Originally, the word ‘offshore’ used to refer to the islands off the shores of Great Britain but under British governance. Later, when these islands became self-governed states de facto, their authorities passed the laws that made it attractive to register international business companies there as some serious tax incentives were offered. Thus, the phrase ‘an offshore zone’ began to refer to zero-tax jurisdictions and ‘an offshore company’ meant a company registered in such a jurisdiction.
The situation has changed drastically with the global strife for de-offshorization: it is hard to find a zero-tax jurisdiction these days. Even though some still remain, registering a company there makes little economic sense anyway as it will be hardly operable.
However, the notion of ‘tax incentives’ still exists and some countries offer more attractive conditions to foreign entrepreneurs than others do. Below we are going to classify the national states by the tax incentives that they offer to international business people, which will be of interest to those readers who are thinking of setting up a foreign company. We will use the word ‘offshore’ to refer to the national states with beneficial taxation regimes.
Offshore jurisdiction types in 2022
There is no universally accepted classification of offshore zones but there are several qualities that allow breaking such zones into classes. These qualities are as follows:
- The tax requirements;
- The reporting requirements;
- The level of personal information confidentiality.
An offshore jurisdiction will offer a package solution of your business tasks: it will let you reduce the tax burden, simplify the accounting record keeping, and enhance the level of your personal information confidentiality. However, each group of countries that we are going to discuss performs each of the tasks with different levels of efficiency. So, you will have to define your priorities and decide which of the offshore jurisdictions will suit your business objectives best of all.
Classification of offshore jurisdictions by their tax requirements
Offshore jurisdictions can be broken into four classes by their tax requirements:
1. ‘Classic’ offshores
These are the offshores that journalists have in mind when describing tax evasion schemes and writing other provocative articles. These are also the offshores that are the main target of the international financial repressions.
The main feature found in these jurisdictions is the zero taxes that they levy. Corporate tax exemption is not the only tax benefit that these offshores offer. Often, they do not levy any capital gains tax, nor inheritance tax, nor tax on global income, nor personal income tax on its residents, and so on. However, there is a state duty in any of the countries that is payable instead of the taxes.
Registering a company there is comparatively cheap and the registration procedure takes around one week. Even though there are economic substance requirements in ‘classic’ offshore, managing companies registered there is simpler and less expensive than running an onshore company.
Before, most offshore zones did not require that financial records be kept and submitted to the authorities and the level of information confidentiality protection was high. Today, the records need to be kept and they have to be submitted in some countries. Confidentiality of the company owners’ personal information is still protected but not as well as it used to be before. Some states have joined the group of countries that practice automatic exchange of financial information.
The largest disadvantage of such jurisdictions is that they are found in various black lists. This means that companies registered there have trouble opening bank accounts and run reputational risks.
The following countries can be referred to as ‘classic’ offshores: Seychelles, Nauru, British Virgin Islands, and Belize.
2. Low-tax jurisdictions
The average corporate tax rate in the world is 22.6%. If a national state levies a corporate tax twice as low, it can be referred to as a low-tax jurisdiction. For example, the corporate tax in Hungary is 9% and it is 12.5% in Cyprus and Ireland.
These countries are more attractive than ‘classic’ offshores from the point of view of their international reputation. It is much easier to open a corporate bank account for a company registered in one of these jurisdictions. However, submitting financial reports is mandatory there and audits have to be conducted under certain conditions.
3. Jurisdictions with territorial taxation systems
Of special interest are offshore jurisdictions that apply the so-called territorial taxation system. While many countries tax their citizens and legal residents regardless of where in the world the latter make incomes, there are some national states that levy taxes only on the income obtained within their geographical borders. If a business company registered in such a state earns profits abroad, these profits are not taxed in the state.
Hong Kong, for example, practices territorial taxation. Thus, if your Hong Kong registered company exports goods from China to Russia, the USA, or Germany, no Hong Kong taxes are due because the profit is earned outside the jurisdiction.
You should bear in mind, however, that Hong Kong values its positive international reputation very much and this entails constant inspections and annual audits. Besides, it is not so easy to prove that your company should be able to enjoy the privilege of paying 0% in taxes. At the same time, we can help you here!
