What is a tax haven?
In everyday language, a tax haven is a country or territory which presents a remarkably wide range of tax benefits for the offshore companies registered there (the original English term – a tax haven – means tax shelter). That is, an offshore company can operate under positive tax provisions only if it is registered in a tax haven area.
On traditional tax haven areas, the operation of companies is supported by a thoroughly-regulated juridical mechanism. This suggests that in the given country the constitutional code provides favorable taxation situation for the offshore companies. It is important to stress this because it is not that the company pays no tax illegally, however, on the opposite, it is excused from the payment of tax or a part thereof as granted by law.
What is the reason for the corporation of an offshore company?
This is one of the most significant issues concerning the establishment of organizations. There may be a number of goals and purposes, in the same way, that the business relationships evolving in a market economy may involve an infinite number of combinations. Therefore, to a particular extent, the client himself should find the answer to the above question because nobody knows his business actions better than the client himself. We can only briefly describe the purposes for which offshore companies are most commonly used.
Offshore trading businesses
Offshore investment businesses
Offshore ship-owner businesses
Offshore finance businesses
Offshore holding businesses
Offshore insurance businesses
Offshore banking businesses
Offshore companies developed for owning a property
Offshore private funds
What are the benefits of utilizing an offshore company?
We list the benefits related to offshore companies registered in tax havens in two different groups:
Direct taxation benefits
Additional advantages independent of the beneficial tax status
Direct taxation advantages
These advantages do not need a specific explanation. The volume of revenue generated is taxed in the nation of the offshore company. Taking benefit of the fact that these nations present a broad range of tax advantages for enterprises of this kind, we may secure significant tax savings.
This other group of advantages is made of benefits independent of taxation which are not to be overlooked by specific types of businesses in certain circumstances. Some of these clear advantageous are listed below, though the list is by no means exhaustive:
Lack of bookkeeping burden: In a number of tax havens offshore companies are not obliged to keep books. This, too, results in a significant saving since, if we look at the data of a domestic corporation of a similar size, the annual accounting fee alone usually amounts to several hundred – or even thousand dollars.
Implementation of prestige-related considerations: It may happen that in certain business situations a foreign corporation may offer more advantageous terms and conditions. The participation of a “foreign investor” in a domestic enterprise sometimes produces considerably more security and confidence in a potential business partner, or it may even provide an exemption from customs duties in specific cases, etc.
Where should you set up an offshore company?
At the time, there are more than 40 locations in the world which offer significant advantages for offshore companies as tax havens. Traditional tax havens are customarily located on archipelagos (e.g. the British Virgin Islands), in small countries (e.g. Cyprus, Panama). The independent bill of these countries and regions encourages foreign investors to build companies on the given territory.
What is it that offers favourable taxation status for the company?
It is right to ask the first question: In what regard is the taxation of the offshore company favorable? And in connection with this: Why is it necessary for these nations to offer benefits of such magnitude to foreign investors? One all serious tax haven territories, tax advantages have a constitutional basis and foundation. For example, this advantage is provided for the companies listed in the above-mentioned British Virgin Islands by the code of laws originally adopted in 1984.
Why is it beneficial for the country of registration to offer tax benefits?
These areas are usually located in geographically small nations. The population is normally small. Tourism and various services play the numerous significant role in their economies. Offshore businesses generate essential revenue for them. On the one hand, concrete employment possibilities are created: various law offices, a state registration apparatus, deputies, banks registered on these territories, etc. are needed. On the other hand, through the state duties and taxes, the people of the country obtains significant revenue.
What laws of taxation are implemented in the place of registration?
As previously mentioned, one of the most important purposes of the registration of offshore companies in tax havens is to reduce high tax burdens and to take advantage of direct or indirect tax benefits. At the same time, we should emphasize that totally tax-free and cost-free organizations do not constitutionally exist in any part of the globe, in spite of the fact that in a number of nations offshore companies are often related to as tax-free businesses. Essentially, the following systems of taxation may be implemented in the locations of registration of offshore companies:
- In nations where the company may only derive revenues from overseas, these revenues will be totally free from the payment of any tax. In this case, the organization is obligated to pay a fixed annual charge which is self-governing of the turnover and profit of the company.
- Tax exemption is awarded only in respect of revenues derived from abroad. In such countries as, for instance, Panama and Hong Kong, organizations may seek economic activities within the nation, too, and the domestic profits are taxed on the basis of a linear rate, while earnings derived from overseas are tax-free. In this case (Hong Kong), the organization is obligated to indicate domestic earnings separately in its annual report.
