9 Common Pitfalls When Choosing the Country for Incorporating a Company

When a business person thinks of starting a company in another country, they have their own goals in mind. Some would like to optimize their tax burden, some wish to protect themselves from the hostile takeover attempts, and some want to enter the international market. Most owners of international companies use them to accumulate profits, protect assets from the risks that exist in their home country, and distribute cash proceeds.

If you are thinking about establishing a company in another jurisdiction, then we recommend that you first consult our experts. This will help you  avoid certain common pitfalls that are unfortunately made by business persons who decide to set up an international company in a haste, without proper understanding of all the peculiarities.

Mistakes when choosing an offshore company

Pitfall No.1: Superficial knowledge of the other country’s tax laws

Often, when choosing a country for company registration, a business person is guided by superficial knowledge of the tax laws of the jurisdiction: general information on income tax and VAT. Dividends are perceived by them without in-depth study which may subsequently lead to additional expenses that are not expected.

For example, having registered a company in Estonia, and hoping there is no income tax on unappropriated profits, the business person ends up having to pay this tax at the rate of 20%. The point is that the Estonian Income Tax Act stipulates the conditions under which the taxation of profits still takes place. The list of such cases includes a payment that is not related to the company’s activities, a loss incurred after the sale of property at an underestimated price, a donation or gift made on behalf of the company, etc. 

And if the business person had ordered a tax opinion or made a comprehensive assessment of the company taxation in the country of incorporation, the additional costs could have been avoided.

Pitfall No. 2: Not taking into account the business geography

If a company that plans to supply goods or services from Europe to the CIS countries will be registered in the Seychelles, then talking about the effectiveness of such a solution will be pointless. In this case, the ideal instrument would be a company from Europe with a local VAT number.

If the business has an international nature, then it would make more sense to incorporate a company in the U.S. This solution is good for intermediary and consulting services, the purchase of American or Chinese goods and IT-services. The choice of jurisdiction for company incorporation should be made taking into account the geography of one’s business.

Pitfall No. 3: Insufficient awareness of the local corporate laws

The legal world distinguishes between two main legal systems:

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English Common Law has a more flexible structure. It is suitable for those who value high levels of data security and the ability to use the professional director services. It is used in European countries, the U.S., Malta and Cyprus.

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Unified Law or the Romano-Germanic Legal System. The law requires the real owner to be listed in the documents. It is used in almost all EU countries including the Czech Republic, Estonia, Latvia, Hungary, etc.

If you start incorporating a company in the country with a unified corporate law system, you will be probably be disappointed by the level of the data security. The corporate law clearly stipulates the content of the founding documents. For example, lack of attention to proofreading of the bylaws and articles of association may lead to certain difficulties in managing the company by its director because of the incorrect description of their powers.

Pitfall No. 4: Believing that in order to obtain a residence permit of the country one only needs to register a company

Many business persons start a business abroad for the purpose of obtaining a temporary or permanent residence permit. Not all countries provide equal opportunities for business persons in this regard. The mere fact of incorporating a company in the country is not enough to qualify for a residence permit. Prosperous conservative countries that do not need the influx of foreign nationals have tougher requirements to those wishing to become local tax residents with the residence permit status. These include the Netherlands, the United Kingdom, Luxembourg, and Sweden.

In order to obtain a residence permit in Spain through setting up a business, you will need at least a million euro. To obtain a residence permit in Greece, you must establish a company with authorized capital of 60,000 euro, and also invest 300,000 euro.

If one of the purposes of your international business is the possibility of obtaining a residence permit, we recommend taking professional advice on this matter before choosing the country for setting up a company.

Pitfall No. 5: Not studying the financial reporting requirements of a particular country

Yet 5 to 10 years ago, when registering a company offshore, business persons did not even think about the fact that the company would have to keep accounting records. But the situation is changing. And today the requirements to keep accounting records can be found even in classic offshore jurisdictions. 

As a result of amendments to the corporate laws, many offshore jurisdictions require non-resident companies to keep accounting records, store them in a certain place and provide them to the authorized bodies upon request. Such requirements are driven by anti-money laundering and terrorist financing prevention.

Lack of awareness on these matters may result in fines for the registered company. For example, a company in Nevis that does not keep books and accounts will have to pay a 5,000 US dollar fine. European companies not only have to keep accounts but also regularly report on their financial standing to the tax authorities. In addition, many jurisdictions in Europe also have auditing requirements.

You should check with a qualified accountant for the record keeping and filing requirements.

