Offshore Companies: Setup vs Purchase, Specifics, Reasons, Advantages, Risks, Value

Many pragmatic entrepreneurs have found out that offshore company acquisition can be a booster for their business, wealth, privacy, and safety. Many UBOs still believe so, despite the global outsourcing trends, discrete national directives on deoffshorization, international requirements of curbing illicit financial flows, domestic and joint initiatives on transparency in economic and business decisions. The truth is that this working tool, like any other instrument, needs to be mastered to yield high profits and other`– advantages.

In this detailed material, we will discuss definitions of offshore companies, how and for what purposes they are used, how much they cost, the most popular jurisdictions, taxation, and other relevant issues. Let us consider the setup vs purchase of offshore companies – the risks, benefits, and, most importantly, how they can help achieve the set objectives.

First of all, we need to dispel some common delusions about offshore companies as a legal panacea for almost all woes in business. Many opinions and misconceptions have changed very little since the times when registration of offshore companies was encouraged by tax havens trying to attract direct investments.  Yet, gone are those days, and many perks granted in the past by many of them are not available to non-resident companies any longer. Therefore, there is no room left for carefree attitudes and recklessness in the management of offshore companies. However, they still can be a useful reliable tool worth your attention if you consider thorough planning of their acquisition and maintenance.

Here is a list of popular topics relevant to offshore company formation. You can click on the links to study some aspects you need to know or study them in more detail in the topical articles on our portal.

• An offshore company: what is it?
• What are offshore companies set up for?
• What kinds of offshore companies are there?
• How much does it cost to form an offshore company?
• How long does it take to register offshore companies?
• How can one register an offshore company remotely?
• How do offshore companies save money for businesses?
• How much privacy is guaranteed by offshore companies?
• How are offshore companies controlled?
• Why do major states defy offshore companies?
• How can you avoid risks when using offshore companies?

An offshore company: what is it?

There are two main generally accepted definitions of the term “an offshore company“:

However, most entrepreneurs use this term in the meaning of “a foreign company that, due to its location, receives various benefits, primarily in matters of taxation, confidentiality, reporting“. 

The maximum scope of such incentives and the zero-rate or lack of some taxes is still offered by classic offshore jurisdictions – Nevis, Belize, Panama, Seychelles, BVI, the Caymans, Bermuda, the Bahamas. (For your reference, Panama, Nevis, Belize, and the Commonwealth of Dominica are independent states. While the Caymans, the BVI, and the Bahamas are the British Overseas Territories). 

Some of the classic offshore companies are heading for business transparency faster than others. For example, such a large business center as Panama, which by many parameters is a midshore on par with Hong Kong and Singapore, has long compiled an open register of company directors and UBOs. Several small independent states that are classic offshore zones, such as Nevis, Belize, and the Commonwealth of Dominica, are still far from creating a public register of beneficiaries. Popular classic offshore jurisdictions, including the British Overseas Territories that are not independent states, have accepted commitments to establish such registers and are forced to act faster. Of course, in the long run, all offshore jurisdictions will have to eventually compile a single register of beneficiaries and/or directors. However, some of them will be allowed the buffer time (to prepare) – due to their status of developing economies, or the relatively low popularity of offshore companies in some jurisdictions.

Anyway,  the phrase ‘an offshore company’ is mostly used today to define any foreign company registered in onshores or midshores. Why so? Because over the past 5 years, international legislation and norms of international business have changed dramatically. Besides, the written and unwritten rules of ethics for international transactions are often confused with legal norms and perceived as regulations. Almost all “classic” offshore jurisdictions, while remaining international financial hubs, have already ceased to be the domain of business and banking secrecy. They are no longer seen by all decent media and politicians as destinations for parking illegal wealth. They meet relevant international requirements and promote legal opportunities and attractive instruments to protect assets and companies from aggressive or adverse business and political environments. 

What are offshore companies set up for?

Registration of offshore companies serves several purposes. Let us name some of them.

