How to Harness Offshore Company Potential in International Trade in 2023 and Who Should Do It?

The COVID-19 pandemic has underscored the elusive nature of a borderless world for individuals with no second citizenship or permanent residency in multiple countries. In the aftermath of the pandemic, a new phase of the global crisis has emerged, imposing significant restrictions on access to immigration programs. 

Nevertheless, viable solutions do exist, even for international business owners. International trading companies, for instance, offer a legitimate avenue for international business trips and potential pathways to secure residency rights in specific jurisdictions where applicable programs are accessible.

You are free to remain in your home city in any corner of the world, while effortlessly procuring goods from various regions such as Europe, Thailand, China, and beyond. To benefit from the said conditions, many trading companies still leverage traditional offshore companies to effectively optimize profits.

The basics of offshore strategies in international trade

In practical terms, what does international trade entail? It encompasses the acquisition of affordable products from countries such as China, India, Vietnam, and others, which are subsequently marketed and sold in high-income regions like the United States, Western Europe, Australia, and the like. The actual trading happens in a completely different country. The goods obtained by a trading company are directly shipped from the manufacturing nation to the destination where they will be distributed.

Before converting a standard trading company into an offshore entity, what aspects should you consider? Firstly, evaluate the benefits, tax advantages, and potential obstacles associated with such a transformation. Additionally, remember that tax regulations are changing globally, and in many offshore jurisdictions, this is a forced response to certain legal developments worldwide. However, these changes primarily affect local businesses, while international structures continue to generate profits through minimal or low taxation.

International trade is influenced by factors beyond the economy. The COVID-19 pandemic has brought to light the significant role of politics in international trade. In 2022–2023, the geopolitical conflicts impacted its various aspects, including logistics and trade routes.

A well-structured international trade system, optimized for tax efficiency, plays a crucial role in the success of many collaborative ventures. This is particularly evident in procurement as well as the goods and services sector. Cost-saving opportunities still exist when goods are transported across borders or multiple jurisdictions.

Once revenues are generated, a need to transfer them to low-tax jurisdictions using appropriate holding structures or tax-transparent entities often arises. Registering such structures remains a key priority for numerous business owners.

Another critical aspect that demands attention and careful deliberation is the banking landscape. A commercial enterprise will never thrive without a bank account. These are different types of accounts, such as offshore company accounts, personal banking accounts, merchant accounts, high-risk business accounts, and more. Understanding and navigating this intricate and multi-layered hierarchy poses challenges, even for seasoned global entrepreneurs.

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Exploring offshore company issues in international trade

To develop a comprehensive understanding of offshore business aspects, we offer valuable insights into frequently asked questions on the subject. If you haven’t found the answer to your specific inquiry, seek personalized consultation from the International Wealth team of experts or explore additional articles on the International Wealth website, such as Which Countries Are the Best to Register Offshore Companies?

VAT exemption

In the scenario where your supplier is located in an EU country different from that of your customers, your company might be eligible for VAT exemption within the EU. Nevertheless, to qualify for this exemption, meeting specific statutory conditions is essential.

Free trade agreements

For owners of trading companies, conducting business in jurisdictions where trade barriers have been eliminated through free trade agreements is a strategic step. 

With approximately 300 free trade agreements worldwide, including those currently in the planning stages, there exist ample opportunities for global trade. The United States has made 20 active free trade agreements with countries worldwide, with Panama among the latest nations to join this roster of trade partnerships.

Banking issues

International and non-resident banking is another hurdle when it comes to supplier and buyer location in international trade. It is undeniable that establishing your company in the same country as your suppliers and customers brings about enhanced prospects and benefits.

Key advantages lie in banking services such as letters of credit (LsC) and international money transfers (IBAN accounts for transfers within EU member states). By leveraging a letter of credit, as the owner of a trading company, you will negotiate more advantageous discounts with suppliers, as the payment risk is assumed by the issuing bank. The same principle applies to an IBAN account, streamlining cross-border transfers between countries.

