Offshore and Foreign Companies: Key Issues Revisited

The concept of a tax haven is usually associated with zero or only nominal taxation. Such jurisdictions are classified as offshores and have been widely used in international business for quite a long time. 

However, the recent OECD and FATF international initiatives and recommendations have forced most jurisdictions to revise their own legislation. Their rules and procedures for companies’ registration and disclosure of beneficiaries need to comply with international standards. 

Since 2012, the offshore industry has been undergoing serious changes and is gradually becoming obsolete. Instead of investing in offshore shell companies, owners have developed their companies’ physical presence and real operation in the jurisdictions of incorporation. 

Questions and answers about offshore companies and accounts

Our experts are ready to assist you with registration of an offshore company and its corporate account in popular low-tax jurisdictions. So, we recommend you to start with this article answering the most common questions of foreign investors and businessmen ordering this service.  

Offshore Jurisdictions: Current Trends in Legislation and Global Approaches 

Since 2008, a good deal of measures and new approaches have been launched globally to counter malicious competition, the privileged offshore taxation schemes, and the outflow of direct international investments from countries promoting conventional taxation policies. According to the new guidelines and amendments, the classic offshore jurisdictions had to update their own legislation, so that not to be blacklisted or grey-listed. That was how they divided into 2 main categories: 

  • jurisdictions that have taken comprehensive measures to meet the global requirements set for beneficial owners of foreign companies
  • jurisdictions that have been gradually changing their legislation without introducing sweeping reforms. 

In both cases, most of the offshore jurisdictions have managed to withdraw from the blacklists of tax havens, though their approaches were different.

The countries referring to the first category have been drastically revising their laws. In addition to collecting data on ultimate owners of companies and their transfer to registered agents, these jurisdictions created public registers of shareholders and directors, and completely canceled bearer shares. Such countries include the Isle of Man, Jersey, the Bahamas and Mauritius. 

The countries referring to the second type have been gradually and moderately changing their by-laws relevant to foreign companies. Nevertheless, this has not prevented Belize, the BVI, the Seychelles and the Marshall Islands from being withdrawn from the blacklists, and they have retained their appeal for international corporations. 

The above-mentioned two categories of offshore jurisdictions make a good case illustrating how the definition of tax havens has almost completely changed its connotation. It also explains why offshore businesses have to adjust to the new realities. For example, since 2021, most offshore countries will need to be committed to the new economic substance rules or prove the tax residence of businesses in another country. 

Popular Questions: Incorporation, Taxation, Banking, Compliance of Offshore and Foreign Companies 

Let us consider the difference between low-tax jurisdictions and classical offshore jurisdictions, the requirements banks impose on corporate accounts, and other common issues faced by foreign investors. 

The current reforms and transition of offshore jurisdictions seem to scare away a large number of foreign businessmen. In particular, they are concerned about the electronic exchange of tax information introduced by most offshore countries. Moreover, OECD and FATF have developed new rules for Due Diligence procedures, that need to be observed by all licensed intermediaries: banks, trust companies, registered agents, etc. Let us consider the main challenges. 

What is the difference between companies registered in low-tax and offshore jurisdictions?  

Our expert’s reply:

When registered in a classical offshore jurisdiction, your business does not have any tax liabilities. Its offshore incorporation means the complete exemption of your company from any taxes, with the exception of the state license fee to be paid annually (it ranges from $150 to $1,000, depending on the country of incorporation). All business activities need to be performed only outside the jurisdiction. The most well-known classical offshore areas are the BVI, the Marshall Islands, the Seychelles, Nevis, Belize, and others.

A low tax jurisdiction is a country maintaining the minimum corporate tax rates. It may also offer a relief from certain taxes, for example, the dividends or inheritance taxes. As a rule, such states establish their own requirements for the actual local presence and activities of the companies registered in the jurisdiction: operation of the local main office, the key decisions taken within the country, financial statements submitted locally, etc. Such states, including Cyprus, Hungary, Liechtenstein, Luxembourg, Hong Kong, Hungary, and Ireland, are rather popular with foreign investors. 

