Offshore Company Tax Benefits: What You Need to Know

Setting up an offshore company in a foreign jurisdiction can provide access to many advantages. Perhaps the most significant of these comes in the form of significant tax benefits and savings.

In this article, we will look at the various tax benefits which are often available to offshore companies along with other additional advantages. We will also discuss how to actually qualify for and best make use of the benefits which may be available.

Table of Contents:

• Tax Benefits Of Incorporating An Offshore Company
• 1. Low/Zero Tax Rates
• 2. Lower Taxes / Tax Rebates On Defined Activities Or Sectors
• 3. Tax Deferral
• 4. Tax Exemptions For International Business Companies (IBCs)
• 5. Tax-Offsetting Incentives And Other Tax Loopholes
• Why You Need An Offshore Company 
• Basic Eligibility Requirements
• Optimising Your Strategy
• Conclusion

Tax Benefits of Incorporating an Offshore Company

In most cases, the primary reason for incorporating a company “offshore” is to take advantage of more favourable tax regimes than in one’s home country. This obviously involves selecting an offshore jurisdiction which provides significant tax advantages to offshore entities incorporated on their shores. Such jurisdictions are referred to as “Tax Havens” or more generally as “International Financial Centres” (IFCs). 

It is important to note that not necessarily all corporate entities will have automatic or equal access to the tax benefits of an IFC. We will discuss exactly how to obtain these benefits along with eligibility requirements later.

First, let us explore what the main tax benefits of an offshore company are. While the specific benefits vary across different jurisdictions and in different individual situations, they can be generally listed as follows:

1. Low/zero tariff rates

The first advantage is quite obvious. Popular IFCs for incorporating an offshore company generally have either very low or zero tax rates across the board. This can include the likes of corporate taxation, income tax, capital gains tax, withholding tax, and so forth. 

2. Lower taxes / tariff rebates on defined activities or sectors

Many offshore jurisdictions offer specially reduced taxes or tax rebates to businesses conducting specific activities or operating in defined sectors.

3. tariff deferral

The classic argument that offshore tax havens do not really help to reduce taxes, because business owners are still taxed on the profits when they are repatriated to their home country, is not completely accurate.

It is true that this is an important issue to consider as it has the potential to degrade the benefits obtained from lower taxes in an offshore jurisdiction.

However, owning an offshore company in a low-tax jurisdiction usually allows you to defer your taxes to a more favourable time to claim them, or even to defer them perpetually.

Corporate profits can be continuously reinvested into the company while only a small portion is “withdrawn” to your home country and thus exposed to higher domestic income tax.

4. Tariff exemptions for International Business Companies (IBCs)

Some offshore jurisdictions offer special tax benefits/exemptions to those businesses that are deemed to be an International Business Company (IBC). That is, they are incorporated in the jurisdiction in question, but do not conduct any business activities inside the country’s borders. 

These companies usually need to have a local office and local agent, as well as pay an annual levy (the cost of which is minor compared to the tax savings which they get in return).

5. Tariff-offsetting incentives and other loopholes

The final type of tax advantage which is often available to offshore companies in certain jurisdictions is access to various tax-offsetting incentives and loopholes.

These allow a company’s effective/realised tax obligation to be significantly reduced through legal tax shielding strategies, deductions, exoneration on stamp duties, and other methods.  

Why You Need an Offshore Company 

The benefits of an offshore company extend beyond favourable taxes alone. IFCs and tax havens regularly offer all-round favourable corporate environments with additional benefits such as:

Easy, cost-effective incorporation with reduced maintenance costs

Incorporating a company in a favourable offshore jurisdiction (such as those in the Caribbean) is usually made easy and affordable by the host country.

Furthermore, the ongoing maintenance costs are lower than in most traditional ‘onshore’ jurisdictions.

Reduced administrative and reporting requirements

Offshore financial centres typically have less arduous administrative requirements along with fewer reporting obligations.

Offshore companies are often not required to submit detailed annual financial statements, do not need to be independently audited, and do not have to keep public records of company activities and details of beneficial owners etc. This results in lower costs, less time and effort, and greater privacy.

Asset protection

Offshore companies provide an ideal added layer of security for your assets. By placing your assets under the ownership of an offshore company, they become out of reach of domestic threats such litigations, bankruptcy, creditor claims, and so on.

