An Offshore Company refers a corporation, LLC or similar class of entity formed in a foreign country foreign to that of the principals of the organization. It also refers to a company that can only operate outside of its country of formation. This article provides information to help one understand the definition of the term “Offshore Company.” It will also describe how they differ from domestic companies.
Define Offshore Company
First of all, we will define the term Offshore. Offshore means located or situated beyond one’s national boundaries. The term Offshore Company has two definitions depending on its perspective. From the standpoint of the principals of the company, it is a company that one has filed outside of the country where its principals reside. The principals include the officers, directors, shareholders, members, partners. From within its country of formation, it is a company that has been formed for the purpose of operating outside of the jurisdiction where it was originally filed.
Why would one would form such an entity? It is often to take advantage of laws that are not available in one’s country of residence. Examples of these benefits may be tax savings, asset protection from lawsuits. On the other hand, one may want to take advantage of foreign business opportunities.
So, why would country would offer such entities? It is to bring revenue to the jurisdiction. They do this in the way of filing fees and fees to the agents that form such entities. For example, jurisdictions such as Nevis, BVI, Belize and the Cook Islands have little in the way of natural resources. So, they have created unique offshore company laws. These laws make it attractive for foreign investors to form entities and/or hold capital within their borders.
As an illustration, an offshore company filed in the Caribbean island of Nevis can hold a bank account in that country or other countries but it cannot operate a business within the country of Nevis. Nevis LLC legal statutes were written to protect the assets held inside the company from being seized by lawsuits and creditors. So, those who do research on creditor protection may chose Nevis as the jurisdiction to form their entity.
Big Organizations use Offshore Companies
One tax-savings example is Apple, Inc., the technology company headquartered in Cupertino, California in the United States of America. Apple established offshore companies in Ireland. Neither the Irish holding company nor the Irish corporation that is the principal company, as of this writing, have paid any income taxes in Ireland for the past several years. Suppose one company were to associate with another company doing business in Ireland. This country allows some Irish companies to claim non-residence status. Therefore, this allows Apple’s main company to not pay taxes anywhere at all.
Tax Laws
US law asks where you filed your company (IRC Sec. 7701(a)(5)). Irish law asks where a company is managed and controlled. Since the laws of neither country define the company as resident, no tax treaty does either. Therefore, the tax treaty between the US and Ireland does not cover Apple’s nonresident subsidiaries.
By the way, the European Union filed a lawsuit against Apple in order to collect the taxes that this loophole allowed. We will see after Apple has exhausted its appeals what the results will be. Since that time, The EU and Ireland have put laws into place that may no longer allow such tax maneuvering.
Domestic Company Comparison
In contrast, a domestic, or local company is a corporation or partnership one has created or organized for the purpose of operating from its country of formation. Typically, the officers, directors and, most often, the owners are located in the same nation in which one has filed the organization. It can conduct business within the borders of the country where they formed it, in addition to other countries if they meet certain requirements. For example, UBS Bank is filed as UBS Group AG the Swiss Canton of Zurich. It conducts business in that country. Its lawyers have also registered it to conduct banking business outside of Swiss borders.
Offshore Company Uses
An offshore company, similar to a domestic one, can open bank accounts, own property, operate a business, enter into written agreements, buy and sell and engage in other forms of commerce. Also known as an International Business Company (IBC or Offshore IBC), it generally does not have tax obligations in the country where it was formed. It needs to conduct its business outside of its country of formation.
Offshore companies can be corporations, that we also call “limited companies,” limited liability companies (LLCs) or limited partnerships, for example. Belize has a entities similar to LLCs called limited duration companies (LDCs). LDCs have 50 lifespans, at which time they can be renewed or re-filed.
Offshore Company Jurisdictions
There are a number of jurisdictions where offshore incorporation can be conducted. These locations include Nevis, Belize, Cook Islands, BVI, Seychelles, Panama and Anguilla. The decision about where to file depends on the price, speed, ease, and reputation of the jurisdiction. For example, a Nevis LLC tends to be quite advantageous for the US person. This entity seems to offer superior asset protection and tax benefits. Assets held inside of a Nevis LLC can be shielded from creditors. Plus, an LLC in Nevis does not pay taxes in that jurisdiction. When the right forms are filed, it is simply an owner flow-through entity for tax purposes, without any income taxes at the company level.
A Belize LDC offers other affordable means to protect assets and gain financial privacy from would-be litigants. Belize has a fairly robust banking system with debit cards and online access.
The Cook Islands LLC offers benefits that are nearly identical to that of Nevis. Plus the asset protection provisions are superior to that of other jurisdictions. Cook Islands is located in the South Pacific in the same time zone as Hawaii. It has a very stable government, independent from, yet associated with New Zealand.
Onshore vs. Offshore
In contrast to forming a company in a typical offshore territory, one can form an onshore company in a location that is offshore to the owner. This may be for legal or tax advantages. For example, a citizen or resident of the US can form a company in Hong Kong, the UK, Canada or Mexico. A person in the UK can incorporate in the US state of Florida, Delaware or Wyoming. An Australian resident may form a company in the US or UK. A Wyoming LLC with a foreign owner, for example, does not pay taxes on profits generated outside of the USA.
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