Is it profitable to develop business in a classical offshore jurisdiction?   

Our expert’s reply:

At the moment it is possible to start an offshore business in almost any jurisdiction, but there may be problems with opening an account. For example, European banks are practically unwilling to cooperate with offshore companies. If the client is ready to provide detailed information about the beneficiary and the origin/sources of the assets, which is a FATF mandatory requirement, it is easy to open a corporate account. 

Benefits of the offshore registration of companies can be drawn only from the careful structuring of the business. The basic IBC taxes are payable in offshore jurisdictions where the tax residence of such company is registered; in some cases, incorporation of an offshore company may not be reasonable. As a rule, it is difficult to open a corporate bank account if foreign investors register partnerships. The ideal solution is to incorporate business in jurisdictions offering low tax rates and additional incentives (Cyprus, Ireland, Scotland, etc.).

Which banks open accounts for classic offshore companies?

Our expert’s reply:

The starting point in choosing a financial institution for an offshore company should be your analysis of the terms of banking services. If you are ready to provide full information about the ultimate owners, business structure and origin of the company’s assets, you can open a corporate account for your classic offshore company with the Caribbean banks plus correspondent accounts in the UK and USA. There are several options of opening accounts in some European payment systems. However, one should take into account the requirements for the minimum balance, which amount is as a rule rather big in the EU zone. In addition, innovations promoted by the international task forces may change the banks’ attitudes towards offshore companies, so that they could even refuse to work with such clients. May we advise you to employ the professional legal assistance when you are going to choose the most reliable bank which would suit you best. 

Is it possible to enhance the owners’ anonymity by incorporating a European company and involving services of nominees?

Our expert’s reply:

According to the European Directive 4 (AML) of 26.06.2017, all EU member states are obliged to maintain public registers of ultimate owners of companies. Therefore, beneficiaries of European companies, even in case nominees are involved, are not entitled to anonymity and confidentiality. The registers are publicly open, i.e. accessible to third parties.  

Involvement of nominees is a rather beneficial solution when the company employs a resident manager, which allows the owners to run their business remotely. In some situations, having a nominee director/shareholder residing in the country of the company’s registration in the EU is an advantage in terms of the tax residence of the company: it makes the company eligible for and subject to the taxation rules of the jurisdiction of its incorporation. 

In order to prevent violations, in case the submitted information about beneficiaries arouses compliance concerns, the AML Directive allows the forced closure of such companies and their exclusion from the registers of enterprises, and prescribes administrative and criminal liability. 

It is also important to note that in case of concealment of the beneficial ownership, there is a risk of legal recognition of the nominee’s rights to the company ownership. 

Why do I need to maintain the active company status (renew it annually)?

Our expert’s reply:

The annual renewal of the active status of the company allows to legally conduct business and comply with all the requirements prescribed by law. The renewal fee includes the annual fee for the legal address, a fixed Government fee, a fee for the registration, a fee for the nominees’ services and the services of the registered agent. It also covers services of the authorized managers of the corporate account with the bank. If a company submits annual reports to the Registrar of the jurisdiction, such service is charged and paid for separately. Inactive companies are subject to penalties (which are contributed to the budget of the country).  

Besides, there needs to be issued the Certificate of a Good Standing officially confirming the company’s proper performance and full compliance with the relevant laws. 

An inactive company is fined, then it is given a conditional period for the renewal of its active status, and in the event of any violations the company is withdrawn from the registry.   

Can the involvement of nominees protect from the automatic exchange of tax information? 

Our expert’s reply:

The first such exchange took place on 21.09.2017 between 87 states that signed a special agreement. By 2020, the number of such jurisdictions has increased significantly, and is still growing. This exchange of tax information is an important agreement and rule for international task forces and joint initiatives aimed at countering tax evasion and money laundering. 

