Offshore holding companies provide an ideal vehicle for holding real estate investments. As such, an increasing number of offshore companies are being registered for this express purpose. While in some instances it might make more sense to hold a property investment in your personal name; in most cases, registering an offshore company to hold the property on your behalf can provide significant benefits.
In this article, we will explain what an offshore holding company is, how it can be used to hold real estate, why it is worth it, as well as some additional factors to consider.
Offshore Company For Holding Physical Real Estate
An offshore company is a corporate entity specifically used to hold assets or other subsidiary companies. Holding companies do not actively engage in business themselves, but are merely legal vehicles used for holding other assets. An offshore holding company is the same as a regular holding company the difference is that it is incorporated in a foreign jurisdiction.
Holding companies can be used to hold a variety of asset types
Holding Companies generally benefit from receiving passive income from these assets. These include:
Interests/shares in secondary subsidiary companies
The holding company receives income from dividends and capital gains from the sale of these interests.
Bonds and other financial instruments
The holding company receives ongoing income in the form of interest.
Intellectual property
Company would act as a vehicle to receive the royalties.
Real estate and other assets
The holding company receives rent and other ongoing income, and be entitled to the proceeds upon sale of the property.
Using an offshore holding company in a favourable foreign jurisdiction as a vehicle to hold your assets can provide numerous benefits and financial incentives.
How to Use an Offshore Holding Company for Real Estate Investments?
Using an offshore company to purchase real estate is a relatively straightforward process. Here are the steps involved:
1. Incorporate an offshore holding company in your jurisdiction of choice
This is where it is worthwhile doing extensive research and consulting with an expert to determine the optimal offshore jurisdiction in which to incorporate. The ideal choice is a tax-free jurisdiction such as British Virgin Islands (BVI) or Bahamas.
Other factors to consider include the reputation of the jurisdiction (which will have a factor when trying to secure a loan), tax treaties, cost and speed of incorporation, etc.
2. Apply for a mortgage loan if needed
Depending on the country in which you are purchasing the property as well as the jurisdiction in which you have incorporated the holding company, it may be possible to secure a mortgage to pay for part of the property purchase.
For example, it is common for BVI holding companies to qualify for mortgage loans of up to 70% for the purchase of property in London. The balance of the purchase price will be provided to the holding company by the shareholder (i.e., you) in the form of a loan.
3. Proceed with the purchase of the property in the name of the holding company
Once the company has been incorporated and the funding has been secured, you can proceed to purchase the property investment through the offshore holding company. As the company is a separate legal entity, the company’s name will appear on the title deed of the property, and it will not be associated with your personal name. This has some important benefits as we will now discuss.
The Downsides of Holding Property in your Personal Name
There may indeed be circumstances that warrant holding real estate (investment or otherwise) in your personal name. For example, depending on the location, there may be certain restrictions on corporate ownership of property.
There may also be tax advantages to holding the investment in your own name in certain situations; however, in most cases, using a holding company is more tax efficient. There are also a number of potential downsides to holding real estate in your own personal name compared to using a holding company. These include:
1. Increased risk due to personal liability
Assets held in your own name are susceptible to risks from court cases, bankruptcy, liability claims, etc.
2. Probate and inheritance tax
Transferring personal property on to your heirs after your death involves expensive and lengthy probate procedures and high inheritance taxes. This can be avoided through an offshore company, whereby the shares are merely redistributed. This can even be used in conjunction with a trust which will further smoothen the transfer of the assets to the beneficiaries.
3. High taxes
Usually, it is less tax efficient to hold property in your own name in your own jurisdiction. This is because the property will form part of your personal estate and be subject to personal capital gains and income taxes in accordance with the tax legislation where you reside.
The Benefits of Using an Offshore Company for Real Estate
Using an offshore holding company structure to invest in real estate can provide many benefits, including:
1. Avoidance of probate
Property that is held in your own personal name will inevitably incur probate tax when your heirs inherit it. On the other hand, many offshore jurisdictions allow company shares to be directly inherited and redistributed without the need for lengthy probate procedures or expensive estate taxes.
2. Asset protection
Using an offshore holding company for your real estate will provide much better asset protection. Firstly, the assets will be disassociated from your personal name, meaning they will not be at risk if there are any liability claims against your personal estate.
Secondly, there are favourable offshore jurisdictions which have legislation that is specifically geared towards providing maximum asset protection and privacy. Placing your assets outside of the jurisdiction of local courts adds an important layer of security to your wealth.
3. Tax benefits
There are many ways to structure an offshore holding company so as to minimise the taxes you will incur. Depending on the jurisdiction in which you incorporate and the tax agreements between them and the country in which the real estate is purchased, an offshore corporate entity can enjoy greatly reduced tax rates.
Where to Incorporate your Offshore Real Estate Holding Company?
One of the primary factors to consider when setting up an offshore holding company for real estate is where to incorporate the company. This will depend on your personal circumstances, including but not limited too:
- where you are currently a tax resident
- where you wish to purchase the real estate
- your income and tax bracket
- personal preferences and objectives
- budget for setting up a company, etc.
Generally, the ideal is to find a jurisdiction with zero or low corporate taxes, which has a double taxation avoidance treaty with your home country. It is also ideal to choose a jurisdiction that is relatively reputable, so that it is easier to gain access to funding, and you will not be subjected to undue scrutiny from your own government and tax authorities.
Examples of favourable jurisdictions include in no particular order:
- British Virgin Islands (BVI)
- Hong Kong
- Singapore
- Cyprus
- Belize
- Netherlands
Conclusion
There are significant benefits to using an offshore holding company for real estate. If you are planning to invest in real estate, either domestically or overseas, it is definitely worthwhile setting up an offshore holding company to use as an ownership vehicle for the property you purchase. While it might feel like additional work and hassle to do so, the advantages which come with such a structure are certainly worth the extra time and effort involved.
If you are unsure what the best structure is to suit your own needs and objectives, it is advised to consult with an expert who can help guide you through the process. They will be able to recommend the best offshore company structure based on your own circumstances, and help you to practically establish the company and take the steps to use it for your real estate investments.