A significant challenge arises when certain banks choose to freeze your account after they detect transactions involving individuals from blacklisted countries. This may create considerable difficulties with accessing the banking services you require.

To mitigate such risks and ensure the security of your business, carefully consider the most effective and convenient methods for receiving funds from both clients and suppliers. Operating within the same jurisdiction as your clients and suppliers simplifies the process of sending and receiving payments. If you opt to reside in a different country, evaluate the availability of efficient payment transfer services and assess whether they are easily accessible to your clients. Don’t forget that any additional complexity could pose a significant barrier for potential customers.

Scope and scale of business 

The size of your business is a critical factor that requires thorough consideration. Establishing a trading company in an offshore jurisdiction comes with a significant cost, potentially surpassing the expenses you will bear if you decide to register a business in your home country.

The key question to address is whether it is more advantageous to establish the company locally, despite the lack of tax incentives and various challenges, or to opt for a higher-priced offshore company that offers tax benefits and asset protection.

Once you have decided on this matter, the next step is to assess whether it is possible to obtain tax residency in the country where the company is incorporated. In certain cases, pursuing tax residency is advantageous for tax optimization purposes.

Tax residency is a complex subject that significantly influences the choice of the country for offshore company incorporation. The tax obligations and requirements of a trading business structure also depend on the specific type of tax system in the jurisdiction, whether it is global or territorial.

Guidelines for controlled foreign corporations (CFCs)

Transferring international trading businesses to offshore jurisdictions offers a compelling opportunity to leverage more efficient tax systems. However, to fully capitalize on this strategy, you can’t do without a comprehensive understanding of the tax laws governing the country in which you choose to register your company.

One of the key objectives behind transitioning to offshore locations is to capitalize on advantageous tax conditions. Controlled Foreign Corporation (CFC) regulations were implemented with the same objective in mind, i.e., to prevent profit manipulation and tax avoidance by companies operating within their domestic borders. These regulations determine the portion of profits from foreign sources subject to taxation in the country where the parent company is headquartered, as well as the portion that is exempt from such obligations.

If your primary motivation for offshore transition is tax optimization, you may encounter significant challenges. CFC regulations have the potential to undermine expected benefits and even impose financial burdens. Thus, it is highly recommended to seek expert guidance and consultations before you make any critical decisions in this regard.

Transfer pricing rules and regulations

Similar to CFC rules, transfer pricing regulations are in place to prevent tax evasion in cross-border transactions.

Many countries have adopted transfer pricing rules based on the internationally recognized arm’s length principle.

This principle is also applicable to transactions between related parties, such as a parent company and its subsidiary. From a tax perspective, these transactions are treated as if they were conducted under similar conditions by independent entities. They account for the profit that would have been generated if the transactions were carried out between unrelated organizations.

Each country has its own set of laws on pricing methodologies and reporting requirements. Failure to comply with these regulations or undervaluing such transactions referred to as transfer pricing manipulation may result in significant penalties. The latter may reach up to 400% of the price discrepancy.

Transfer pricing rules hold particular importance for international trading companies that operate multiple subsidiaries in different jurisdictions. To ensure compliance, you should thoroughly understand and adhere to these rules.

Costs associated with offshore trading company registration and maintenance 

While there exist notable benefits to establishing an international trading company in an offshore jurisdiction, don’t disregard the associated costs. The long-term goal is reducing expenses and maximizing profits through offshore operations your offshore trading company will make. However, you should by all means anticipate and be prepared for initial financial outlays.

The value of this investment depends on the size of your business and the projected revenue. If you have ambitious plans for a large-scale trading enterprise, the minor setup costs can be recouped swiftly, making them less significant.

Additionally, an important consideration is that the business shall substantiate its economic viability to qualify as a tax resident in the country where it is incorporated.

Why bother with setting up a company in a traditional offshore jurisdiction?

Why do many individuals still opt to utilize low-tax companies for international trade?

