Introduction:

One of the key benefits of international businesses over the local businesses, specifically the digital businesses, is that you will have the ability to choose the best strategic jurisdiction from which you will be operating your business. The first question that you have to ask yourself is whether you want to incorporate your business onshore or offshore, or even both if you want.

We define the offshore or international business company, as a company that is incorporated in a jurisdiction that is tax-neutral, is not a tax resident in the jurisdiction and it is not subject to any account filings or the other reporting requirements at all. Whereas, an onshore company is a legal entity that is a tax resident in the jurisdiction where it is located and is usually subject to some taxes and financial reporting requirements.

Offshore incorporations offer many advantages as compared to incorporating ‘onshore’ in a high tax location. However, certain things must be considered and depending on your business, your business needs, your clients and suppliers, and your personal conditions, incorporating only offshore might not be very suitable.

Next, we look at some of the key facts that you should consider regarding whether to go offshore or onshore, or even both. In the following sections, we will look at some of the major aspects to take into consideration in some jurisdictions that might help you determine if they are suitable for your specific business needs. 

Tax Compliances & Other Factors:

Taxes are mostly the main reason why businesspersons go to set up shop offshore. Offshore businesses are not usually subject to any taxes in the jurisdiction of incorporation and the corporate compliance burden is the lowest in every regard. According to law, the company must keep accounting records though it is not needed to file them anywhere. No need for audits or filings and just an annual renewal fee will be enough for keeping the company in a good position. This makes maintaining an offshore business much less complicated and expensive than an onshore company.

Though, there is a catch here! If the offshore company is structured properly, it will most likely be considered a tax resident in the jurisdiction where it is managed and controlled from. This is because, in most of jurisdictions, the corporate tax residency is checked by the place of business management. Mostly, this is called the controlled foreign ownership and sometimes it is referred to as constructive ownership. The exact laws of tax for the non-resident businesses controlled by the management mostly vary from jurisdiction to jurisdiction.

A brief example is that if you run a company in Belize from the UK, the company might be considered a tax resident in the UK and will be subject to all the taxes and compliance in the UK. You may also be obliged by the law to disclose the information about the company, and the tax authorities will most likely consider it a tax resident business.

Also, if your local entity or you, hold a certain ownership percentage of the company that is incorporated offshore, and your country of residence has the controlled foreign company (CFC) rules, then the offshore entity will be deemed as a CFC and you might be subject to the taxes for income of your CFC even if this specific income has not yet been distributed anywhere at all. 

If you think that your offshore company will sneak through and the local tax authorities will not notice anything not be a good idea. Most countries exchange the tax information through the Common Reporting Standard (CRS) under the framework of the OECD’s Automatic Exchange of Information.

You will most likely be required to disclose your tax residency to the bank in order to open an account for the purpose of filling out a self-certification of CRS, including your tax residence and tax identification number too. If you are a person belonging to the US, you will be required to fill out some FACTA forms too. The banks are required to disclose the information to the local authorities, who will further disclose it to the key foreign authorities then. 

Your personal tax residency of yours and the jurisdiction where you are properly handling the management of the offshore business matters a lot and therefore it should be included and also planned in all the internationalization strategies. Remember, there are ways to legally minimise your taxes.

There is one more aspect that you should consider: where your suppliers and clients are located. This can also lead to various types of tax liabilities too. Such as if a foreign entity is effectively connected to people, such as through sales and management staff selling to customers in the US, then you might also face tax in that country even if you’re operating from outside the US. 

You should also look at the tax benefits under the double tax agreements (DTA) in the places you are operating to reduce the tax liabilities, which are usually not present for the offshore companies. For instance, some places withhold taxes on the payments that are made to the non-resident businesses that could be exempted under the DTAs. You also consider where your workforce is located to be able to offer the local employee benefits or to set up the corporate offshore schemes for employee benefits and the retirement benefit plans for the workforce of your business. 

The Privacy & Protection:

Going offshore might offer a higher level of protection and privacy for you. In some jurisdictions, your business assets might be protected by solid asset protection legislation. Sometimes it is just too cumbersome to bring in litigation against an offshore business which might help you avoid the lawsuits. In addition to this, the details of the directors and shareholders of the company are usually not available for public inspection, offering a degree of privacy that is not present in the onshore jurisdictions.

This means that they will not show up on an asset search, which is something that a litigious attorney will surely be looking for. Finally, many offshore jurisdictions don’t allow contingency fees. Contingency fee arrangements, most of the time lead to lawyers taking a larger share of profits for being able to successfully sue a defendant that is wealthy.

There are a few types of legal entities, such as the LLCs, which are more suitable for protection purposes. The LLCs ownership is divided into membership interests rather than the shares and that is very advantageous. And the membership interests might not be confiscated by a court order. There are some LLC legislations that will also provide you with charging order protection which is very beneficial. Also, there does not need to be a director present in an LLC, which means that a person does not need to have the same liability that comes automatically with the directorship roles and this is very good in every regard. 

In a company the decision making depends on the procedural formalities and a failure to work with these may allow the plaintiffs to harm the corporate veil and cause lots of personal liability. The LLCs are not subject to these procedural formalities and are handled by their operating agreement, which is always customized and then adapted according to the requirements and needs of their members, unless and until they are not against the laws in any way. A few offshore jurisdictions have made it possible to get other powerful asset protection vehicles such as the Trusts and Foundations. 

