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What Is the Difference between Offshore and Overseas Company?

You often hear about offshore and foreign companies, and usually, the perception surrounding offshore companies is ambiguous, unlike the foreign ones. What is the actual difference between them, and why is there nothing inherently reprehensible about utilizing offshore companies?

Offshore and Overseas Company

Foreign company and offshore company: what’s the difference?

Let’s start with the main point: currently, offshore companies and foreign companies are essentially the same thing. By registering a business outside of your country of residence, you create a foreign company that, with a few minor additions, can be considered offshore.

Historically, offshore jurisdictions referred to island nations that offered significant tax advantages, high levels of confidentiality, and even anonymity for their clients. In many of these jurisdictions, financial services provided to non-residents (companies, accounts) constituted a significant portion of their GDP.

Today, the concept of anonymity has vastly diminished, and reasonable confidentiality can be achieved not only in traditional offshore jurisdictions but also in certain midshore and onshore ones.

Legally saving on taxes is possible not only in places like Nevis, Seychelles, or the Bahamas but also in Hungary, the United Kingdom, or even the United States. It is even possible to create conditions where the corporate tax rate on profits amounts to 0%.

According to other definitions, a company is considered foreign if registered in a third country and operates in the local market. It is considered offshore if registered in a third country and operates outside this jurisdiction.

Nowadays, it is quite popular to establish a company with offshore elements in an onshore jurisdiction. Such an option offers:

  • confidentiality for owners
  • tax incentives
  • flexible business management conditions.

Therefore, any foreign company can be referred to as an offshore company, and any offshore company can be referred to as a foreign business. If you are concerned about the negative reputation historically associated with offshore companies, you can use the term foreign company in your communication.

However, there is one reputational pitfall to consider: many countries have created gray- and blacklists that restrict local businesses and banks from engaging with companies from offshore jurisdictions. For example, these companies may face difficulties opening bank accounts or be subject to additional taxes when repatriating dividends.

The benefits of an offshore or foreign company depend on the purpose for which you intend to use it.

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Options for using an offshore and foreign company

For what purposes is it reasonable to utilize offshore and foreign companies? Here are some examples:

  • Launching a business in a foreign market and specifically registering a foreign company there.
  • Conducting international business, such as trade or insurance, which is convenient to register as an offshore company in a recognized financial center.
  • Managing the financial flows of multiple companies as an international holding.
  • Safeguarding assets against confiscation, economic and social disruptions, former spouses, and fraudsters (we recommend companies and trusts in Nevis).
  •  Inheritance planning, especially for countries with high levels of asset taxation (in the UK, tax rates can reach 45%). Foreign companies enable savings since the company’s shares, rather than individual assets, are inherited. Furthermore, using trusts and foundations allows for precise determination of how the inheritance will be transferred, in what proportions, and at what points in time.
  • Investing in foreign assets, which, in some cases, may only be possible from within the respective jurisdiction.
  • Acquiring residency, permanent residency, or citizenship in another country. By registering a business or purchasing real estate, it is possible to obtain resident or citizenship status in certain countries. We recommend exploring the concept of citizenship by investment in more detail.

As you can see, the list does not include tax optimization as a category. Offshore companies have indeed helped significantly reduce tax burdens (again, historically), sometimes leading to tax evasion. The fight against tax evasion has been in an active phase since 2013 and has achieved notable successes. Nowadays, any offshore jurisdiction or foreign bank, in one way or another, shares information regarding the storage of funds, their sources, and the payment of taxes.

Therefore, to safeguard your well-being and freedom, it is recommended to completely avoid attempts to evade tax payments. It is important to remember that in some countries, significant tax evasion is considered a criminal offense punishable by imprisonment and severe penalties.

However, within the framework of thoughtful selection, optimization and reduction of effective tax rates can be achieved through foreign and offshore companies. For example, in Serbia, it is possible to establish a foreign company in a special economic zone and be exempt from value-added tax (VAT) and customs duties. Nevis, Seychelles, and Bermuda do not impose taxes on corporate or personal profits. In the United States, when registering an offshore company in Wyoming, Nevada, or Delaware, corporate taxes can also be avoided if the income is generated entirely outside the country.

How to choose an offshore or foreign company?

When selecting a foreign company, ask yourself several questions:

  • Which market do I want to enter: international or local?
  • What type of product or service am I offering?
  • Do I need a license?
  • What turnover is anticipated?
  • In which countries do I need an account?
  • Which country am I a citizen and resident of?
  • Where will the company distribute dividends?
  • Is this company for business or personal purposes?

Based on the answers, a suitable jurisdiction can be chosen, not only based on the tax level but also on solving the task at hand. In some cases, a foreign company with a 9% corporate tax rate may prove more advantageous considering the sum of factors than an offshore company with a 0% tax rate.

Which offshore jurisdiction will be the right fit for you? Contact us for a free consultation via email: [email protected].

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