Consider 7 questions when choosing the country to register an offshore company

What is the best country to open an offshore company in? I wish we could give you one single correct answer. But the truth is that there is no one right answer. Every offshore company needs to meet the individual requirements of its owner.

There is a long list of jurisdictions that offer registration of offshore companies: from classic tax havens like Belize, Nevis, and BVI, midshores like Hong Kong and Singapore, to EU jurisdictions like Cyprus and Luxembourg. Each of these jurisdictions has its strengths, but there are also weaknesses that can show up at the most unexpected moment if they are not taken into account from the beginning! Therefore, start selecting a jurisdiction with a professional. 

There are also unexpected Black Swan Events that tarnish the public’s perception of some jurisdictions. For example, sadly enough, Panama is still associated in many people’s minds with the ‘Panama Papers’.

There are several reasons why we urge clients to share their business goals and objectives with the professionals at International Wealth before choosing a particular solution. There are dozens of nuances to consider. We know about many of them. Our experts keep abreast of global offshore industry developments, news on corporate and tax legislation, international banking practices, and news on tax information exchange practices. So if you have decided to set up an offshore business, you need to educate yourself about all the relevant matters.

Today we bring to your attention several questions that you should ask yourself before choosing an offshore company (even if you are choosing its structure together with professionals). If you know the answers to them, you will be able to get some vision of the general situation and particular details. Our consultant, based on your vision, will suggest the best solutions for creating an offshore business just for you.

How to choose the best country to register an offshore company: the main questions

1. What is your nationality?

There are two sides to this question. The first applies more to the United States, whose citizens are taxed no matter where they live. For example, if you have a US passport and you live in some European country and do business in the Seychelles, you still have to report income to the US tax authorities.

On the other side, holders of different passports are treated differently. Some nationals (for example, people from Iran and North Korea) are expressly prohibited by many jurisdictions from opening non-resident accounts and companies, due to international sanctions. Other nationalities are considered high risk and face red tape and restrictions (though not openly stated).

The general strategy depends on your passport: where to open an account, where to start a company, and how to make a profit.

By the way, it is possible to partially bypass this stumbling block by means of a second citizenship. You don’t have to be stuck with the Citizenship you were born with. Read more about Second Passports and Citizenships here.

2. Where do you live, and what is your tax residency?

The question about one’s place of residence is quite odd to most people. Just a generation ago, the difference between citizenship and residence was not really pronounced for the majority of the population on the globe. But the trend is clear: more and more nationals of different countries choose to have multiple citizenships and settle somewhere else or be nomads, changing their homes and working online.

That is why many jurisdictions adopt regulations prescribing the following: if a person has become a tax resident, he is obliged to report foreign bank accounts, declare foreign companies, and pay taxes on CFC profit if it exceeds an annual threshold or personal allowance. 

You cannot simply open an offshore company in the hope of avoiding taxation. It is necessary to clearly understand what kind of tax and other consequences to expect if you are starting a business in this or that offshore jurisdiction.

It is quite likely that your country of tax residency may have a negative attitude towards a particular offshore jurisdiction while having friendly relations with other offshore centres, due to factors like politics and history.

Please note: the old “flag theory” strategies of deciding not to be a tax resident anywhere else is very hard to manage these days. It’s best to obtain residency in a country that doesn’t tax your foreign income.

3. Where do your company’s clients live?

This issue in the 21st century is not as relevant to the place of your company’s registration as it used to be 30 or 50 years ago. While in the past a business used to follow its customer, today it is possible to transact easily over the Internet.

Experts advise that you should keep your focus on information about where your customers reside. First, if customers are mostly residents of one jurisdiction, your offshore business headquarters need to meet the requirements of that state, maintain a friendly economic relationship with it. For example: many people who are selling into India use Mauritius as their offshore base, because of the friendly relations between the two countries. Selling from Panama would be harder. On the other hand, for selling to Latin America, Panama might be the perfect hub.

Second, your product/good/service needs to be legally allowed for sale to local customers. Why do most ICOs explicitly say in their white papers that Americans are not allowed in? Because those who raise funds for projects don’t want the burden of complying with US rules.

Even if you are fully compliant with the rules of the country in which you sell goods and services to customers, you may or may not pay taxes in that country. Double taxation agreements, structural features, and other nuances continue to affect taxes and the degree of cooperation between different states in business matters.

Moreover, there are special requirements such as in the EU: if you sell goods to someone in the EU, you must accrue and then pay VAT at the rate of the country from which the customer made the order. So the client’s place of residence has a direct impact on you, on how you choose the country for incorporation, and how you keep your accounts.

4. Where do / will your employees live?

This question is more important than the question about the domicile of the clients. The reason is that having an office and employees in it is one of the important criteria for determining Substance – a real presence in a particular country.

If your employees, and in particular your management staff, are working in Cyprus and are fulfilling their employment obligations from there, it is more likely that your company will be considered as a Cyprus company. If, on the other hand, in a Cyprus company all employees are based in India, questions may arise as to the jurisdiction of the true management and control of the company.

The real location of executives influences taxation. Modern offshore companies are required to have the Substance to prove to the regulator that they can/need to be entitled to zero taxation.

On the other hand, the existence of employees will subject the company to corporate taxation in a midshore or onshore jurisdiction, as in the case of Hong Kong.

5. How will business accept payments?

Money is the lifeforce of any business. Without money business will make no sense. That is why the question of how payments will be accepted needs to be resolved from the very start. 

If you accept only bank transfers you will have to be aware of the terms of transactions.  

To accept electronic payments and bank cards you will need a merchant account or intermediaries, such as PayPal, Stripe or similar.

Some payment processors are more open to offshore companies than others, but even there you have to meet high requirements. You will have to look for a bank which agrees to open merchant accounts for your company. This in turn presents a problem because banks don’t like to discuss things hypothetically – they prefer to receive a formal application from a company that already exists. PayPal, as the most popular electronic payment system, is fairly open to offshore companies.

In any case, you need to consider how much this or that solution will cost, whether there will be any savings, and whether arguments with the regulatory authorities are likely.

6. How are you going to receive your personal profits?

How you plan to make a profit is also an important factor. Will you take on the position of the Director and receive a salary? Or will the company pay quarterly dividends? Will there be an alternative legal way?

Whichever way you decide, it will affect the strength of the above factors. If you became an official employee of a company incorporated in an offshore jurisdiction, you may suddenly become a tax resident in that same jurisdiction. If you receive dividends as a tax resident of another country, they may be taxed at the local rate.

At this point, all the elements – citizenship, residency, employees, clients – begin to play specific roles. If this is not taken into account at the start, a seemingly easy strategy can easily turn into a terrifying headache.

7. What will you sell – a service, a tangible product or a digital offer?

Services may be taxed where they are provided. Therefore, it is more profitable to conduct consultations over the Internet from your office in Nevis than to come to Hong Kong, which is a real reason to pay local taxes.

Digital goods are taxed, like services, wherever they are produced. However, sales taxes can be calculated directly at the place of purchase, as the EU does. Be sure to take this point into account beforehand.

Physical goods are taxed both at the place of production, in transit, in storage, and at the time of sale. With reasonable logistics, some of the taxes and costs can be avoided. Especially if you move some of the operations offshore.

If you have answered all the above questions, then you are ready to move on to the next step: a consultation on opening an offshore company. Understanding your objectives and the technical nuances of the project, the consultants will shortlist the  choice of jurisdictions to a few items. Your choice will be easier.

But the main benefit will be that the choice will meet your needs and not the commercial interests of offshore sellers who strive to sell whatever they have, not what you need.