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OFFSHORE COMPANIES AND THEIR USES
"No man in the country is under
the smallest obligation, moral or other, so to arrange his legal relations
to his business or property as to enable the Inland Revenue to put
the largest possible shovel in his stores. The Inland Revenue is not
slow - and quite rightly - to take every advantage which is open to
it under the Taxing Statutes for the purposes of depleting the taxpayer’s
pocket. And the taxpayer is in like manner entitled to be astute to
prevent, so far as he honestly can, the depletion of his means by
the Inland Revenue."
- Law Lord Clyde, (Ayrshire Pullman Motor Services v Inland Revenue
Comrs [1929] 14 Tax Cas 754, at 763,764).
"There is nothing sinister in so arranging one’s affairs
as to keep taxes as low as possible. Everybody does so, rich or poor;
all do right. Nobody owes any public duty to pay more than the law
demands; taxes are enforced exactions not voluntary contributions!"
- US Judge Learned Hand -
We act for a wide range of clients from large multinational companies
to family businesses to private individuals. Our clients are engaged
in their own country or internationally in many areas of activity.
Apply the principles to yourself or your company to appreciate how
we can help you.
By utilizing an off shore company, it may be possible for
the owner (or beneficial owner) to secure a number of advantages,
mainly revolving around taxation but could be useful for the protection
of assets etc. In the following notes, we outline some of the structures
which are available and give examples of uses which may be made of
off-shore 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 off shore
entities usually depend upon the country of residence of the beneficial
owner and its anti-avoidance legislation. Regard has to be had, too,
for the requirements of any other country with which the off-shore
entity might carry on its business.
Typical uses to which an offshore
company might be put, and a few actual examples (read between the
lines for ways of how you might adapt these for your own use, but
always remember, there is a very fine line between tax avoidance and
tax evasion) are:-
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Trading Companies
An importing or exporting company might establish itself in an off-shore
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 off shore area, or at least an operational base, which
has good communications as shipping and other documentation may be
critical to the scheme.
For European Union transactions, the Isle of Man and Madeira have
become very popular locations for conducting cross border trading
activities. Both the Isle of Man and Madeira are able to obtain VAT
registration, which is imperative for transactions within the European
Union. As an example, if an Isle of Man company wished to source products
from France for sale to Germany, the Isle of Man company would inform
the French company of its VAT number so that it could zero rate its
sales invoice. The French company would not have to charge VAT to
the Isle of Man company. The Isle of Man company would then obtain
the German company’s VAT number so that it could zero rate its
sales invoice.
This type of transaction would not normally be possible through other
jurisdictions without the requirement of either establishing a branch
office or appointing a tax agent within the European Union which can
be a complicated exercise and may give rise to taxation implications.
Factoring trading debts of a company resident in a high tax jurisdiction
through a company established in low tax jurisdiction may assist in
transferring funds to the low tax jurisdiction.
Another common use of an offshore entity is for bulk purchasing. Such
a structure is typically established by a group of associated or un-associated
companies to benefit from economies of scale and reduced administrative
costs. Moreover, such a structure may be more tax efficient than an
onshore arrangement.
The Publisher of a number of collections of rare classical books had
a 'product' which had a very high perceived value and a high demand.
Naturally he was concerned that when he sold his business, which he
intended to do a couple of years later, there would be substantial
capital gains - how could he avoid paying tax on them. What was the
solution? Simple but brilliant even though we say so ourselves.
1. Firstly both an offshore company and an offshore discretionary
trust were set up, with the trust owning the shares in the company.
Nominees were used throughout.
2. Secondly the Publisher placed an advert in a national newspaper
saying that he required equity finance to expand his business. Co-incidence,
one reply, the one he accepted, was from the off shore company which
stated that it had some experience in rare book publishing and, although
not able to inject a great deal of capital, could actively assist
in worldwide marketing as part of the deal.
