Offshore Company for IT Business: How to Choose the Right Structure

An offshore company structure can bring many benefits to an IT company or startup. First and foremost, an offshore company structure can help achieve various international business objectives, such as cross-border ownership, IP holding, cross-border investment, and cross-border operations management. Global IT companies with employees working remotely worldwide, customers worldwide, and funding from around the world would greatly benefit from a properly set up offshore corporate structure.

A low-tax jurisdiction does not exempt an IT company from the tax and information-reporting obligations of local tax authorities for its founders, managing directors, or other employees in the countries where they reside. When choosing an offshore jurisdiction for an offshore company, consider the company’s business model and overall strategy, not just how to achieve minimum taxes.

Key Takeaways

• Offshore incorporation of an IT company helps to create a platform to conduct international business activities, to protect intellectual property, to set up investments, and to organize cross-border ownership interests.
• Key aspects to consider when selecting a jurisdiction for an IT founder’s offshore company include taxation, banking, payment processing, IP, investors, data protection, economic substance, and compliance. The lowest headline tax rate is not necessarily the best option.
• This means that, in addition to taxation, other key factors include a company’s banking options and payment methods, IP protection, investor relationships, data protection, economic substance, and compliance requirements.
• There is often a big difference between the jurisdiction in which an offshore company is incorporated and the company’s tax residency status. Importantly, the company’s tax residency status can be affected by where it is managed.
• Different offshore jurisdictions have different focal points: the BVI, the Cayman Islands, Nevis, the UAE, and Singapore, to name a few, and each is used for different reasons, not as a substitute for another.
• What is initially advantageous for a two-person startup can become a problem when the company grows to a certain size after funding rounds or when it hires staff all over the world, when it realizes that its intellectual property is one of its key assets or when it is preparing an acquisition.
• Founders should also consider how the company will develop in the future and balance the company’s immediate needs with its long-term growth. 

Why Are IT Companies Interested in Offshore Structures?

Technology companies inherently operate globally.

Many companies are based worldwide. For example, a SaaS company may have founders in one country, developers in another, customers across Europe and North America, a payment processor in another country, and the company’s intellectual property in yet another country. Often the founders of a software development company are located all over the world, including in a home office. Many technology startups also want to attract investors worldwide, even if the investors have no connection to the startup.

For more traditional, locally based businesses, choosing where to set up a local entity is a crucial decision. However, an international technology business has numerous additional considerations when setting up an offshore corporate structure.

• Where should the operating company be established?
• Where should the company’s intellectual property be located?
• Where will contracts with customers be executed?
• Where will employees and contractors be based?
• Where will the company open its banking and payment accounts?
• In which jurisdiction is the company’s management actually conducted?
• Where do investors expect the company to be incorporated?
• What are the implications of an offshore corporate structure for a technology company?

An offshore corporate structure can be a part of an overall international business strategy, but it is not the only option for a technology business.

Global Customers, Remote Teams and Cross-Border Payments

While technology companies with entirely remote workforces can now expand easily to any country in the world, they must not neglect compliance.

Subscriptions can come in from around the globe in many different currencies. Contractors can be compensated in different countries. Large enterprises can be licensed worldwide. All payments and transactions need to flow through the company’s robust corporate structure to avoid problems with banks and tax authorities.

Evaluating banks and payment-processing processes pre-incorporation is crucial for a technology company and should not be left until after incorporation in the country where the company intends to set up and trade legally. Banks’ different approaches to KYC/AML (Know Your Customer/Anti-Money Laundering), as well as how they handle the unique characteristics of a technology business, can greatly affect the success of onboarding for cross-border collected payments.  

Intellectual Property Can Be More Important Than the Company Itself

Much of a technology company’s most valuable assets are not stored in offices, data centers, or cash. The most valuable assets are the intellectual property (IP) the company develops. 

This can include:

• software and source code;
• trademarks and brand assets;
• Patents;
• Algorithms;
• proprietary databases;
• technology licenses;
• domain names;
• other contractual or intellectual property rights.

It therefore becomes a more complex issue than is commonly anticipated.

A more accurate question for an expanding technology group is, “Which entity should hold and commercialise IP, and in which jurisdiction should such an entity be incorporated?” 

International Investors Can Influence the Structure

When a founder seeks external funding, matters that initially seemed less important can take on greater significance, such as incorporation costs or the tax implications of a particular jurisdiction.

