Relocation of existing companies to overseas jurisdictions is quickly becoming a popular practice among business owners. Offshore destinations like Panama, the British Virgin Islands, Belize or Anguilla offer stable economic and political environments that enable foreign companies to internationalize their operations, increase profit margins and access new markets. Although offshoring is often associated with tax evasion, it’s a completely legitimate business strategy. American corporations alone are legally holding about $1.4 trillion in various offshore jurisdictions, according to a 2016 Oxfam report.
So, why exactly should you move your business offshore? Is it a worthy move? Read on to find out.
Take Advantage of Low Taxes
High corporation taxes can have a destructive effect on businesses. Not only do they take away a significant portion of their profits, but also force corporations to adopt cost-reduction measures, such as job cuts and low wages. Yet, advanced economies like the US and the UK have some of the highest corporate tax rates in the world (39 and 20 percent, respectively).
As such, the primary benefit of moving your business offshore is to take advantage of low taxes. Many offshore territories, popularly known as tax havens, typically levy taxes at very low rates. In fact, Bahamas, Isle of Man, Bermuda, Bahrain and the Cayman Islands don’t have any corporation taxes at all. Other forms of tax, such as property tax, personal income tax, capital gains tax, stamp duty, dividend tax and inheritance tax are either not applicable or very low.
If you, therefore, feel that the tax burden in your home country is too heavy to bear, setting up an offshore or international business company (IBC) in a zero-tax jurisdiction could be the best way to ease up things.
However, it is important to note that offshoring to a low or zero-tax jurisdiction doesn’t necessarily mean your tax burden is gone. If your foreign income is subject to taxation in your home country, you will still have a responsibility to pay income tax. To fully take advantage of the low tax rates in offshore jurisdictions, you need to move along with your business; that is, obtain tax residency in your preferred overseas destination.
Avoid Double Taxation
In international business, double taxation occurs when the same profit or income is taxed in two different countries. For instance, if you are a British national with business operations in the Dominican Republic or any other country that doesn’t have an active double tax treaty with the UK, your income will be subject to taxation in both territories.
To avoid double taxation, you must either set up your business in a country with a double taxation agreement with your home country or set sail to a zero-tax jurisdiction. This means that if a British national opts to set up an offshore company in the Bahamas – a country that is yet to enter into a double tax avoidance treaty–, their foreign income will only be taxed in the UK.
When offshoring, it is important to consider whether your preferred offshore territory has an active double tax treaty with your home country. This will help protect your business from double taxation in case the territory introduces corporation tax on all overseas companies.
Lower Your Organizational and Administrative Costs
Organizational costs are expenses incurred during the incorporation of a company. They include incorporation fees and the cost of hiring directors, holding organizational meetings and securing legal services. On the other hand, administrative costs are expenses incurred during the day to day operation of a business, such as settling rent, procuring office supplies, and paying employee wages and benefits. In many onshore countries, organizational and administrative costs are usually too high. Some cost drivers, like holding annual general meetings and filing of annual reports, are usually a mandatory requirement for corporations.
Sending your business offshore is one of the best ways to lower your organizational and administrative costs. In many offshore jurisdictions, the costs of incorporating a company are very low, and administrative requirements are minimal. For instance, you can set up an IBC in Belize for as low as $650 or in the British Virgin Islands for $1100. In addition to low company formation costs in overseas territories, it’s not mandatory to appoint a company secretary, hold annual company meetings at a specific location or audit and file financial statements with a government agency. The exemption of offshore companies from undertaking these administrative tasks reduces the amount of money required to keep them operational.
Gain Access to Offshore Banking Facilities
An offshore bank account offers a wide range of benefits that you can’t draw from ordinary bank accounts. It protects your money from political and inflation risks, enables you to hold money in various currencies and earns you a higher interest for your savings or deposits. On top of that, the banking systems in overseas jurisdictions are more stable.
However, opening a bank account overaseas in jurisdictions with the healthiest banking systems, such as Singapore and Hong Kong, is getting harder by the day. In a spirited effort to curb tax fraud, money laundering and other financial crimes associated with offshore banking, many governments are enforcing laws that make it more difficult for their citizens to access offshore banking services. On their part, overseas banks are adopting strict account-opening requirements for non-residents. Singaporean banks, for instance, must hold personal interviews with non-resident applicants before their applications can be approved.
Establishing an IBC makes it much easier for you to open and operate an offshore bank account, especially when you engage the services of companies that offer incorporation and bank account opening services. Upon getting to know your business background and financial standing, these companies can introduce you to an offshore bank that best suits your needs. Although banks reserve the right to approve or reject account applications, an introduction by a reputable company can enhance your chances of getting approved.
No Operations and Transaction Controls
Governments often enforce operations and transactions controls that regulate the execution of certain business processes. For instance, a government may order manufacturing companies to upgrade production technologies to reduce emissions or limit the volume of foreign capital that can be transferred in and out of the country to prevent fraud and promote economic stability. Such controls, especially exchange and capital controls, can significantly reduce the ability of a business to invest overseas.
In many offshore jurisdictions, regulatory controls limiting the operations of offshore companies are either very generous or aren’t in force at all. In Panama, for example, there are no capital controls. You can ship as much money as you can afford into the country and make as many investments as you wish. The lack of operations and transaction controls gives potential overseas investors the flexibility to move capital freely and pursue their investment strategies without encountering any obstacles.
Protect Your Physical Assets and Preserve Intellectual Properties
Offshore territories typically have strong laws for the protection of physical business assets, as well intellectual properties such as copyrights, patents and trade secrets. This makes an offshore company an ideal vehicle for holding physical business assets and protecting intellectual properties from theft. Whether you have a formula for producing a soft drink, a revolutionary manufacturing technique or a marketing strategy that keeps you ahead of your rivals, your secret will be well protected from exploitation. Cook Islands, the Island of Nevis and the Isle of Man are some of the overaseas jurisdictions with the strongest asset protection laws.
Access New Markets/Expand Your Market Reach
Beyond asset protection, some offshore jurisdictions are perfect locations for accessing new international markets. Setting up an offshore company in Hong Kong, for instance, can help you to easily access trade markets in mainland China. Or, if you are looking to access markets in North and South America, a Panamanian corporation will best serve your interests, because Panama is situated on a piece of land that links the two continents to each other.
Easy and Quick Set Up Procedures
Company formation red tapes discourage investors from expanding their business to various countries. This is not the case in many popular offshore jurisdictions. In a bid to attract foreign direct investments, these territories develop and implement policies that simplify the process of incorporating a company. In general, you won’t have to worry about bureaucratic process or corrupt government officials that make company formation a painful, costly and time-consuming exercise in many onshore states.
Regardless of the misconceptions you may have heard about offshoring, moving your business to a suitable offshore territory is a sound strategy that can help to minimize business costs and maximize profits. But to fully enjoy these benefits, you must get your offshoring strategy spot on. Don’t move your operations to a certain territory because it’s highly recommended or your competitors recently moved there. Evaluate your reasons for offshoring, study the political and economic stability of your preferred territories, and then settle on one that best meets your needs.
Source: Library (Grace Monene, Business and Personal finance expert)