This is especially true when the offshore company is based in a jurisdiction with strong asset protection measures and laws. Examples include Nevis, Cayman Islands, Cook Islands, etc.

It is important to note; however, that transferring your assets to an offshore company is not an absolute guarantee that they are safe from local court orders, especially if you only transfer them after a court case is initiated.

Setting up an asset protection strategy with an offshore company long before a threat is apparent is a highly effective way to keep your wealth secure and out of harm’s way.

Financial Privacy

Conducting your business and financial matters through a separate legal entity such as an offshore company in a tax haven can provide much greater levels of financial privacy and confidentiality.

While the global financial services sector is becoming increasingly interconnected and less private with the introduction of information sharing treaties and a move towards greater transparency, many tax havens still uphold the values of financial privacy as much as is realistically possible.

In most cases, you will not be required to publicly disclose sensitive information such as the names of beneficial owners or the business activities and financial records.

How to Obtain Tariff Benefits with a Foreign Firm

Accessing the tax benefits which can come with owning an offshore company in a favourable International Financial Centre (IFC) is not as simple as merely incorporating a business in the jurisdiction of choice.

There are two important areas to consider if you want to actually realise the tax advantages on offer and reduce your actual net tax burden.

These are firstly to make sure that you are eligible to be granted favourable taxes in the jurisdiction in which you set up an offshore company, and thereafter to optimise your strategy so that you realise maximum tax reduction from the advantageous regulations. 

Basic Eligibility Requirements

In most cases, the attractive tax benefits on offer in tax havens and other popular IFCs are not available to just anyone. They are usually specifically aimed at non-resident individuals and “offshore entities”, and involve meeting the basic eligibility requirements which are set by the corporate legislature in the specific jurisdiction.

These basic eligibility requirements do vary across different jurisdictions, but are mostly quite similar. In order to qualify for full tax exemptions and other benefits in an offshore jurisdiction, a company generally needs to meet the following requirements:

• It should not conduct any business activities in the offshore jurisdiction of incorporation,
• It should not generate any income in the jurisdiction,
• It should not own real estate or other substantial assets in the jurisdiction,
• It should be managed and controlled from outside the jurisdiction of incorporation, and the managing owners should be non-residents of the jurisdiction. 

Basically, offshore tax benefits are usually only available to those offshore companies that have registered in accordance with local regulations but do not conduct any business activities in the jurisdiction of incorporation, nor are controlled by entities residing in the jurisdiction of incorporation.

Companies which meet these requirements are usually referred to as “International Business Companies” IBCs. 

Optimising Your Strategy

When setting up an offshore company with the primary goal to optimise taxes, it is important that you optimise your strategy so as to acquire the maximum tax benefits. You should consider issues such as:

• Whether the entire company should be transferred/incorporated offshore or,
• Whether only a division or subsidiary of the company needs to be set up in the offshore jurisdiction,
• Where the beneficial owner of the offshore company will be based and the associated tax implications.

In many cases, the favourable taxes which are offered by IFCs to offshore companies are greatly eroded by improper planning and structuring.

An example of this is when the owner of the business repatriates the profits of the offshore company to their home country and ends up exorbitant personal income taxes, or worse yet, is liable to pay double taxation if there are no DTAAs (Double Tax Avoidance Agreements) in place. 

Unfortunately, there are no simple, one-size-fits-all solutions to avoiding these pitfalls and properly optimising your offshore structure so as to minimise your tax burden. It involves careful planning and a deep understanding of your personal circumstances and how to tailor a strategy that best suits your needs.

As such, it is essential to enlist the services of an offshore tax expert who can help you to set up the ideal tailored offshore tax structure fits your situation and objectives.

Conclusion

It is clear that owning an offshore company in a favourable IFC or tax haven can be an excellent way to legally reduce your tax burden, maintain greater financial privacy, and better protect your assets.

It is important to understand not only what benefits might be available to offshore companies, but how to actually qualify for these benefits and best structure your offshore plan so as to make optimal use of them.

For this, it is always best to speak to an offshore tax specialist who can help you decide on the best route to take and guide you through the practical steps of implementing it.