In this article, we will analyze several forms and types of offshore companies, cases of their use, and expert advice about the most favorable jurisdictions where such foreign legal entities should be registered.
The term ‘an offshore company’ usually refers to any foreign company, regardless of the place of its incorporation. Besides, it often means a business entity set up in some offshore zone (Belize, Nevis, BVI, or any other classic tax haven).
To define the form of a foreign company, we usually analyze its business structure. To refer an offshore company to a particular type, we need to focus on its features and the purpose of such a company. We will not study here the details of a particular classification, we will only give a brief overview of the basic taxonomy of offshore companies – to help you understand the differences and the rationale before you decide to form this or that business entity structure.
The main FORMS of offshore companies:
- Limited Liability Company – LLC
- Limited Liability Partnership – LLP
- Public Limited Company – PLC
- Private Limited Company-LTD
- Company Limited by Guarantee – a Guarantee Company (whose members’ liability is limited by a guarantee)
- Limited Duration Company – LDC (a company with a short life cycle)
- Unlimited Company – a company with unlimited liability
- Limited Partnership – LP
The above-given list is not exhaustive but includes the most popular forms of business entities used across the world.
FREE EXPERT CONSULTATION
on which jurisdiction is best for
your business, preferred tax regime,
on which jurisdiction is best for your business, preferred tax regime, company structure.
The main TYPES of offshore companies by the purpose of use
Offshore Holding Company
In simple words, an offshore holding company is a foreign company that is not involved in any production and owns shares of other offshore, midshore, or onshore companies. A holding company that holds a controlling stock and the number of votes sufficient to appoint directors and to control strategic decisions, is called a parent company.
In which cases may you need an offshore HOLDING company?
- to integrate assets and companies into one structure
- to secure the confidentiality of ownership
- to protect the absolute privacy of the ultimate business owners (UBOs)
- to take advantage of the company’s flexibility and prompt acceptance of changes in the structure and management
- to avoid the need to involve professional directors or other third parties, and thus to save resources through such an arrangement in the long run
- to ease the tax burden on dividends and capital gains when selling business in the countries of the investment activity.
When selecting a country for the registration of an offshore holding, the following factors should be taken into account:
- availability of Double Taxation Agreements (DTA)
- the withholding tax rate for dividends in the country of the subsidiary’s location, as well as the tax rate for incomes from the sale of shares of non-resident companies, if it is planned to sell the subsidiaries in the future
- the rate of income tax on the sale of corporate rights by non-resident shareholders in the country of registration of the holding
- if you plan to invest in the EU, we recommend registration of the holding company in some EU country (this will allow you to benefit from the European Union Directive “On Parent and Subsidiary Companies”, and you will be able to qualify for the exemption from the withholding tax on dividends
- rules and legislation on controlled foreign companies in the home country of a non-resident investor
- if you plan to create a holding company to invest in an existing business, you need to carefully study the prospects for taxation of the transfer of ownership in the investor’s country of residence.
For example, if you are going to set up a parent company in Nevis, we recommend to register it as a limited liability company (LLC), since this business form will enable the classic offshore company to enjoy maximum protection of assets, take care of the owner’s interests and confidentiality of ownership.
A trust is a written agreement to transfer the ownership or management of assets from a trustor to a trustee. A trust controller is authorized to monitor the agreement implementation, while the beneficiary enjoys all the benefits and profit derived from the trust agreement.
A trust is, in fact, a product of the Anglo-Saxon law to which several classic offshore jurisdictions adhere (for example, our experts offer services of company formation in Nevis, including the registration of trusts entitled to the income tax exemptions under certain conditions).
In which cases may you need an offshore TRUST?
- to protect or inherit an asset or an operating business
- to protect assets or business from third parties: aggressive creditors, greedy or insane relatives, any ill-wishers, and other threats to your wellbeing
- to protect from excessive taxes and/or bankruptcy
- to officially withdraw from the ownership of assets, while retaining control over them
- to undertake some charity activity or project.