What happens in companies involving nominees?

Please note: Involvement of nominee directors/shareholders does not rule out the mandatory submission of valid information about beneficiaries to the bank. 

Registration of a company with a corporate account (its availability is mandatory in almost every jurisdiction) involves the submission of questionnaires about the actual business owners and, accordingly, the actual holders of such an account. The payment systems, banking and credit institutions are obliged to submit essential account details to the tax authorities of the country in which the beneficiary resides.

Involvement of nominees does not rule out the automated exchange of tax information. Of course, there are some exceptions – some classic offshore companies do not participate in such exchange, but the pressure from the OECD and FATF will eventually push them to signing the agreement.  

How are the rights and obligations transferred in case of death of the nominee/director? 

Our expert’s reply:

This question is quite relevant in the light of the COVID-19 pandemic. Many foreign investors are concerned about the future of their business in case of the nominees’ death. Let us state this straightforwardly: our nominee directors and shareholders are professional and experienced employees with appropriate qualifications, strong health and competencies needed to perform management functions. 

Protection of your interests when nominees’ services are involved is subject to rather serious legal documents. First of all, it is a bilateral agreement, which specifies all restrictions and rights of the nominee owner of the company. Secondly, when signing the contract, the nominee shareholders/directors write and sign in advance their own applications for dismissal with an open date. This allows the business owner in the future in case of any violation to set the date of the director’s dismissal/termination of employment. 

As for the shareholders, the arrangements are very simple – the nominee can be replaced by a new one, and the shares are transferrable to the newly nominated person. As a rule, such substitution does not involve any additional expenses; registered agents make records of the relevant changes in the Trade Registrar (Register of Companies).  

Who can have access to information about beneficiaries? 

Our expert’s reply:

Everything depends on the rules adopted in a particular country. Incorporation of a company in an offshore, on-shore or mid-shore jurisdiction may require entries in the public (open) registers of ultimate owners. In this case the data is publicly available to any interested person. If the registers of beneficiaries are closed, third parties do not have access to the records. However, a closed register is a rather conditional arrangement, because information about the beneficiaries is subject to transfer to the registered agent and the bank. In case of judicial proceedings or claims from the tax authorities, the data about the ultimate owners are disclosed upon the court order.  

This articles discusses the most popular questions asked by our clients and readers representing the offshore industry. If your business needs assistance in registration, liquidation, obtaining any certificates and licenses, you are welcome to refer to our experts by writing to the e-address given at the top of this page.  

Do offshore locations remain attractive for business?

As of today, registration of a company in an offshore jurisdiction or establishment of a foreign company in the EU requires a detailed study of the business structure and tax planning. Offshore jurisdictions allow companies to refrain from paying taxes if the company operates outside the EU. In this case, the company pays taxes in the country of its actual work. On the other hand, it is important to take into account that the residence of the beneficiary matters a lot, as the country of his main source of income is the country of his tax residence (where the taxes are payable according to the local rules).

Can I increase anonymity by involving nominees?

In theory – yes, in fact – no. In any case, the company’s registration includes the opening of a corporate account, and the banks are obliged to share the beneficiaries’ data with the relevant bodies. Otherwise, you will not have a chance to open an account, because the OECD and FATF have introduced the Due Diligence procedure. However, in some countries there are closed registers, which information cannot be viewed by third parties. Involvement of a nominee is an ideal arrangement for businesses that need to recruit resident shareholders/directors (a requirement in most EU countries) to confirm the substance of their business.

What are the risks faced by companies involving nominees’ service?

The most typical concerns of our clients are associated with the risk of the nominee’s death because of the COVID-19 virus or other causes. Otherwise, a company involving nominees is legally protected. Besides, every contracted nominee has signed in advance the application for dismissal with an open date.
May we assure you that in case of the nominee’s death the registered agent registers a new director/shareholder, who has been previously agreed with the beneficiary. The shares are rewritten in the new person’s name.

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