Pitfall No. 6: The company is registered but opening an account is difficult

Sometimes you can see on the web certain ads that promise to open a business account for companies in just a single day. These promises are nothing but a marketing ploy. No bank will open a business account for a company in a single day without a detailed verification of its operations, founding documents and other information. In a burst of deoffshorization, financial institutions have tightened requirements for customers, as they do care for their own reputation.

Banks are very cautious in choosing applicants for opening business accounts, preferring companies from prestigious jurisdictions with the most transparent structure. This does not at all mean there are no suitable offers on business accounts for companies from classic offshore jurisdictions, they surely are available. But a competent selection of the foreign bank account would be better performed by professionals, given that it is free of charge and easy to apply for. Thanks to the thorough analysis of the data provided, our experts will advise on which bank to choose, and will do everything possible to obtain an approval on the application for opening a bank account.

Company incorporation in the country you chose is not the most important thing. The company that will not be able to open a business account later on is an almost useless instrument. It is worth using the services of qualified consultants beforehand to choose the best jurisdiction with the possibility of becoming a client of the right bank and avoid making a mistake.

Pitfall No. 7: Not taking into account the company maintenance costs

Registration costs for establishing a company range from 1,000 euro and more. It all depends on the specific country and its requirements. But the costs do not end there. After all, running the company and keeping it in proper condition also costs money. Mandatory payments include the annual fee for company renewal, the cost of a registered office, the annual non-financial report.

Additional expenses on the professional director services, postal address, powers of attorney, preparation of the Certificate of Good Standing, preparation and submission of financial statements must also be taken into account.

One of the common errors when choosing a country for incorporating a company is not to take into account the requirements for the further maintenance of one’s business. Sometimes business owners who set up an organization in a haste are surprised by incoming bills that need to be paid for the company to operate within the bounds of the law. And if they had studied these requirements in advance, they could have been ready for the additional costs or chosen another country with a lower annual fee.

As a result, there are abandoned companies that disappear from the registers due to non-renewal after a while.

But remember, all obligations of such a company still remain! The accounts are frozen. Such a company loses its corporate rights.

Therefore, it is better to correctly estimate one’s resources before registering a company, and if the company already exists, but it is unprofitable, it is recommended to take care of its full liquidation in accordance with the law of the country of incorporation.

Pitfall No. 8: Not taking into account the share capital requirements

The order of payment of the authorized capital and its size are determined differently in each country. For example, in Estonia, the size of such a capital is 2,500 euro. One is not required to pay it at once. But it is necessary to pay it before distributing the dividends. Therefore it is very important to know these peculiarities.

Some countries of European civil law (Spain, Germany) require that the share capital be paid into the accumulation bank account of the company before its registration. Certain issues may arise due to that, as the customer verification by the bank sometimes takes quite a long time.

In this case, you can register a branch where there is no requirement to have an authorized capital, or form the share capital with liquid intangible assets.

Pitfall No. 9: Not taking into account that it is necessary to provide information on the ultimate beneficial owners even in a country that does not have a public register

If the company owner wants to maintain a high level of data security, they usually choose the country of incorporation that has a closed register. But nowadays, even classic offshore jurisdictions are not able to guarantee complete confidentiality. After all, reliable data on each shareholder and founder will still have to be provided. In the era of global business transparency, all information about the ultimate beneficial owners and important persons of the company must be provided to the registration authority. However, they have no right to disclose it to the third parties solely at their request. It would be a mistake to think that today somewhere there is a country where you can start a company and remain under an incognito. 

Using a nominee director will help to a certain extent to improve the data protection, but you should pick your nominees very carefully, giving preference to the professional directors. A questionable director can cause delays when it comes to opening an account. It is still advisable to research in detail the issue of data security in a particular country, as well as to take care of decent professional director services.

Summary

In order to avoid pitfalls when choosing a country for your company incorporation, above all it is necessary to determine the purposes for which the company will actually be set up. If a business person wants to get a residence permit in the future, then you should look for a jurisdiction with the most acceptable conditions of granting residence permits to business persons. If the purpose of starting a business is scaling it up, then you need to focus on the countries with the right laws for a specific type of business.

We recommend using the help of our experts, without relying on chance and luck. After all, the country that is ideal for one company may be unsuccessful for another. It is better to pick several jurisdictions that meet your specific requirements, get an expert opinion, make a road map for company registration and further maintenance, and decide on the key executives and the structure together with the professionals. This will help you avoid embarrassing mistakes. Please do not hesitate to ask your questions right now using the feedback form.  

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