• To develop international trade. Import-export operations, for example, when the manufacturer works in China, and the buyer lives in the United States. In this case, it is advantageous to establish a company in Hong Kong and engage in trade subject to minimal taxation plus enjoying easy access to mainland China.
• To extend international partnerships and contracts. An offshore company can be compared to a transformer house. You can efficiently establish business relations between different legal systems, different economies via an offshore company. Many offshore companies are engaged not only in international trade, but also in scientific research,  industrial development, and celebrities’ image rights commercialization. 
• To protect property rights and assets. Ownership rights transfer to an offshore company is a classic solution for protecting assets from raider seizure. 
• To streamline many other activities: rendering of services, consulting, investing, keeping accounts. Don’t you feel your horizons are limited when you provide services only in one country? You can open an offshore company to offer your expertise and accomplish your plans in international markets. Even if you just need a foreign bank account and enjoy an increased level of confidentiality, you should register or buy an offshore company.

What kinds of offshore companies are there?

Offshore companies can be categorized by several parameters. Firstly, by the jurisdiction of registration of the offshore company:

• Companies in classic offshore jurisdictions (Seychelles, BVI, Belize, Nevis);
• Companies in reputable European offshore companies (the Netherlands, Cyprus) that, as well as many other similar jurisdictions (Singapore, Switzerland, Hong Kong, Panama), are more often called midshores. They have both the onshore and offshore companies’ features (e.g., they can qualify for lower taxes under certain conditions).

Secondly, by the type of an offshore company:

• International Business Companies (IBC);
• Ltd and LLC, or their local analogs in the countries of registration;
• Joint-stock companies (JSC);
• Limited Partnerships (Scottish Partnerships, English partnerships);
• other country-specific business types.

Moreover, some structures that are not registered as legal entities (e.g., funds, trusts, informal partnerships) can be also sometimes referred to offshore entities. 

How much does it cost to form an offshore company?

This is the most relevant question for many of our readers. There are several misconceptions about costs that we need to clarify for you here. It is only natural that everyone is looking for ways to cut down the expenses.  On the other hand, if you buy cheaply, you pay dearly! Don’t be penny wise and pound foolish!

Delusion # 1 about offshore companies as a cheap solution

There are many ads online offering to “open an offshore company in 2 hours for USD 200 or next to nothing!” The truth is that even in the most competitive offshore destinations somewhere in the middle of nowhere such prices do not exist today. Just give it a thought: if a company can be bought for next to nothing,  any cab driver can earn more than a registrar and buy companies by dozens. This is, of course, pure nonsense.

Such ads are either a hoax (i.e., the scammers are not going to register any company at all, so you will get NOTHING for your money); or fraud (the price is given only for a PART of the service, so you can hope to get from the scammers an incomplete package of documents which would not be valid for opening a bank account or to qualify for ownership of the asset ‘acquired’).

It is feasible to find an offshore company for USD 300-USD 500, i.e. at the value of the state registration fee or stamp duty. But on top of that you will have to pay the serves of a registered agent, since the relevant authorities in most jurisdictions do not accept applications directly from applicants. Besides, the prices in such unreasonably inexpensive ads are too small to cover the costs of documents processing and forwarding, the consultant’s services, validity verification, compliance check, the fee for tracking the payment accepted by the state body, the annual office maintenance costs, the salaries of the professional CEO and receptionist. You can also add to this list the fee for customization of the corporate Charter, the hired staff working hours, the lawyer’s fee, other expenses, depending on the complexity of the tasks. Moreover, cheap prices do not include the issuance and forwarding of the recently notarized certificates of Good Standing or Incumbency, which some banks also require from newly registered companies, even though this is an odd requirement. This is not to mention the cost of translation and certification of documents, and mailing a separate certified package of documents to the bank when you apply for opening an account for the company.

Therefore, you should be alert to scams when you come across ads of inexpensive offshore companies. You can be trapped into big losses. Offshore companies just cannot be cheap. However, registration and maintenance of a classic offshore company is always cheaper than registration and maintenance of a solid midshore company in Hong Kong or Singapore, since midshores require to submit financial reports and to undergo regular mandatory audits (for example, in Hong Kong). At the same time, the more solid an offshore  company is, the more banks will be eager to offer their services to such a non-resident client. 

If you choose to register or buy a classic offshore company, be prepared to incur accounting costs (even if reporting may not be mandatory in the early stage of its formation). The point is, you will have to provide such reports to banks when opening accounts for a classic offshore in the second and third year of the existence of such a company. If you have an active business, banks will look even more closely at the website of a classic offshore company than at the website of a company registered in Hong Kong, Singapore, Australia, or one of the EU countries. Therefore, if you have an active business and know that your offshore or midshore company will need a corporate bank account, you should analyze your chances of opening such an account with a reputable bank (this should be done with professional help of an expert). Perhaps it would be more reasonable for you to start your foreign company in an onshore jurisdiction, and avoid the challenges many offshore companies face. All options can be discussed with our consultant.

