal family).
Can offshore companies invest on the stock exchange ?
An Offshore Company can buy securities (shares, bonds, futures), and can also freely sell them. If we look at the turnover of the major stock exchanges of the world (New York, London etc...), we can see that the majority of the shares in circulation are in the hands of offshore companies, and change hands between these companies. Offshore companies are the major ownership players in developed capital markets. Offshore companies are also present in the commodities markets, where they are active in foreign currency transactions, as well as deals in the related futures markets. They also deal in the various raw materials and fuels markets.
Can offshore companies own patents and licenses ?
Generally, offshore companies can be the owner or holder of any object, material or immaterial. Immaterial goods include various patents and similar rights, which can be assigned to an author or composer. In general these can be referred to as intellectual property, which may or may not be due as a result of legal protection (such as application for patent, copyright or industrial design patent), but they may also be other types. It can be seen, therefore, that offshore companies can own and make profit from intellectual properties.