The main purposes of an offshore company are tax avoidance, minimization or deferral, asset protection and confidentiality. However, before we look at each purpose in detail and the benefits therein, let’s get to know what an offshore company actually is.
WHAT IS AN OFFSHORE COMPANY?
An offshore company is a business entity that conducts all of its transactions outside the borders where it is incorporated. Because it is owned and exists as a non-resident entity, it is not liable to local taxation, as all of its financial transactions are made outside the boundaries of the jurisdiction where it is located.
PURPOSE OF AN OFFSHORE COMPANY
The following are the reasons for opening offshore accounts:
- Tax avoidance
- Asset protection
- Confidentiality
- Deferral or minimization
1. TAX REDUCTION/AVOIDANCE
Most offshore financial centres offer special taxation status to non-resident companies that incorporate in the country. These offshore companies hold a special status that makes them not liable to local domestic taxation. They are also not obligated to pay taxes on their worldwide income, capital gains or income tax. However, tax obligations vary greatly from country to country so it’s important to make sure what your tax obligations are before choosing a jurisdiction.
2. ASSET PROTECTION
Protecting your assets with an offshore structure, be it an IBC, LLC, Trust or Foundation, makes it much more difficult to tie you as an individual to your assets. Having your assets under an offshore structure will give you a layer of protection should you face lawsuits. This is because the structure takes on a legal right to incur debts/liabilities like that of a legal person.
3. CONFIDENTIALITY
In most offshore financial centres, company registries are not open to the public thereby providing confidentiality for directors and shareholders. Unless in the event of a criminal investigation, all the details of an offshore company and its accounts are not open to the public.
4. DEFERRAL OR MINIMIZATION
Countries such as the USA requires all their citizens to pay federal income taxes on all their income, wherever in the world they earn it. However, if they operate offshore companies, they can delay paying U.S. taxes on overseas profits as long as they keep those profits offshore. Consequently, deferral is ideal for investors with global operations because they can delay paying taxes on their overseas earnings for many years.