Delusion # 2 about offshore companies’ maintenance costs

It is a misconception that annual maintenance costs almost nothing. The state duty alone range from USD 300 to USD 500  a year. Besides, your company needs some substance.

What does this mean in practice? It means that it is impossible today to have a company only with a bank account and a mailbox in Cyprus. The tax authorities check contractors and foreign partners to make sure that the profit is generated legally. An offshore company (even a classic one) needs to prove it has a real office, employees who perform official duties, and a director who has enough knowledge and experience to manage specific activities.

The substance means a real office, computers, employees, and even the Internet connection, and this all is not for free. Such overheads cost from USD 1,000. That is why we have to state it clearly: an offshore company is a useful but costly tool. While it has lots of benefits, it also needs some initial investment. As the business develops, its costs will inevitably exceed the unreasonably low prices quoted by many fraudulent online sellers. You need to start at least with a website and a corporate e-mail for this particular offshore company, which you will provide to the bank when opening a non-resident account for your offshore company.

Otherwise, you will have to recognize that it’s a waste of money to own an offshore company that does not operate and may even be accused of money laundering, tax evasion, other international crimes.

In order for an offshore company to benefit from discounts, tax allowances, double taxation treaties, it needs to be in active operation.  Classic offshore jurisdictions do not have double taxation avoidance treaties (DTA). But they sign agreements on the exchange of tax information – TIEA. In most cases, classic offshore companies are not subject to double taxation, since some types of taxes are simply not levied by jurisdictions of their incorporation.

To summarize briefly: ready-to-use offshore companies can never cost USD 200 – neither at the stage of registration, nor in terms of maintenance. The final price depends on the specific place of registration, the form/type of incorporation, additional options, and an individual approach. Each offshore company is suitable for some specific purposes, so before looking at the price, you should decide which offshore company you need. You are welcome to request our expert advice. Just write to our e-mail address given at the top of this page.

The main thing is to be aware of the responsibility and liability of a beneficiary for the company’s annual operation and dues. 

How long does it take to register offshore companies?

The time to register an active offshore company depends on the 3 following aspects:

• Preparation and collection of personal documents of the directors and beneficiaries of the future offshore company (the time spent on this stage depends mainly on the client, i.e. on you);
• Registration of the offshore company  (it really takes 1-2 days, but without consideration of the arrangements for the apostille and delivery);
• Preparation of copies of duly certified copies of documents for opening a bank account and sending them to the bank. Besides, it will take some time to verify with the bank the fact of the receipt of documents by the banker participating in the account opening procedure.

The registration procedure for a company with properly compiled documents takes at least a couple of weeks, depending on the legislation of the country. Registration of a classic offshore company (including the notarization and apostilles) takes 1-2 weeks. The time required in European and Asian jurisdictions depends on the opportunities for the applicant to visit the bank in-person or apply remotely.

It is really possible to register an offshore company very quickly. In some jurisdictions it can even be performed within 1-2 days. However note that these time frames are generally applicable for obtaining registration number from the Registry, whereas you should also mind the time for pre-registration procedures and/or documents completion after you receive the Certificate of Incorporation. Unrealistic timelines for the registration of offshore companies are often mentioned in scammy advertisements. You can buy a ready-made company faster, but even in this case, it takes more than 2 days to re-register.

Please note: the preparation of the application portfolio and the stage of opening an account are the time-consuling steps. But you should never hurry with them, as well-prepared documents are the key to success. If some transcript is unavailable, if the documents are not translated/issued in English, if there are some errors in names or other data, the application will be rejected. But the good news is that the list of documents for opening a company is relatively small.

However, applications for a bank account is often a quite challenging task if you act on your own, without professional assistance. 

The most important thing is that not all banks in all jurisdictions open accounts for classic offshore companies. If you have decided to buy or set up an offshore company without taking into account the future chances to open a bank account, you should be aware that every month there are fewer and fewer old high street banks that are ready to open accounts for classic offshore companies. At the same time, there are new banks with licenses and direct SWIFT that are ready to work with classic offshore companies. 