In addition to the relatively modest corporate tax rates, there are various other compelling advantages:

1. Confidentiality: In numerous jurisdictions, the confidentiality of beneficial ownership information remains intact. While this may not apply to banks, creditors with valid claims, or Interpol, it serves as a robust defense against unscrupulous competitors.
2. Cost-effectiveness: Establishing and maintaining offshore trading companies often proves more financially feasible. This translates to savings in audits and even the submission of accounting reports. However, ongoing accounting management remains essential.
3. Asset protection: Offshore structures provide a strong safeguard for your company’s assets against local creditors and minor legal disputes. This protection is further enhanced by incorporating trust arrangements within the business.
4. Expanded trading opportunities: Creating an international trading company in a prominent global hub, such as Singapore, Hong Kong, or Europe, opens doors to new prospects not readily available in your home country. This enables entry into untapped markets, facilitates superior supplier networks, and enables catering to a larger customer base across diverse regions worldwide.
5. VAT exemption and tax incentives for onshore operations: Besides benefiting from zero or low corporate tax rates, onshore companies take advantage of VAT exemptions and other tax incentives. Eligibility for these perks depends on your business structure and the locations of your clients and suppliers. For instance, if your supplier is based in one EU country and your clients are situated in another EU country, your company may qualify for VAT exemption based on intra-EU transactions.

In addition to a range of benefits, offshore jurisdictions also present certain practical challenges. These essential aspects should be taken into account and worked around in most situations if you want your offshore trading company to be successful and efficient. For more information on the subject, please seek assistance and recommendations from International Wealth seasoned pros.

Don’t underestimate the country’s image

Certain countries of residence or where clients are located conduct thorough investigations into the invoices issued by offshore companies to banks that operate in licensed and widely recognized offshore jurisdictions. Even if an offshore jurisdiction enjoys an impeccable reputation, banks or payers may demand alternative bank details unrelated to offshore entities.

The optimal strategy is to select low-tax jurisdictions with a solid reputation and ensure full compliance with all legal obligations.

Even if your business operates with absolute integrity and transparency, managing an offshore company may negatively affect its image in the eyes of clients and customers.

In many cases, it is a wise step to choose a highly reputable onshore jurisdiction with favorable tax conditions or a territorial tax system, such as Singapore or Hong Kong, instead of a conventional tax haven. These countries boast a superior global image.

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Licenses and authorizations for offshore businesses

Licenses and permits for business operations are issued by federal, state, or local authorities, depending on the jurisdiction. Regardless of the incorporation country, if your commercial activities fall within regulated sectors, be sure to timely submit applications for the necessary licenses and permits.

In some cases, registration service providers may reject applications. This is particularly true for companies that attempt to apply without professional assistance and operate in high-risk industries such as pharmaceuticals, medical devices, cigarette and tobacco production, alcohol manufacturing, chemicals, and more.

Each jurisdiction has its own unique set of requirements. Hence, make sure you have all the necessary information about the specific licenses you need, the application process, associated costs, and the potential for application rejection in advance.

Location of the supplier

The residence or business activities of your suppliers and clients may significantly influence the country you should choose for company registration.

By establishing your business in a specific location, you may potentially enhance the efficiency of interactions with clients and suppliers in their respective regions. For instance, if most of your clients and suppliers operate in Europe, it would be more advantageous for you to register an offshore company in a favorable European jurisdiction than in Central America.

International Wealth consultants recommend you carefully consider factors such as tax regulations, customs benefits, and banking considerations when making the decision.

Offshore companies in international trade – summing up

International trade companies engaged in cross-border import and export will reap substantial benefits if they incorporate a tax-exempt offshore structure. For international trade companies, the multinational nature of their business and the substantial revenue derived from international sources make offshore operations highly advantageous.

However, creating the optimal offshore structure in the suitable jurisdiction for your particular international trade company is more complex than it may seem. It necessitates a meticulous assessment of diverse factors and strict adherence to the applicable regulations and procedures that shall be observed.