4. Onshore jurisdictions with offshore territories (reputable offshores)
There are countries that could hardly be thought of as offshore jurisdictions. Would you think of Great Britain or the United States as offshore zones? Probably not as there are high taxes there, strict transparency requirements, public company registers, and so on. These are certainly not signs of an offshore jurisdiction.
But the abovementioned requirements apply to legal residents of these countries only. If you are a foreigner and if you choose the right territory (state) and the right company ownership type, you can benefit greatly by setting up a business company there. You will be able to minimize or even avoid the corporate tax and provide for your information confidentiality.
Apart from Great Britain and the USA (that is the largest offshore zone in the world), other favorable jurisdictions include Malta (the corporate tax is 35% there but it can be reduced to 5%), Austria, the Netherlands, and Lichtenstein. The latter three jurisdictions offer special taxation regimes under special conditions.
Switzerland with its cantons can also be included in this group of countries. The difference is that Switzerland is more popular for opening bank accounts there rather than registering companies.
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Company ownership types that provide for comfortable business operations in offshore zones
There are multiple forms of company ownership but the following ones should be considered first of all when thinking about establishing an offshore company:
- LLC – Limited Liability Company. This company ownership type may allow avoiding the corporate tax as the profits go directly to the owners (a mixture of corporation and partnership);
- Limited Partnership and Limited Liability Partnership. The company profits are not considered business profits as they go directly to the partners. The partners then are taxed as private individuals;
- Specialized companies. Sometimes it is possible to strike a special deal with the country’s authorities for a special kind of business company. Classic offshores do not provide for such opportunities while some high-tax onshore countries do. Lichtenstein and the Netherlands are especially well known for giving special opportunities to large companies.
Financial reports and information confidentiality
In general, the lower the taxes are in the country, the more relaxed are the reporting requirements there and the higher is the level of information confidentiality.
This does not hold for each particular country though. Low-tax jurisdictions and those where territorial taxation is applied have different reporting requirements. For instance, audits are mandatory in some states and not mandatory in others.
Confidentiality protection can also be different in different countries but the common trend in the world is quite clear. Almost all reputable jurisdictions now exchange fiscal information with their foreign counterparts. Many of them exchange the information in an automatic mode.
Offshore jurisdictions in black lists
When choosing the foreign country where you would like to form a company, it is important to enquire if it is in a black list. There are international black lists and national black lists.
The following international organizations have their own black lists: The Organization of Economic Cooperation and Development (OECD), the Financial Action Task Force (FATF), and the European Union. These organizations lay down the rules that banks and business companies have to follow and they decide who is in compliance with the rules and who is not.
OECD blacklists Costa Rica, Uruguay, Labuan, and the Philippines. There are also numerous ‘partially compliant’ countries that include all offshore and onshore jurisdictions that offer some opportunities to save on taxes.
FATF has a shorter list that contains only Iran and North Korea. The countries that FATF is not quite happy with are Algeria, Myanmar, Ecuador, and Indonesia.
The EU black list includes Panama, Palau, Seychelles, Cayman Islands, Guam, Samoa, Fiji, Oman, ABO, Vanuatu, Trinidad and Tobago, and American Samoa.
If your company is domiciled in one of the blacklisted countries, doing international business via this company becomes problematic. In addition to international blacklists, there are also national ones so you had better check out what countries are blacklisted by your home country government before registering a company abroad.
What should be taken into account when choosing an offshore zone for registering a foreign company
Now you have the general understanding of what types of offshore zone exist. Let us summarize and capitalize on the factors that you have to take into consideration if you are planning to incorporate a business company abroad.
- Taxes: zero, low, or high? In some cases, paying zero taxes can turn out more expensive than paying some taxes.
- The offshore legislation both in the target country and in your home country. What guarantees does the offshore jurisdiction provide and what requirements does your home country put forward? In some countries, CFC (Controlled Foreign Corporation) laws apply.
- Confidentiality protection legislation: who is going to have access to your personal information as the company owner?
- Political situation stability: you do not want to lose your assets due to a coup and regime change.
- Ease of capital flow: the country that you are considering must provide for easily bringing capital there and as easily disinvesting it.
- Economic stability: the richer the country is, the more predictable your business operations there will be.
- Reliable banking system: banks in the country must be safe and easy to work with.
- Ease of communication with the rest of the world: the country must offer reliable telecommunication opportunities. If there is only one telephone line on the island, a random shark can ruin the cable and you will be cut off from your business and your money for a while.
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