Therefore, it is necessary to acquire an offshore company with consideration of further steps and the possible complications. The assistance of professional experts in such matters is invaluable! Otherwise, too many naive buyers choose a “cheap” offshore company and then realize that there are no chances for them to open a business account. This is a waste of time and money, and, most importantly, nerves and a bitter feeling. However, such risks CAN BE AVOIDED if you plan wisely relying on expert advice.

Secondly, the requirements set by banks for documents submitted by applicants from classic offshore companies are much tougher than those set for registered agents. Banks may require to submit volumes of extra documents that answer their questions (and their questions are often VERY personal).

Therefore, the answer to the question “how long will it take to register an offshore company” no longer depends only on the registration of the company: it depends on the time required for the bank to be convinced that you are a decent trustworthy client.  Only after the bank opens an account for your company, you will be able to launch it. Our wisest clients apply to several banks at once, using the Pre-Approval procedure offered by our experts.

There are many reasons for your offshore company to have several foreign bank accounts.

How can one register an offshore company remotely?

One of the obvious advantages of offshore companies is the fact that a company can be registered remotely, without a personal visit. Nevis, Belize, Panama, Singapore, Hong Kong, and others agree to use modern technologies to accept applications remotely and issue business permits. Moreover, in the case of classic offshore companies, most registrars will be surprised if you want to visit in-person. However, some clients registering offshore companies for parking really large assets want to see the registrar’s office.

As for remote registration of an offshore or midshore company, the registrar also needs to prepare documents scrupulously and in compliance with all the requirements for the validity of data, so that the state authorities would not refuse to open a company. Please note that the main decision of whether your classic offshore company can be registered is made by the registrar. 

How do offshore companies save money for businesses?

The comparatively low cost of registration of classic offshore companies is a well-known fact. The second advantage of offshore registration is privacy. 

The most important benefit of offshore companies is tax planning perks: offshore zones have offered and are offering offshore companies a zero or reduced tax rate.

Besides if your offshore company can be run online via a corporate website by just one employee (it depends on the business field, of course), the savings will be significant.  

The costs and quality of SUBSTANCE are country-specific, but offshore zones are more likely to be more favorable in these terms. If an offshore company is created to store the already earned assets, the expenses associated with SUBSTANCE are not as important as in a situation where a classic offshore is part of the structure and strategy of optimizing your business costs.

In the past, many entrepreneurs would create a company in a distant tax haven, where the company was managed and operated by one director, while the revenues were earned outside the jurisdiction. This was quite legal for different structures trading goods and services. And their incomes grew higher because of the agreements on the avoidance of double taxation and very weak control. Such approaches were quite legal. Now the rules have changed. It is illegal today to evade taxation where the profit is received. International agreements are applicable only if the offshore company is in operation and does not belong to the same beneficiary as the business generating income outside this jurisdiction. 

Offshore companies involved in the protection of assets earned in other jurisdictions can be entitled to minimum or zero taxes on personal income, but mostly in case of a real change of permanent residence or the UBO.

But in any case, if you comply with the law, you are able, if you own an offshore company with SUBSTANCE, to save on the following aspects and thus get important benefits:

• Reduce the effective tax rate on the basis of the double taxation avoidance agreements;
• Be exempt from or minimize personal income tax (some offshore companies offer such options);
• Be exempt from  taxes on capital gains, inheritance, gift, etc.;
• Save on paperwork: it is necessary to keep records even in the classical offshore companies, but it is much easier than in some onshore jurisdictions. The above-mentioned opportunities can save time and resources;
• An international offshore company can choose where and how to conduct business, to have access to the most effective solutions (if a contractor from India delivers an order faster and cheaper than a contractor from France, then why should you refuse to cooperate with him?).

How much confidentiality is guaranteed by offshore companies?

Another reason for the popularity of offshore companies is the confidentiality of data about its owners. Many offshore companies were started in the past as a way to reliably conceal information about the true owner(s) of the business and would not disclose it to anyone. Of course, this opportunity used to attract not only those who wanted to get rid of publicity in mass media and needed protection against aggressive competitors. Unfortunately, this feature of offshore companies was abused by criminals of various stripes. They, as well as tax evaders, became the reason why offshore companies were “gutted”. To date, there are virtually no offshore or midshore companies that do not cooperate with Interpol and other information exchange agencies across the world.

Data exchange can be quite minimal or substantial, depending on the issue. Of course, classic offshore companies do not have publicly open registries, and many offshore companies resist the automatic exchange of information. But the trend of international data exchange is quite established in many countries. Authorities of large countries need information on the deposits and companies of taxpayers – to make sure that all dues have been paid by them.