If properly created and settled in a suitable jurisdiction, a trust might protect the intangible assets held by the trustee, as any foreign court will not have any jurisdiction over the trustee holding the assets in an offshore location. However, the foreign trusts are not recognized in a lot of jurisdictions, as several countries that have a legal system that is based on civil law might not be able to differentiate between the formal and beneficial ownership systems, and the trust could be disregarded in such a scenario. The foundations may be a lot more suitable in such a scenario as they have a legal personality which is distinct from the owners and its board. But unlike corporations, they do not have owners or shareholders and their assets are handled by a management board in most cases. 

The Banking Systems:

Because the fact that an offshore company’s ownership details are not public, and your business may not be tax resident anywhere, it means that most banks may look at your business as a high-risk business. There are many reasons why your banking options might be very limited, especially for small-scale businesses where the banks may not see a good reward by getting your business on board.

The banking systems are changing significantly with respect to the regulatory requirements of all financial institutions in the business world. The onshore banks are now rejecting a lot of companies that are unable to provide a TIN. If the offshore business is not a tax resident in any jurisdiction, and it does not submit the financial reports to any relevant authority, it will be very difficult for such a business to get access to any bank. 

Even the offshore banks with an international banking license, are under pressure from other banks and authorities to impose heavy scrutiny on transactions that exceed certain amounts or those that take place within some specific jurisdictions. Also, at the time of writing, it is still possible for offshore businesses to get accounts in the reliable banks that are present in good financial centres such as Singapore and Hong Kong.

The banks firstly ask for a strong introduction. They also to see a solid business, and you might also be required to have around 20 to 50 thousand dollars the minimum balance for maintaining the account, and you will be required to show your business background and provide invoices, bank statements, and other important documentation during the entire process.

And if you have an IBC that conducts a legitimate business and you can prove it, and you also possess the ability to put a good amount of deposit in the bank account, then you will have the access to quality transactional banking options in the onshore banks, as long as you are not doing activities such as high-risk FOREX trading.

Payment Services:

The business structure matters a lot if your business has to accept credit card payments. The merchant accounts mostly need to be present in the jurisdiction where the company has been incorporated and credit card payment services are now rejecting offshore companies due to the strict regulatory compliance requirements that are present now. 

The payment aggregators that still accept the offshore companies are either becoming really picky with the businesses that they are considering or charging very large fees in most cases. Also, if your business needs access to quality USD payment services such as Paypal, then going for an offshore business will most likely not work for you as you expect it to. We have seen that there is a major confusion among all the “internet entrepreneurs”. Even if the payment service provider that you prefer is present in your offshore jurisdiction, it will only deal with the local currency and will only allow you to make withdrawals to local banks and this might not be very beneficial for the majority. 

The offshore banks that have international banking licenses will be prohibited from dealing with local currencies, and local banks mostly do not open accounts for offshore businesses. You might open an account for your offshore business with an ‘onshore’ payment service provider, but you will not be able to withdraw funds from your bank account, which is the major issue that arises. 

The Public Image & Reputation:

Reputation matters a lot, and it is obvious that your public image, overall credibility, and customer trust will probably not be the same if you run your business with a low-level jurisdiction as compared to one that is considered to be a “high class” one. It is that there are many offshore jurisdictions that have a better reputation than the rest. However, they still exist, something that is known as an “offshore stigma.” Even though most offshore businesses are used for legit purposes, the overall corruption and money laundering issues haven’t helped them build a good public image. Whether it is offshore or onshore, you will have to establish your company in a jurisdiction that is stable in economic and political terms. 

Types Of Regulated Activities:

If you are thinking about starting a business whose activity is regulated, such as insurance, financial services, or gaming, then there are some factors that you must analyze in order to select where you should headquarter your business at.

What are the services that you wish to provide? Who is your target market? What are the regulatory and overall requirements that you must meet in order to function properly? These are some of the many questions that you must discuss with your team.

Raising Funds For Business:

You must also think about whether your business includes raising funds from venture capital or issuing an IPO when you will be incorporating your business. The fundraising aspect varies among jurisdictions, and your structure has to be one that your investors will be comfortable with in every regard. For example, you will want to set up a corporation in Germany, the UK, or Hong Kong if you are planning to raise funds at some point. 

The Matter Of Company Structure:

Offshore companies are perfect for certain businesses or for a certain purpose within a given group structure of a business. For example, you can hold some business assets offshore such as an IP of a business, for better business investments with entities that are tax-neutral. You can also use foundations, or trusts, for specific purposes, which could result in better protection and maximization of planning and control efficiency, while maintaining all the confidentiality.

If your business is structured right, you will be able to take advantage of the offshore offerings perfectly such as: low tax, privacy, and asset protection. And you’ll also get the benefits of onshore offerings such as: access to top payment services, quality banking options, and a lot more. 

Concluding Remarks:

To conclude, it depends on considering what your business needs are. You also need to consider all your business activities, clients, tax residency and even suppliers.  There are many factors to consider such as which bank you’ll be taking the services of, the payment options, the tax residency and even the matter of citizenship. 

So, consider all the aspects of your business in detail and then you’ll know which the best jurisdiction is for you to incorporate your business.

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