When selecting a country for the registration of an offshore trust, the following factors should be taken into account:
- legislation and cases relevant to the trust formation
- the stability of the political regime in the country of the trust registration
- transparency/protection of data about founders and beneficiaries, the terms of sharing relevant information with foreign authorities.
Please click on the link to articles about New Zealand to find details and examples of strengths, requirements, and opportunities of trusts registration for the purpose of asset protection. A PTC (a Private Trustee Company – the local form of business in New Zealand) can yield many benefits. You are welcome to book a consultation with our experts to discuss advantages of your trust registration.
Offshore Shipping Company
Classic offshore zones are often used for the registration of shipping companies. Freight air carriers also prefer jurisdictions that offer favorable tax incentives for ground maintenance of their aircrafts.
When selecting a country for the registration of an offshore shipping company, the following factors should be taken into account:
- the local income tax regulations
- incentives for the registration of vessels, navigation services, and Sea services
- legislation in the field of labor law and its advantages (if any)
Prof tip: if you need to register a vessel you will have to set up a shipping company. This means that the costs will include the annual maintenance expenses in the amount depending on several variables (tonnage, cargo capacity, the crew, etc.).
Please note that to register an offshore shipping company, you will need to submit to the registrar not only the application portfolio for the incorporation of the legal entity but also the documented proof of the vessel’s compliance with international standards, as well as the proof of the safety of shipping operations.
In which cases may you need an offshore SHIPPING COMPANY?
There are four main activity types in the transportation business: ownership, registration, management, and operation of a vessel. We recommend that you should register a company for each vessel separately. Favorable jurisdictions may be Cyprus or Malta, Panama or Nevis.
For example, registration of a yacht or vessel for a classic offshore LLC in Nevis is much appreciated by owners for enhanced confidentiality of ownership and ease of operation of such a company.
Offshore Trading Company (Export/Import Operations)
In which cases may you need an offshore TRADING COMPANY?
- to promote the company’s status in the eyes of potential buyers
- to obtain credits and open accounts with local banks
- to plan tax optimization for profits generated from trading activities and the withholding tax
When selecting a country for the registration of an offshore trading company, the following factors should be taken into account:
- a reasonable income tax rate or the opportunity to optimize it if certain conditions are met (for example, to pay dividends as a way to distribute the profits derived from trading activities)
- favorable DTA (double taxation avoidance) agreements to reduce the withholding tax (on dividends and on profits from the sale of corporate rights to non-residents)
- local taxes, such as VAT
- legislation on controlled foreign companies in the investor’s country of residence (as a result of which the profits of foreign companies registered in certain countries are taxed)
- if a foreign company is created to expand the trading activities abroad, it may be regarded as a transfer of goodwill, and a tax may be charged on the relevant profit
- transfer pricing rules and legislation.
An offshore trading company can act as a trade agent – in sales, distribution, or import-export operations. Such an offshore company is useful if the goods produced in one country are sold in another, while the principal is located in a third country. The profit, which is derived from the difference between purchases and sales, can be accumulated in an offshore bank account and reinvested in business development.
For example, a Private Limited company registered in Singapore can be effectively used not only for trading in Asia, but also for doing business around the world
Offshore Professional Services Company
Such companies are created to provide on behalf of a foreign company professional services of, for example, engineers, developers, architects, etc.
In which cases may you need an offshore PROFESSIONAL SERVICES COMPANY?
- to reduce the risk of personal liability
- to have access to more benign income tax rates
When selecting a country for the registration of an offshore professional services company, the following factors should be taken into account:
- the income tax rate or the possibility to reduce it
- agreements on the avoidance of double taxation
- withholding tax, VAT
- the tax regime in the country where you are going to sell services – if the company is going to be its resident or arrange a permanent local office.
A classic international business company to be registered in some offshore jurisdiction to render professional services can have any of the following abbreviations in its name: Ltd., Inc, S.A., A.G., and so on.
If you need to set up such a company urgently, you should book a FREE private consultation with our experts to discuss the make-or-buy options and available offers of ready-to-use companies in, for example, Nevis.
