Offshore Business Planning – Beware of Top 10 Myths

The offshore industry is not what it used to be 5-10 years ago or even 2 years ago. Today one should be especially careful when choosing a country of business incorporation, the financial institution, and registration or purchase of a ready-made company in an offshore jurisdiction or a country offering low taxes and additional incentives.

The wrong choice of an offshore business and other mistakes stem from misconceptions planted in the minds of many non-residents by such catchy headlines and slogans as “Offshore means fast”, “Offshore guarantees 100% confidentiality”, “Offshore is zero taxes and zero problems with all banks of the world”.

In 2021, if you are planning to register your (non-resident) company in some jurisdiction of your choice, you should be acquainted with all the relevant local and international laws. Besides, you should have preliminary approval from the financial institution that would agree to accept and serve your offshore company. 

Let’s consider the 10 common misconceptions about offshores. If you have at least one of them, you will have to acknowledge that your business is doomed to big problems, if not an ultimate failure. 

This article is a guide on how to safely and quickly detect and debunk the most common risky delusions that could lead to wrong choices. 

Total confidentiality is guaranteed for business in an offshore jurisdiction. Is it a myth or a proven fact?

The desire to have full confidentiality guaranteed through the registration of an offshore company seems quite fair. However, it is almost impossible to achieve it in reality. 

There are many common fallacies related to this and other privacy issues.

Let us analyze the top 10 misconceptions and see why it will be impossible to conceal the name of the ultimate beneficiary and some other data of offshore businesses in 2021. 

Misconception #1 – Information stored in the Register of businesses is not available to third parties and public 

The close type of registries is maintained only in classic offshore locations, such as Panama and Nevis. However, even in their cases, the data on each real shareholder/founder is transferred to the state authorities, and the global transparency requirement obliges all national governments to keep such records. This is a mandatory requirement, so the privacy of data is conditional (third parties can get access to information, though only by court decision or on order from controlling authorities if there are rather serious reasons for that).

Misconception #2 – Employing a nominee is a simple solution

The appointment of a nominee shareholder or a nominee director is a practicable ploy. However, its efficiency depends on the professionalism of the person involved. You cannot afford to save money on such an arrangement because to recruit the services of a real professional is more important. 

What are the most common mistakes made when hiring nominees for offshore businesses?

Wrong reasons and answers. 

Banks, where questions are asked not by you, but to you, will certainly ask for data about the ultimate shareholders. You will have to explain why you need a nominee, and whether the company assets are declared in your country of residence, or whether the company pays taxes in the location of your tax residency according to CIC rules, etc. An answer that the nominee is necessary to hide taxes will crash your company.

A dubious nominee

A legally valid nominee can be an individual or a legal entity. Most often this is a corporation providing services simultaneously to several offshore companies. Therefore, you just cannot receive the full scope of services, you lose the credibility of your counterparties and partners, incur financial expenses, and lose your reputation with the financial institutions. 

Unawareness of extra paperwork in future transactions

A nominee is always a party to the transactions, including the opening of corporate accounts. And such cases are subject to the bank’s standard or special requirements to submit the notarized and apostilled copies of the updated documents of shareholders and directors of the company. Most often, the sellers/providers of services of professional nominees omit this important information during negotiations. As a result, you may need to spend some extra time (not always available in urgent matters) on the paperwork and formalities associated with the nominees.

Unawareness of additional banking requirements

If you recruit a legal entity specialized in nominees’ services for many companies, the banking problems increase considerably. You will have to provide copies of documents of each individual employed by this corporation, information on their work experience and professional achievements.

Misconception #3 – A nominee can be invisible to tax agencies  

This opinion is mistaken. The automated exchange of information, which many jurisdictions have ratified, involves the transfer of information on corporate and personal accounts. Besides, tax authorities receive information from banks on both the authorized signatory (nominee) and the ultimate beneficial owner. 

That is, it is impossible to conceal details of the profit generated by a particular offshore company run by a particular person.