In large classic offshore jurisdictions (like BVI, for example), PRIVATE (i.e., currently not open to the public) beneficial ownership registers are introduced, so the data is submitted to the UK or other states on request. 

Not everyone has given in yet: Nevis continues to protect the personal information of company owners; the US has generally become the largest offshore jurisdiction in the world, since it does not exchange data with almost anyone.

But even supporters of information security have to meet new requirements – otherwise they will be forced to give up their business.

Nowadays, there is no chance for an offshore company to hide its ownership information from the tax authorities. The old complicated schemes of protecting their UBO’s absolute privacy are still used by some companies, but they never last long, being subject to information leaks and hacks. Besides, new rules and laws promoting transparency are or will be soon adopted by all offshore jurisdictions because of international agreements and the overall trend. Ultimate opacity is impossible through the registration of a classic offshore company. 

Classic offshore companies still do an excellent job of protecting information from third parties, from envious relatives and competitors. But if the tax agency requests specific information, the information is always provided.

How offshore companies are controlled? Laws and regulations

It has become quite difficult to briefly answer the question “how are offshore companies controlled?”.

It’s clear only that the focus of monitoring and control is not on the companies and the registers of beneficiaries, but on the bank accounts of classic offshore companies. Tax and regulatory authorities simply look at where the money comes from and where it goes. And in this way, they understand what kind of activity is being conducted and whether taxes are being paid.

Among the most important tides of recent years, we should mention the following:

• The policy of deoffshorization has rolled out practically all over the world. This is because of the popular opinion of public authorities that offshore companies are malicious, guilty of hiding huge sums of money from taxation.
• The FATCA (Foreign Account Tax Compliance Act) in the United States is targeted at the bank accounts of American citizens: it obliges banks to provide information about all accounts of Americans around the world. Any refusal to cooperate is subject to severe punishment.
• The BEPS (Domestic tax base erosion and profit shifting) initiative promoting a set of measures to combat the “blurring of the tax base” has launched the process of deoffshorization in Europe and the world. It is controlled by the Organization for Economic Development and Cooperation (OECD).
• The EOI (exchange of information in the tax field) standard also applies to bank accounts. The tax authorities of many countries receive data on foreign deposits of their citizens automatically.
• Country-by-country reporting is often inevitable. The data becomes available to tax authorities in all the countries in which the company operates.

There are other international and local laws adopted or discussed to control offshore companies and foreign deposits of the population. Such control will probably only get tighter in the future. But, of course, the most flexible clients will be able to adapt. 

Why do major states defy offshore companies?

While offshore companies is a way to legally minimize taxation, the development of complex structures allows considerable savings. But since the 2008 recession, they have been attracting closer attention from authorities, as the states need more funds to resist many global challenges. 

Major global players have unanimously concluded that offshore companies and offshore jurisdictions could be an excellent source for additional tax collection. So they come up with new approaches designed to increase tax revenues. They intend to collect billions of dollars and euros of extra net income. Therefore, capital amnesty programs have been carried out nearly everywhere.

The world is changing fast. So, you need to rely on the analysis and vision of experienced consultants in international trends and taxation, foreign accounts, and business.

How can you avoid risks when using offshore companies?

In order for an offshore company to become an advantage, and not a burden, it is necessary to follow a few simple rules. Failure to comply with them can lead to the loss of money, time, reputation, and in some cases even freedom.

• Act legally. Follow updates of the legislation and international conventions in the jurisdictions of your business interest. If you feel it is a too challenging task for you, you should hire the professional services of a legal consultant.  
• Use offshore companies wisely. Any tool can be a great help or a great risk. It depends mostly on the skills and knowledge of the tool user. So, beware of all risks and act accordingly.
• Do not chase cheap options. An offshore company needs not only registration, but also a reputation in the world, and a bank account to accept money. Besides, not every jurisdiction is suitable for any business. Where it is convenient to protect assets, it is not always convenient to trade industrial equipment. Explore the environment in which your company is going to operate, and remember that caution is the parent of safety.
• There are no easy solutions to complex problems. To choose and run an offshore company, you need to think, analyze, check the facts. Never trust easy escapes. In most cases they are traps. Ignorance of the rules and lawas will never protect against fines and bans, pain and disappointment.

Be prepared to meet challenges professionally, and then all the benefits of offshore companies will be yours.