Investors typically assess:

• the company’s legal structure;
• shareholder rights;
• corporate governance practices;
• beneficial ownership details;
• intellectual property rights;
• due diligence requirements;
• the legal framework of the jurisdiction;
• the ease of issuing and transferring shares;
• the prospective exit strategy.

In summary, what suits a bootstrapped start-up is not necessarily what suits a start-up seeking venture capital funding. 

What Does an Offshore Company Actually Mean for a Tech Startup?

The term “offshore company” is frequently misused, has become a misnomer, and is mistakenly believed to refer to one entity rather than a category of offshore structures. “Offshore” refers to a company that has been formed in a foreign country (i.e., not in the same country as the company founder(s) or the company’s principal business operation(s)).

Offshore companies are set up in foreign jurisdictions. Each offshore country offers numerous business structures for forming a company. Tax laws and corporate legislation, as well as the level of support services provided by the offshore country, can vary greatly from one country and structure to another.

When people talk about offshore companies and structures, they often mistake “offshore” for “tax haven” or “anonymous.” In reality, modern cross-border structures are built on 4 pillars: beneficial ownership, AML/KYC, tax information exchange, and economic substance.

FATF is an international body that works to combat money laundering and fascist funding worldwide. The FATF recommendations require countries to ensure that competent authorities have adequate, accurate, and up-to-date information about the beneficial owner.

While the requirements of Nevis concerning the beneficial ownership information for offshore entities compare with other jurisdictions, the Financial Services Regulatory Commission of Nevis (FSRC) stated in a correspondence dated June 21, 2016, that Nevis “is required to obtain and maintain up-to-date information concerning the beneficial owners of any relevant legal entity and to verify the identity of all beneficial owners from time to time.”

Offshore structures offer the same benefits, corporate features, and protections as onshore structures. They do not offer anonymity. 

Place of Incorporation Is Not the Same as Tax Residence

However, it is also crucial to bear in mind that the income of a foreign company will not necessarily be taxed in the country where it is incorporated.

Tax residency is defined by individual countries, normally with reference to the place of incorporation, control, the carrying on of business, and any relevant tax treaty.

HMRC’s policy for tax residence is to regard a company incorporated in the UK as being UK tax resident, as well as companies incorporated abroad where the central management and control is in the UK (subject to any exemptions or contrary provisions in tax treaties).

A founder who operates an offshore company from their home country should not assume that simply incorporating a new company in a foreign jurisdiction will shift all tax liabilities from one country to another.  

The Founder’s Personal Tax Residence Still Matters

A company and its founder are separate legal entities. However, their tax situations can affect each other.

A founder may have personal reporting obligations in their country of residence regarding:

• Dividends;
• Salary;
• Director remuneration;
• Capital gains;
• Interests in foreign companies;
• Controlled foreign companies;
• Foreign assets or accounts.

Factors that affect a founder’s tax situation can also affect the company’s tax situation. Therefore, before choosing a jurisdiction in which to form an international company, consider the founder’s tax residence and weigh the company formation options available in that jurisdiction against the founder’s personal tax circumstances. This can help avoid expensive, inefficient corporate structures. 

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What Should You Look for When Choosing a Jurisdiction for an IT Company?

No single offshore jurisdiction suits every technology company, and most companies must consider several factors when choosing the most suitable jurisdiction now and for future growth.

Key factors to consider include:

• Tax treatment: This goes beyond the simple corporate tax rate for the entity and looks at all the withholding taxes, as well as the taxes on dividends, capital gains from foreign-source income, charges on Controlled Foreign Companies (CFCs), transfer pricing between group members, all of the company’s tax treaty benefits, and how IP income is treated differently from other forms of income.
• Banking and payments: Are appropriate business bank accounts available, and are there no restrictions when making international payments? We have many years of experience with local banks and branches and have a good selection of financial institutions at our disposal that are geared towards fintech and cryptocurrencies, as well as other higher-risk areas, and are also authorized as Electronic Money Institutions (EMIs) as well as fintech companies for online payment processing.
• Intellectual Property: This is where software (and other IP), trademarks, etc. are created, owned, and licensed. For early-stage companies owned by individual entrepreneurs, the company’s location may be more valuable than its operations. For later-stage technology companies, IP is most valuable. How offshore jurisdictions treat IP will vary.
• Compatibility with investors: Will your choice of offshore jurisdiction and its legal structure facilitate a smooth round of funding with your investors? The corporate structure and shareholder agreement must be acceptable to future investors and allow for an optimal exit strategy for them.
• Data protection/regulation: An offshore entity does not exempt a company from local compliance requirements for doing business in foreign markets. It will also have to comply with local data protection requirements where it offers services to individuals or monitors their behaviour in that country, e.g., as part of online marketing. The GDPR is a good example: companies outside the EU may be required to comply with its provisions if they offer services to, or interact with, individuals in the EU.
• Economic substance: Even though setting up an offshore entity often takes only a few hours, the actual business activity usually occurs in the founder(s)’ home country. Therefore, it also has to comply with the local data protection and other rules and regulations. Also, some offshore jurisdictions now require economic substance for specific activities conducted within that jurisdiction (e.g., sufficient premises, appropriate staffing, etc.).
• Beneficial ownership disclosure and AML/KYC requirements: Complete anonymity when forming an offshore company is unlikely. Companies will be required to provide full details of all beneficial owners, along with required identification documents and further information on the source of funds used to set up the structure through which the offshore company will operate when opening a business bank account.
• Reputation and future development: Consider whether your choice of offshore jurisdiction will be adequate in respect of future growth of your startup with employees, investors, and partners globally. In the event that your startup acquires valuable IP and attracts customers from across the world with a view to future acquisition, will your chosen structure still be appropriate? 

Which Offshore and International Jurisdictions Can Work for IT Companies?

Different locations offer different structures for different purposes, and it is not necessarily helpful to compare them directly. It is more helpful to establish what sort of structure a jurisdiction can offer.

British Virgin Islands: Flexible International Corporate Structures

The British Virgin Islands (BVI) are a popular destination for international corporate and holding structures. While a BVI company structure may not suit every technology business, it can provide an excellent international corporate vehicle when you don’t need a local entity with a large workforce.

Potential applications include:

• International holding structures;
• ownership of investments;
• cross-border shareholder arrangements;
• certain IP or asset-holding structures;
• International group structures.

Many people mistakenly believe that a BVI company can be set up anonymously. The BVI Financial Services Commission regularly updates the legislation governing business companies in the BVI. We therefore suggest that you always check the latest legislation on beneficial ownership requirements and the economic substance requirements for BVI business companies.

BVI companies are not suitable for all scenarios, and you must consider other factors. For example, tax residence, economic substance, beneficial ownership, and the laws and regulations of other countries where the business operates. 

Cayman Islands: Investment and Sophisticated Corporate Structures

The Cayman Islands have become an important location for technology groups with sophisticated investment structures involving foreign shareholders.

Cayman is especially recognised for:

• investment funds;
• private equity structures;
• holding companies;
• international investment arrangements;
• sophisticated corporate structures.

However, you will not realise the key benefits of low-tax jurisdictions, such as the Cayman Islands, unless you identify a suitable structure. In addition to the benefits of the selected structure, all entities operating in the Cayman Islands must also comply with local economic substance requirements and other local and international legislation as applicable.

The Cayman Islands Government continues to strive to improve and update the economic substance legislation, with the next revision expected to be published in 2026. 

Nevis: Flexible LLC Structures for International Businesses

Nevis offers a well-regulated Nevis Limited Liability Company (LLC) structure suitable for foreign entrepreneurs.

Potential applications may include:

• international holding structures;
• ownership of specific assets;
• cross-border businesses;
• entrepreneurial ventures;
• international corporate arrangements.

The LLC structure provides more flexibility than the traditional corporate forms available in Nevis. Nevis does not offer true anonymity. All entities (including LLCs) are registered with the Nevis Financial Services Regulatory Commission and must maintain records identifying the beneficial owners of those entities.

Also, tech founders should establish a Nevis LLC that matches their business, helps open bank accounts worldwide, complies with tax and accounting requirements, and supports founders’ long-term goals.  

UAE: An International Business Hub Rather Than a Traditional Offshore Jurisdiction

The UAE is an unusual jurisdiction and can serve as a complete business and operational hub for technology entrepreneurs. Technology entrepreneurs who need a physical presence in the region or who want a place to reside while running a company will find the UAE an excellent place to be based.