Therefore, the entire nominal scheme will yield the following commitments and liabilities of the company founder: 

• to pay the income tax payable by corporations at a fixed rate;
• to submit the details of participation in the CIC to the tax authorities at the place of residence;
• to pay tax on profits received from abroad to the personal account.

Classic offshores

This segment presents several serious issues associated with the expectations of zero taxes and the nearly global policy of deoffshorization. As a result of the discrepancy between the international commitments and the classic offshore companies’ propositions, founders face multiple problems if they are blind to the facts.

Misconception #4 – Banks cooperate with all offshore businesses

Banks readily cooperate with and provide services to companies that meet the requirements of international regulators and pay taxes, even if at minimum rates. As for the classical offshores, they may seem attractive because they offer zero profit tax rates, but this often causes several problems:

• no serious bank in the world agrees to deal with such companies;
• even payment systems may refuse to service an offshore company;
• if the company is not set up but acquired as a shelf company, it will be very expensive to open an account for such a business, if at all.

If you request the services of our InternationalWealth experts, they will help you open an offshore company and get an account in a respectable bank in the Caribbean region in the shortest possible time and without any complications.

Misconception #5 – A shelf company can be launched immediately after purchase

Unfortunately, this is not true. The point is, ready-made companies can’t do business without an account. However, as a rule, companies are sold without bank accounts, so a corporate current account needs to be set up by the new owners. 

Experts recommend buyers either to apply to financial institutions in advance to obtain a preliminary agreement to set up an account for the offshore company, or acquire a business with an excellent reputation, but not in an offshore jurisdiction.

In case the company comes with a bank account, which also happens sometimes, you should be ready to face some unpleasant surprises:

• the seizure of the company’s accounts due to some law violations by the previous owner;
• the service denial for the same reasons;
• the requirement to cancel the previous account before opening a new account, which usually takes some time.

Banks in and beyond offshores 

There is one of the main rules that you should know and apply first and foremost: choose a bank BEFORE, NOT AFTER the registration of your company in an offshore or any low-tax jurisdiction. Let us explain the reason behind this recommendation.

Misconception #6 – Banks do not control offshore business 

This misconception is fundamentally wrong. If a business is opened in a classic offshore, it is virtually impossible to get a corporate account anywhere except for St. Lucia. 

You should also know that due to the exchange of tax information between countries, financial institutions are the first ones to share with the authorities information about suspicious transactions.

At the same time, the bank is unlikely to open an account for the company, if it does not comply with its requirements to provide additional documents, which may turn out to be of a rather different task:

• a certificate of the owner’s criminal record;
• public information about the beneficiary;
• passport details of the nominee manager;
• some confirmation of the company’s business reputation;
• explanation of the reasons for opening of the company and the scope of its activities, as well as many other things.

Misconception #7: An account is not mandatory 

More than 90% of companies registered by non-residents are intended for active operation. Without a corporate account, it is impossible to conduct business activities and maintain contacts with clients/partners. Moreover, almost all countries require that every legal entity would have a corporate account when it comes to financial and tax reporting, as well as control over the movement of financial assets.

If the company is not active (in such cases as inheritance, investments, custody of assets, real estate ownership, etc.), such a business can exist for some time without an account. Sooner or later, however, an account will need to be opened for withdrawal of some assets, transfer of inheritance, and other transactions.

Mistake #8 – It is easier to open an account for a ready-made company

No, this is not true either. It is a rather complicated arrangement, no matter if it’s for an offshore, onshore, or midshore business. The possible difficulties are associated with the common perception that shelf companies are bought to avoid publicity, conceal some illegal activities, and cash without paying taxes. 

Shelf companies are acquired not only to commit and camouflage unlawful actions. 

In most cases, a company’s offshore status benefits its owners aspiring to expand their horizons, work in other regions and countries. Some just want to get an off-the-shelf company to get a legal entity with a history.

But, banks usually consider such a corporation very cautiously, especially if it is registered in an offshore jurisdiction. After all, the new owner is very likely to have unwillingly acquired from the former owner not only the company but some sort of burden:

• debts and unpaid accounts with another financial institution;
• a negative credit history;
• a damaged reputation;
• problems with the law;
• other possible encumbrances.