3. Thirdly, this company paid our Publisher a modest sum (enough to
satisfy the tax authorities and on which tax was paid) for a 50% share
in the business - it was after all just a small publishing business
wasn't it, how were the tax authorities to know its potential? Over
the next couple of years the business expanded rapidly as our Publisher
knew it would and 50% of the trading profits went off-shore quite
legally into the trust account.
4. Finally, when the time came to sell the business on the open market,
a sum in excess of 100 times its value two years before was realized.
50% of that sum (over US$2 million) went straight, tax free, to the
off shore equity partner whilst our (pretty) honest Publisher duly
paid tax on his share of the profits.
Of course, we couldn't possibly say that the Publisher owned both
the trust and company could we, or that by this simple manoeuver over
US$800,000 in tax was 'saved' on the sale proceeds alone, or that
our Publisher then suddenly went on a long overseas holiday returning
with a US$2 million windfall made during his holiday, which was, oh
dear, just one day longer than required to be non tax resident - and
hence a non tax payer on earnings during that period - in his home
country!
The owner of a small family boat building and yacht broking business
was looking to retire (at all of 45!) in the near future - could he
'sell' his business tax free but still 'run' it? This wasn't so easy
but our Boat Builder wasn't averse to 'sailing close to the wind',
so, after a particularly bad trading year - there were an awful lot
of 'write downs' and land values had dropped hadn't they, and good
customers were looking to go elsewhere - it's not difficult to find
a good accountant who can turn even a substantial profit into a whacking
tax loss - our Boat Builder advertised the business for sale in an
international boating journal.
Surprisingly the offer he accepted from an offshore company in the
boating industry was low, but his accountant did say that it was probably
the best he could get given the 'poor' state of the books. As a 'softener'
though, the buyers did ask that he stayed on for a couple of years,
at a very good salary, to run the business for them. A small amount
of tax was paid on the sale profits after all allowances and our Boat
Builder is still running the business, although all invoices, orders
etc originate from an offshore office which even has its own 'phone
and fax number (isn't communications technology good these days!).
Need we say much more? If the tax authorities had investigated the
company which bought out our Boat Builder they would have found it
was registered some 10 years before - couldn't possibly have been
'our' man could it? - and all contact with their offshore office would
have had prompt, efficient and courteous replies to the effect of
'mind your own business'. But of course they never did. Fully legal?
Well... let's say that there could be gray areas.
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Investment Companies
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 off-shore
country.
A Stockbroker was making very substantial personal profits on trades
on the international equity markets and despite 'bed-and-breakfasting'
to try to gain tax relief decided to move part of his investments
offshore.
As our Stockbroker sold various investments over a period of months,
the sale proceeds somehow found their way into an offshore company
account! Once a sufficient amount had accumulated, this company then
decided to start trading on the markets. Perhaps you won't be surprised
to hear that their investment strategies were an exact replica of
those used by our Stockbroker, and as his personal 'onshore' holdings
and profits reduced, those of the offshore company increased! And
perhaps it was a sheer co-incidence that the Stockbroker suddenly
started using cash a great deal more, making frequent visits to assorted
ATM machines around his country. Of course, when our Stockbroker eventually
dies, his family will mysteriously inherit some bearer shares for
an offshore investment company together with strict instructions on
how to keep their mouths shut!
Hint. Remember well what we've already said about not letting anyone
know about your offshore involvements, especially if they're 'iffy'!
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Holding Companies
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.
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Probate and Privacy
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 or trust so that upon his demise probate would be
applied for in the country in which his company or trust were 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.
The owner of a substantial country estate and several allied 'country'
businesses was concerned over the amount of estate and inheritance
taxes his son and family would have to pay on his death, which, although
unknown at the time was fairly imminent.
A family decision was taken that the entire estate was placed under
the ownership of a discretionary trust, and a wholly owned management
company was formed to run the estate using the son and his family
as local Agents. On the father's death, the family were thus able
to stay on living in the style they had long been accustomed to without
paying a cent of tax.
Note. This structure was not 'off the shelf' and required very careful
planning to be legal in the country where the family live.
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Property Owning Companies
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 Portuguese Property
Ownership Scheme, which we operate in conjunction with lawyers 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.