Offshore Intellectual Property Company (Intellectual Property Ownership, Licensing, Franchising)
In which cases may you need an offshore INTELLECTUAL PROPERTY (IP) COMPANY?
- to own and maximize benefits of intellectual property objects
- to generate income (royalties) from the use of intellectual property objects
- to diversify the risks of ownership and commercial use of valuable assets
- to optimize income tax levied on revenues derived from this type of activity.
Let’s consider the following two cases of using foreign IP companies:
Case 1. An onshore company owns some intellectual property. It sells licenses to its IP users. The company is registered in, for example, Luxembourg, where the tax rates are high. However, it can take advantage of the benefits of a special tax regime available for such companies.
Such an onshore IP company is taxed on profits generated from licensing and can also optimize the withholding tax thanks to the double taxation avoidance agreements signed by the country of its registration.
For more information about company registration in Luxembourg, please click on the link: What form of ownership should you choose for your Luxemburg-based company?
You are also welcome to refer your questions to our experts at the e-mail address given at the top of this page.
Case 2. An offshore company owns some intellectual property and does not pay taxes on worldwide income. It grants an intellectual property license to an affiliated onshore company registered in a jurisdiction with many double taxation agreements. This onshore company, in turn, acts as an intermediary issuing sublicenses to clients.
We do not recommend using an offshore company with direct ownership of some intellectual property, since offshore jurisdictions do not have signed agreements on the avoidance of double taxation. Therefore, it is not possible to optimize the withholding taxes in the countries of registration of legal entities-licensees.
When considering the country for registering an IP company, the following factors should be taken into account:
- the reasonable income tax rate
- availability of DTAs (double taxation agreements) for optimization of the withholding tax when paying royalties
- opportunities for receiving benefits if certain conditions are met (for example, companies registered in the EU may take advantage of the EU Directive on interest and royalties. In this case, the company receives an exemption from tax at the source of royalty payments, and this license fee is paid by the related companies).
- prospects for withholding tax when paying dividends
- no tax at source for dividends
- no tax on profits arising from the sale of shares of companies to non-resident investors in the country of the planned registration of the company that owns intellectual property
- acceptance of the risk of transfer pricing and recognition of the controllability of foreign companies (and taxation of all investor profits received from foreign intellectual property, if these companies are located in some countries), as well as ensuring the presence of the company in the country of registration (management and control are not in the country of the owner’s location)
For your registration of an intellectual property company, we recommend (besides Luxembourg structures such as LLC (SARL) or JSC (SA)) Cyprus Limited or Ltd.
To discuss with our expert your needs, expectations and opportunity for registration of a foreign IP company, please book a free online consultation and see our relevant posts.
Offshore Recruitment Process Outsourcing (RPO) Company
Foreign companies can be used to generate income from contracting human resources out (for example, for implementing some project).
This is a special purpose company that is engaged in the search and hiring of personnel for participation in temporary projects across the world. Why is a foreign company more beneficial in such a case?
When a foreign company comes to the domestic market it can contract a specialized agency to hire (outsource) the right temporary staff. If the Recruitment Process Outsourcing (RPO) Company is registered and located abroad with no permanent local office in the jurisdiction of the project, it is not subject to local taxation.
When may you need to register an OFFSHORE RECRUITMENT PROCESS OUTSOURCING (RPO) COMPANY?
- to mitigate the risk of hiring a poorly trained local staff, to search for and outsource qualified personnel
- to optimize taxes payable on worldwide income and fees of international employees
- to promote competitiveness
When selecting a country for the registration of an offshore Recruitment Process Outsourcing (RPO) Company, the following factors should be taken into account:
- income tax rates
- availability of double taxation agreements and prospects for reducing the withholding tax on the income of recruitment companies
- the VAT rate in the country of registration of such a company
- conditions for withholding tax on dividends
- availability of a favorable system and rates of social security and insurance contributions.
