Can you use offshore jurisdictions to optimize taxation in 2023? Let’s dig deeper into the issue to find an answer.
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Back in the 2010s, the main reason to set up an offshore company was primarily tax optimization, with confidentiality and asset protection following. With ongoing global deoffshorization, the fight to prevent tax evasion, and the new legislation on transfer pricing, possibilities to use offshore jurisdictions to achieve the main goal have been greatly reduced.
So, are offshore companies taxed? Apparently. The incorporation jurisdiction that a particular offshore company operates from, and offshore company owners’ residence are the 2 factors it all depends on.
Offshore company taxation – things to take note of
With every coming year, the number of zero-taxation offshore jurisdictions is dropping. FYI: businesses incorporated in low-tax jurisdictions are also considered offshore companies.
According to industry experts, foreign nationals are free to set up companies in offshore jurisdictions of 4 different types:
- classic offshore jurisdictions with a 0% corporate income tax for companies operating outside the jurisdiction
- low-tax offshore jurisdictions offering special tax regimes for companies incorporated therein
- top-tier offshore jurisdictions with territorial tax systems that do not require companies to pay a corporate income tax on any income earned abroad
- offshore jurisdictions with standard tax rates that grant preferential taxation terms for certain businesses and activities.
With entrepreneurs and business people, it is customary to set up offshore companies in those jurisdictions that have double tax agreements with their home country. Provisions thereof serve to adjust principal tax rates downwards. This means significant tax benefits for offshore company owners will follow.
Below, the jurisdictions are listed where offshore companies shall pay taxes as provided for under offshore taxation principles:
- jurisdictions where the above offshore companies are incorporated and have economic substance
- jurisdictions where the above offshore companies earn passive income like dividends, interest, royalty, etc.
In offshore zones, they still do not impose any corporate income tax on foreign income. Yet, if an offshore company owner is a resident of the state that has laws on controlled foreign corporations, such owner is liable to pay indirect taxes.
Please find updated instructions as to how you can set up an offshore company in 2023 below.
Specifics of offshore company taxation in the EU
Here are the taxation principles the EU implements when taxing deals you make with offshore companies:
- in the absence of an economic substance requirement, many EU countries determine the place of effective management
- if the company’s jurisdiction is the place used to manage controlled foreign corporations such jurisdiction is authorized to tax company profits
- each foreign company shall have not only a rented office but also employees and besides it shall be able to substantiate its economic feasibility
- to be able to apply preferential tax rates, the company shall submit a detailed business plan, which makes offshore company incorporation more difficult and hardly worth it for the sake of tax benefits only.
If the offshore company remains within the jurisdiction blacklisted by the EU it will only be able to use limited transfer pricing options in the European Union. Under the laws currently in force, tax authorities have the right to amend the contract price where the contract in question is made by and between affiliated companies.
To pick a suitable jurisdiction for offshore company incorporation, you are welcome to benefit from International Wealth free initial consultations that we offer to our first-time clients:
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on which jurisdiction is best for
your business, preferred tax regime,
on which jurisdiction is best for your business, preferred tax regime, company structure.
Offshore company incorporation to result in a greater tax load in the US
Remember that all income received by US citizens is taxed regardless of its origin. Offshore companies are not taxed in the US if they do not operate in the said jurisdiction. However, they do pay taxes on income earned by the foreign company’s office in the US.
Profits earned by American citizens who hold shares issued by foreign corporations are taxed only after dividends have been paid. As provided for under Subpart F of the US Internal Revenue Code, a US citizen holding at least 10% of shares in a foreign corporation whose majority stake is owned by US citizens shall be taxed on any income the said corporation earned, subject to Subsection F provisions.
Say, a US tax resident first incorporates an online business to render services to its customers throughout the world. Later on, such US tax resident decides to do business through an offshore company and sets up an Ltd in a tax haven jurisdiction for the above purpose.
While the said US citizen was a private entrepreneur in the US, their operations were subject to the US federal income tax and the US self-employment tax, with the said taxes being paid on all their net income
After the Ltd. incorporation, the business will be taxed as described below.
The Ltd is obviously trading in the US, as the only offshore company employee resides and works in the USA. In this case, the Ltd. shall be taxed in the US and a corresponding tax return shall be filed on an annual basis. In the offshore jurisdiction, local profits will also be subject to the branch profits tax. The tax rate in this case makes 30% of all the US income after federal income tax.
As is evident from the above, transferring the US business offshore results in a tax load increase from 15.3% (the income tax and the self-employment tax) to 45%. It means, an offshore company is only useful for tax optimization, if a US citizen moves abroad and does not reside in the US, which will result in a 0 PIT for the first USD 100,000 in offshore profits per year.
To book your free initial consultation with the International Wealth industry profs as to offshore company incorporation and choosing the right offshore jurisdiction that would meet your business requirements, you are welcome to message us at email@example.com.
Is it possible for an offshore company not to pay taxes at all?
A classic offshore company does not pay taxes in the incorporation jurisdiction provided it operates abroad. Its profits or dividends may still be taxed depending on the owners’ residence.
When isn’t an offshore company obliged to pay taxes?
As provided for under offshore taxation provisions, offshore companies shall pay taxes in their incorporation jurisdictions where they have economic substance and receive passive income like interest, royalty, and/or dividends, etc.
In offshore zones, foreign income is still not subject to any corporate income taxes. Yet, if an offshore company owner resides in a state that has laws on controlled foreign corporations in force, they will have to pay indirect taxes.
How are offshore companies taxed in the EU?
Below, you will find the principles regulating offshore company deals in the European Union.
In case of no economic substance requirement, many EU states determine the place of effective management.
Where the incorporation jurisdiction is the place that the offshore company is managed from, such jurisdiction may have the right to tax offshore company profits.
Each foreign corporation shall have not only a rented office but also employees and besides it shall be able to substantiate its economic feasibility.
A detailed business plan is necessary for an offshore company to be able to apply preferential tax rates.