- Taxation on the foundation of a linear tax rate. One of the famous locations is Cyprus where foreign companies pay a 10 % tax on their net earnings.
What conditions does the nation of registration prescribe in regard to the directors and shareholders of an offshore company?
There are some offshore zones where there are no limitations of any sort concerning either the administrators or the shareholders. These comprise, for instance, the Bahamas, the British Virgin Islands, and Belize. Organizations may be set up here with the support of a single director and a single shareholder of any country who may even be one and the identical person. Other offshore locations do order some constraints in respect of the directors and stockholders of ventures. These limitations may be divided into two main groups:
Quantity constraints. This indicates that the least number of administrators or shareholders is determined. For example, in the case of Panama, a business must have at least three directors.
Nationality restrictions. This is a procurement expressly applying to the administrators, the main objective of which is to generate jobs for the citizens of a given nation.
What type of details are entered in the organizations register?
This is a remarkably significant question since, in the course of a number of business activities, the owners and administrators of a company do not wish to disclose their identity. In nations with a continental legal system, there is a little field for this because, for example, in Austria, Hungary, and Germany the records of a business are totally public and anybody may obtain access to them at the office of corporation registration, relating to any alleged or real benefits. From this regard, we can divide offshore companies into three classes:
Full anonymity. The details of neither the administrators nor the owners are open in the public corporation register since these details must not even be notified to the governments in these nations. Countries of this kind are Seychelles, the British Virgin Islands, Belize, etc.
Partial publicity. For example, in the case of Panama, the buyers of a corporation are not registered in the organization’s register, whereas all the data of the directors are public.
Wide publicity. A number of details concerning the business are available in the organization’s register. For example, in the case of Cyprus, the data of the partners and directors are available.
What should the size of the organization’s recorded capital be? How can or should it be paid up?
When analyzing this condition, the effects of the two types of legal regularities (continental and British-American) on the various areas can be observed.
In nations where an enactment is based on British roots, the system of requirements is quite more flexible. This is especially true of the offshore zones located in the Caribbean Sea region. For example, in the Bahamas, the standard registered capital of the business is USD 5,000. In regard to the laws of that region, this is the so-called candidate registered capital which must not be made accessible for the business through payment to a special bank account. The same concerns to the British Virgin Islands where the regular registered capital is USD 50,000 but the installment thereof is not necessary either. This suggests that these organizations can be formally set up with a few thousand dollars’ worths of property without actually owning a single cent on the foundation.
In the nations of the second group (as a result of the effect of continental law) both the rate and the manner of payment of the certified capital are determined precisely. This is the case, for example in Switzerland where the recorded capital need not only be subscribed by the owners but is further expected to be paid into a personal bank account of the company, and any non-cash donation is needed to be made ready for the company.
Is it necessary to travel to the place of incorporation when establishing a company?
Opposite to widespread belief, it is not needed to travel to the offshore jurisdiction when building a business; it is adequate for our clients to visit one of the offices of Startup Formations. Here we present both old and new customers with establishment and conference services, as well as responses to inquiries which may result concerning the daily operation of offshore companies. In fact, at the time it is not even required to travel to our offices, as the important documents can be completed and returned to us by fax or post.
What is a Certificate of Good Standing?
This is a well-established document in the case of companies registered in America and the UK and its former territories. It is usually issued by the company registrar in the given jurisdiction. This is the document which confirms that the company has not been struck off, and does not owe any tax or duties. The content varies from jurisdiction to jurisdiction, depending on the information which is available to the public in the jurisdiction of incorporation.
The banks normally request for proof of the existence of the organization when the development records are not fresh, which implies that the organization was formed 1, 3, 6 or 12 months earlier. Obviously, a business which has not cleared its yearly payments, charges for its certified office and agent and its annual tax/duty cannot receive a Certificate of Good Standing.
Why should I pay for the registered office and agent if I don’t even utilize them?
A registered office and agent are legal conditions for the preservation of a company. It may be that the business will never really use the office address, however it still requires it, as the corporate law in nearly all jurisdictions claims that a company must have, during its active life and without interference, a certified local office; in most provinces a registered local agent or secretary is also a requirement.
If the agent who presents the registered office address resigns, then the organization is breaking one of the laws on the preservation of businesses, and the business registrar will reject the constitutional activity of the company or strike it off the company register. In most jurisdictions, the yearly tax or duty can only be repaid through the local agent. Therefore, it is very necessary for the business to pay its annual fees each year and on time.