An offshore company is a company registered in a jurisdiction that offers preferential tax treatment and has relaxed reporting requirements. Normally, an offshore company has to carry out business operations outside the country of its domiciliation. Some offshore jurisdictions also serve as tax havens.
Offshore companies are incorporated for the following main purposes:
- Tax burden reduction;
- Management flexibility;
- Confidentiality and data protection;
- Protection against various risks;
- International investment and trade;
- Financial planning;
- Reduction of operational costs.
Is it legal for a U.S. citizen to incorporate an offshore company? Yes, it is if the person abides by the laws of both the United States and the country of the company’s incorporation.
Legal aspects involved in incorporating an offshore company
It is absolutely legal to use an offshore company for the purpose of tax optimization. All you have to do is play by the rules and submit the required reports.
It is also legal to use an offshore company for the following purposes:
- Protection of confidential information and personal data of the company founders/ owners;
- International trade operations and international investments;
- Protection of assets against political, economic, and legal risks.
Tax residents of the U.S. who have offshore companies have to declare the incomes obtained via these companies.
Tax planning measures can include the following ones:
- Business structure optimization;
- Use of tax benefits available in the jurisdiction of the company’s incorporation;
- Use of transfer pricing;
- Use of double taxation avoidance treaties.
Please note that if you try to reduce your tax burden by falsifying the reports, entering sham deals, and concealing your incomes/ assets, you are going to be in for trouble. The American legislation is tough on tax evaders.
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Offshore companies and international legislation
International organizations play a pivotal role in regulating offshore companies. They set the reporting standards and norms and they put forward recommendations aimed at eliminating money laundering opportunities and increasing business transparency.
These organizations include the following ones, among others:
- The Organization for Economic Development and Cooperation (OECD) has come up with the Base Erosion and Profit Shifting (BEPS) initiative. Besides, it has set the Common Reporting Standards (CRS).
- The European Union (EU) has compiled a list of non-cooperative countries and published a Directive on Administrative Cooperation (DAC) as well as an Anti-Money Laundering Directive (AMLD).
- The Financial Action Task Force (FATF) has been developing global standards of combating money laundering and terrorism financing.
The EU black list of non-cooperative countries currently contains 12 states:
- American Samoa;
- Antigua and Barbuda;
- Anguilla;
- Fiji;
- Guam;
- Palau;
- Panama;
- Russia;
- Samoa;
- Trinidad and Tobago;
- U.S. Virgin Islands;
- Vanuatu.
The list is regularly updated: some countries leave it while other countries are added to the list.
The international organizations want offshore jurisdictions to do the following things:
- Harmonize and unify their legislations related to taxation and financial regulation;
- Exchange the information about international bank transfers to minimize the risk of using offshores for illegal purposes;
- Face sanctions in case they violate international standards;
- Apply the BEPS and CRS to increase the transparency of financial operations.
The international regulatory authorities insist that they want to form a just and transparent global financial system.
Advantages of offshore companies
The main goals that you can achieve with the help of an offshore company include the following ones:
- Optimizing taxes: offshore jurisdictions offer beneficial tax regimes;
- Protecting your assets against creditors, lawsuits, and other legal risks;
- Increasing personal information confidentiality;
- Finding new investment and trade opportunities;
- Gaining access to the global financial system;
- Diversifying economic and political risks that are present in your home country.
Creating a holding company in an offshore jurisdiction allows efficiently managing various assets located in different parts of the world.
Risks associated with offshore companies
Alongside the benefits, there are some risks associated with offshore companies. Probably, the reputational risk is the most significant one. Offshore companies are sometimes associated with illegal business activities, which might repel potential business partners. This is especially true if the company is registered in one of the blacklisted countries.
Other potential risks include the following ones:
- The pressure on the part of international organizations may make offshore jurisdictions introduce some new requirements related to the enhancement of transparency of financial operations;
- Spontaneous changes in the legislation of the country of the company incorporation might affect the efficiency of its operations;
- If the company owners fail to meet the requirements in the country of the company incorporation or in their home country, they might face fines, sanctions, and other unpleasant consequences.
Using an offshore company in your business structure is not a simple issue and you need legal and financial consultants to succeed in the endeavor. This means that you have to incur some additional costs.
Good and bad examples of the use of offshore companies
The so-called Panama Papers case is considered one of the most high-profile cases involving the abuse of offshore companies. Documents from a Panama-based law firm were leaked in 2016. As a result, the world learned about 214,000 offshore companies that belonged to publicly exposed persons. The investigation revealed that some of these companies had been used for tax evasion purposes.
On the other hand, such companies as Apple Inc., Google, Starbucks, Tesla, and many others have been using offshore companies in the right manner: they have followed all the rules and requirements. In this way, they have been able to save on taxes considerably as well as reduce their operational costs.
How to use an offshore company in the right manner
If you are a U.S. citizen looking to establish an offshore company, you should follow these recommendations:
- Act within the legal frameworks exclusively;
- Pay the taxes and follow the regulatory requirements applicable in the U.S.;
- Follow the fiscal information exchange regulations;
- Use only legal instruments in the tax planning processes.
We also suggest that you should seek professional assistance in offshore company incorporation and management.
Conclusion
For a U.S. citizen, an offshore company is a legal instrument that allows reducing the tax burden, increasing confidentiality, gaining access to new financial instruments and expanding business operations. At the same time, you should remember about possible risks associated with offshore companies. If you follow all the rules and do not try to evade taxes, your offshore business operations are bound to be successful.