When choosing a jurisdiction for registering a Recruitment Process Outsourcing (RPO) company, it is necessary to take into account conditions for tax optimization, especially in the EU countries. Such a company cannot be entitled to low-rate taxation and allowances on its entire income and low-rate social charges deductible from the employees’ fees and salaries.
Prof tip: Legislative norms governing the social insurance of personnel need to be studied in advance. The task of selecting and outsourcing staff for companies in specific business fields and trades ( for example, in maritime shipping) special EU regulations may apply and require your attention.
Offshore Financial Company
This category encompasses a whole range of foreign non-bank special-purpose companies set for financing a group of companies registered in other countries.
Let’s consider the following two options of how an offshore financial company can be structured:
1. An onshore company acting as the main source of funding.
Such a non-resident investment entity can enjoy the benefits and allowances of the offshore tax regime available to non-resident companies that finance some group of companies or manage funds in the offshore jurisdiction.
It acts as a lender to the affiliated companies in the group. The revenues generated through such financing are subject to taxation in the jurisdiction of its incorporation. The withholding tax is charged in the countries of the borrowers’ location.
2. An offshore company acting as the main source of funding.
No taxes are levied on the worldwide income of a classic offshore company. An offshore company provides loans to an affiliated onshore company registered in a country with a double taxation agreement. This onshore company (intermediary) pays the offshore company for its services.
A classic offshore company’s direct lending to the borrower companies would not be reasonable if you hope to optimize your taxes on the basis of a DTA (double taxation agreement). Offshore jurisdictions do not sign DTAs, and the withholding taxes will be levied at high rates in the borrowers’ jurisdictions.
That is why the involvement of some intermediary onshore company is important – which is entitled to lower rates of withholding taxes in case its jurisdiction of incorporation maintains DTAs with the borrower companies’ jurisdictions.
When may you need to register an OFFSHORE FINANCIAL COMPANY?
- to accomplish integration and centralization of financial operations of transnational companies
- to optimize the taxation of borrower companies
- to plan accumulation of wealth in one jurisdiction
- to finance companies affiliated in one group through lending instruments
- to optimize the taxation of the income (interest) generated through lending/
When selecting a country for the registration of an offshore FINANCIAL Company, the following factors should be taken into account:
- an acceptable income tax rate and favorable tax terms for some specific operations, such as subordinated loan
- availability of double taxation agreements that allow optimization of the withholding tax on interest of creditor companies
- conditions for reducing the tax base due to the interest paid (“undercapitalization rules”)
- withholding tax for the dividents.
The risk of transfer pricing, controllability of foreign companies, the possible disputes with the tax authorities about the legitimate nature of such a structure, and their suspiciouns about creditors’ disguized revenues through”a compensatory financial structure” – also need to be taken into account.
Panamanian forms of business entities (S.A., INC or Corp) are most appropriate for building a financial company. You can find details in our posts or discuss your questions with our experts by writing to the e-mail address given at the top of this page.
Offshore Leasing Company
An offshore company can be created to own and lease out some valuable assets to others. Such a company is called a leasing company.
When may you need to register an OFFSHORE LEASING COMPANY?
- to reduce risks and diversify them by separating the ownership of assets from their use by some companies
A special company is set for ownership of assets. It will lease them to another company for use in profit-generating activities.
- to lease out some asset
- to optimize taxation (by gaining access to lower rates of the profits tax)
When selecting a country for the registration of an Offshore Leasing Company, the following factors should be taken into account:
- the rate of the corporation tax and a chance to optimize the leasing income tax rate
- a variety of DTA agreements
- taxation of leasing payments and rent transfers forwarded to non-resident companies
- the withholding tax on dividends.
Before setting up a leasing company you should be aware of the requirements set for licensing this business activity.
Among other types and forms of offshore companies, there are some more narrowly focused ones (for example, for trading on stock and financial markets, clearing activities, insurance, banking).
You can book a FREE online one-on-one consultation with our professional expert on forms and types of offshore companies. Just send your request and questions to the e-mail address given at the top of this page.
And remember we are here to help you at every step!