We were recently approached by a certain small builder who had spied
an excellent investment opportunity which stood to make him some US$500,000
a year for several years. Not wishing to pay tax, an offshore development
company was formed, with nominee directors and shareholders of course,
which then registered for sales tax in the EU country where our Builder
lives. Due to his geographical location it seemed to any casual (indeed
to a fairly in-depth) observer that the development company was 'just
another "xxxxx" country company operating over here'. But
few, if any, realized that the development profits and on-going income
from rentals were not just going to another EU destination to be taxed
there, but were in fact tax free due to a unique company structure
allowable in the country of incorporation, one which even a company
register search wouldn't reveal.
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 non-resident 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.
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Professional Services
Many individuals engaged in the provision of professional services
in the professions and in the construction, engineering, aviation,
finance, computer, film and entertainment industries can achieve considerable
tax saving benefits through the establishment of a personal service
company, based offshore.
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.
The offshore company can contract to supply the services of the individual
outside the country in which he/she is normally resident and the fees
earned can accumulate offshore, free from taxation in the offshore
centre. Payments to the individual can then be structured in such
a way to minimise income tax.
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.
We have incorporated several offshore companies (one company per Consultant)
for a small group of Management Consultants who are very active in
their field of Computing and allied management activities. Contracts
are entered into by the offshore company, through its Gibraltar office,
for work to be carried out in other EU countries. This work is then
subcontracted to the members of the Consultancy Group we work with,
who are paid by the offshore companies on a time spent basis, at a
rate substantially less than the ultimate invoice charges. The resultant
profits accumulate offshore, perhaps they might even find their way
to paying for the long and frequent holidays our Clients seem to take!
In structures such as this, because they frequently operate in legal
'grey' areas, it is important to diversify the sources of offshore
income, admixed with some from onshore. If the tax authorities do
ever undertake an audit, it can be demonstrated that the overseas
incomes are not just from one, could be suspicious looking, source,
but several. Again it is important to be seen to be 'doing things
right' and ensure that copies of all correspondence between parties,
onshore and offshore, are kept filed - for heavens sake use different
type faces on different letters and ensure that 'offshore' mail is
indeed posted from where it 'should' be if you are evading tax! More
than one person has been caught for lack of such attention to detail.
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Shipping Companies
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 BVI, Delaware USA, 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.
OffshoreSimple Inc are now able to register yachts in the BVI offering
considerable savings on both purchases taxes (VAT) where applicable
and annual registration fees. If you, or anyone you know, has a yacht
which could benefit from being registered offshore, please contact
us for more details.
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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 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.
'John' came to us a couple of years ago as a (then) struggling inventor,
although his full time business was running a small engineering company.
John had several good ideas in mind which he wished to pursue and,
being foresighted, had thought through the tax implications if any
of his ideas did make him a great deal of money.
We set up an offshore company on 'John's behalf, to which he subsequently
sold the rights to any and all ideas he may develop, in return for
a guaranteed payment regardless of success. OK, so 'John' pays income
tax on money, which as far as we know just recirculates round and
round to make it seem like a constant supply (only speculation of
course), but a couple of his projects have been taken up by large
manufacturing and marketing companies, each for six figure sums.
These royalties are of course paid to the holder of the rights, the
offshore company, so they are totally tax-free and in theory John
only receives his flat-rate guarantee sum, but there is a nice little
six figure cash sum, growing substantially with accruing royalties,
that the 'true' owner of the company will one day retrieve. We wouldn't
be at all surprised if it turned out to be 'John' himself!
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Banking Companies
Click here for more detailed information on banking licenses
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.
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Insurance Companies
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.
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Captive Insurance
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.
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These are just a few examples of both the different uses to which
offshore entities can be put and even fewer examples drawn from
real life situations. We're sure that, with a little imagination,
you could find a circumstance and a situation which could reflect
your own, then use it to go offshore yourself. If you're stuck,
do ask us and we'll try to offer a few suggestions.
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