This article is for general informational purposes only. It must not be used as a consideration for decision making purposes due to specific nature of different businesses. We recommend that you contact us for a non-obligatory consultation before making any decision in such exercise.
Businesses in the US and Europe have long been using offshore companies for tax planning measures. However, there are certain groups of people/companies have abused this tax planning tool to perform fraudulent measures such as money laundering, drug and arms smuggling, etc. Such companies are a taboo to Asians in general, and therefore, little knowledge of their legal benefits is understood.
This article is merely to assist the readers to understand a little bit more about the legal aspects of an offshore company, especially their benefits:
- Assets protection
- Protection from lawsuits
- Minimising taxation
Placing personal assets into a separate legal entity is generally favourable, whether in an onshore or offshore company. The main reason is that there is additional layer of protection for the assets in cases of legal claims over your assets.
The fact that offshore companies provide added privacy will make ownership of your assets harder to track. Lawyers typically perform preliminary searches to locate assets that are owned by you, to maximise recover of claims from a winning judgement. By transferring your assets to an offshore company, thereby relieving your personal ownership on these assets, these offshore companies can be a valuable tool in deterring these lawyers from locating these assets.
Protection from lawsuits
It is very difficult to take legal action against properly structured offshore companies because of the added difficulty of locating foreign assets and subsequently proving ownership of them. Further, in many jurisdictions, the lawsuit would have to take place in the country of incorporation since foreign judgments are not recognized except in cases of money-laundering, weapons and drug smuggling, and criminal tax fraud.
It is important to note that tax fraud is entirely different from tax avoidance. Tax fraud is an offense and tax avoidance is an entirely legal means of minimizing personal and corporate taxes.
In many offshore jurisdictions, the company officers, shareholders and beneficial owners can either be omitted from the incorporating documents and/or are not disclosed on any public record at all.
This will provide privacy and anonymity in conducting your business, bank transactions and/or personal financial investments.
Generally, the ongoing requirements for offshore companies are often very relaxed compared to onshore companies. Many of these jurisdictions do not require the accounts to be audited, and no filing of Annual Returns.
Offshore companies incorporated in low or zero tax jurisdictions may reduce, delay or eliminate the tax burden on the company. However, you need to understand that taxes are still paid in the country of citizenship/residence or business domicile, ie. the onshore company.
Transactions and profits arising from these offshore companies will be subjected to the tax laws in within their jurisdictions regardless of location of funds. Therefore, if the jurisdiction is having zero tax, then the company will automatically enjoys tax free profits.
You have to take note of other tax implications that may overlap with the offshore companies, such as withholding tax and transfer pricing matters.