And in case of such a mishap it is difficult to explain that it is not you, but the previous owner, who is to blame. 

Moreover, usually, banks do not even provide reasons for their refusal to open corporate accounts for inexpensive classic offshores. As a result, the new owner loses money, time, carries extra expenses, and finally decides to start anew and set up a legal entity in a more favorable area.

Misconception # 9 – An account for an offshore company is an inexpensive and easy chore

While it is possible to open an account for a company in an onshore jurisdiction at a standard rate, the price of an account for a company in a classic offshore rises to several hundred thousand euros. Not many payment systems and only a few respectable banks agree to take this risk, as it may lead to a big scandal.

Why this attitude?

• Many founders/buyers of offshore companies use them temporarily, subsequently abandoning them without liquidation. We recommend the formal closing down of a business by filing legal documents. A voluntary official liquidation of an offshore company will free the owner from unnecessary troubles in the future.
• Shelf corporations are perceived by banks as entities deliberately set up for illegal business, which justifies their refusal or higher fees charged for consideration of application services, and the account set up. Therefore, even if you have managed to open an account for an offshore company, it does not guarantee seamless transfers and acceptance of money payments. It will most likely draw the attention of the inspecting authorities. Your funds will be blocked by the receiving bank (in case of withdrawal of funds from the offshore to another financial institution), or your incoming transactions will be rejected by the same bank that previously opened the account. And all this is quite possible because classic offshores are carefully monitored.

Are zero taxes available only in offshore jurisdictions?

This article explains why, despite common misconceptions, incorporation of a company in an offshore jurisdiction turns out rather expensive. It is also not always profitable. You should better consider other countries offering reasonably low rates, various incentives, and a trustworthy reputation for incorporation of businesses.

Misconception #10 – Onshoring and midshoring are expensive and not profitable

Midshores and onshore jurisdictions levy taxes on worldwide income, but the rates can often be close to zero due to international double taxation treaties (DTT) and domestic legislation. For example, such terms are available in Singapore, the USA, where we offer you remote account opening and company registration on favorable conditions.

A non-resident founder of a company incorporating it in such countries is entitled to additional privileges that may include the following advantages:

• confidence and trust held by banks, partners, and counterparties;
• tax reduction through discounts and DTT;
• tax payments on a territorial basis according to the geography of the income source; 
• absence of geography-specific restrictions, as it often happens in offshore jurisdictions;
• nominee’s service, if the situation requires it;
• promotion to the international level within one’s business niche.

Another benefit is the possibility to choose a bank for the company in advance – personally or with the support of our experts.

How not to make mistakes when choosing an offshore company. Advice and assistance of professionals

In conclusion, may we suggest a couple of additional important tips if some readers decide that offshore business incorporation is the only right option in their situation. 

In order not to lose, but to preserve, retain, and increase your funds, we recommend to take care of the following arrangements:

1. Activate the service generating financial reports required in the case of opening a bank account.

2. Get a tax exemption certificate.

3. Create a business website for your company and fill it with meaningful and important content. 

4. Open a virtual office that will receive calls and correspondence. This will be a useful support to you in business and a confirmation of the active status of the company.

By spending some extra money on such arrangements for your classic offshore business, you will return all your investment by winning the financial institutions’ trust and maintaining a credible status, even in case of registration in a classic offshore zone.

Another opportunity to improve your offshore company’s reputation without compromising your business interests is the redomiciliation (relocation) to a more trustworthy country/territory which you can read about on the Internationalwealth.info portal. For example, this can be the redomiciliation of an LLC from the Marshall Islands to Gibraltar, where it is easy to upgrade the corporate status, get access to reliable banking services, and control activities even remotely.

If you have any questions or you are ready to start your own business in offshore, onshore, midshore countries, please contact us at the e-address given at the top of this page. 

Our experts will be glad to share advice and offer professional services.