The UAE’s federal corporate tax regime provides a 0% tax rate on taxable income up to AED 375,000 and 9% on income above that amount (subject to applicable rules and available exemptions). Certain free-zone companies may be treated differently for tax purposes.

Other offshore holding jurisdictions are of less interest to technology founders considering the UAE as a holding company. Here are some key issues for technology founders considering the UAE as a holding company structure.

• mainland versus free-zone structures;
• corporate tax;
• qualifying income rules;
• substance;
• residence;
• banking;
• local operations;
• regional market access. 

Singapore: Technology and Asian Market Hub

Singapore offers a unique blend of an offshore environment and an international business environment. It is a fully developed and regulated jurisdiction and is therefore not an offshore haven. However, many technology companies are interested in listing in Singapore in order to penetrate the Asian market. Corporate formalities, a developed financial environment, and a first-class legal framework are key to success.

Referring to the Inland Revenue Authority of Singapore (IRAS) website as of October 2018, the corporate income tax rate for local and foreign entities alike is 17%.

While Singapore does not offer the lowest nominal tax rate for a technology company targeting the Asian market, the 17% corporate income tax rate (which applies equally to local and foreign incorporated companies) in a developed and mature business environment such as Singapore may be more relevant.

Offshore vs. Onshore: Which Structure Makes Sense for a Tech Startup?

When setting up a technology startup, determining whether offshore or onshore incorporation is more suitable is only the starting point. The founder also needs to decide where to place ownership, operations, IP, employees, and customer contracts. This may be done with one entity only, in a holding structure, or in a combination of both, depending on the business model and the startup’s global scope.

When an Offshore Structure May Make Sense

An offshore or international holding structure is advisable for businesses with the following characteristics: 

• international shareholders;
• cross-border operations;
• valuable intellectual property;
• international investments;
• multiple operating markets;
• a necessity for an international holding vehicle;
• assets that require segregation from daily operations.

When an Onshore Company May Be More Practical

A local company can offer distinct advantages when the business:

• serves a majority of its customers within a single country;
• employs staff from the local community;
• requires a local license;
• relies on contracts with local government entities;
• pursues local grants or incentives;
• maintains substantial operations in the region;
• benefits from a strong domestic investor ecosystem.

Hybrid Structures

There are different ways that a technology company can organize itself as it grows.

For example, a corporate group may include:

• a holding company for ownership purposes;
• an operating company responsible for employing staff and dealing with customers;
• a distinct legal entity for intellectual property management or licensing;
• local subsidiaries where the business conducts substantial operations.

More entities do not inherently create a better structure. Each company is unique; therefore, organizational frameworks must align with the business’s specific objectives. 

How Different Types of Tech Businesses Can Use International Structures

There is no single structure for “IT companies.” A SaaS startup and a software development agency may have completely different requirements.

SaaS Companies

A SaaS company should consider the following when going international:

• recurring international payments;
• software intellectual property;
• customer contracts;
• VAT/GST or sales taxes;
• data protection;
• payment processing;
• investor requirements.

Organizational design to drive subscription-based growth on a global scale while addressing tax and payment-related challenges. 

AI Startups

AI companies must navigate several critical considerations, including:

• Ownership of models and software;
• Datasets;
• Licensing;
• Personal data;
• Regulatory requirements;
• Research and development;
• International intellectual property.

For a start-up AI company, the differences between countries with respect to IP and data protection are typically more important than small differences in corporate tax rates.

IT Consulting and Development Companies

An international IT agency typically operates with a streamlined structure that includes:

• One operating company
• international clients;
• remote developers or contractors;
• international banking;
• software and service contracts.

For these organizations, a simple administrative structure is generally more effective than setting up a complicated multi-entity structure.

Fintech Companies

Fintech is a business to be conducted within certain boundaries. Companies offering payments, lending, investments, and many more financial services online have to obtain a license to conduct their business.

Identify the required regulatory permissions for the proposed activities of the business to commence operation.

Only once the founders have obtained all necessary licenses and approvals for their planned activities within a jurisdiction can they go on to assess the relevant corporate tax regime together with establishment costs for the various forms of corporate vehicles available in any given jurisdiction. 

Web3 and Crypto Businesses

Web3 companies face distinct challenges in the following areas:

• Banking;
• AML/KYC compliance;
• Licensing;
• Token classification;
• Payment processing;
• Sanctions;
• Tax reporting.

Please note that permission for a corporate structure in a country does not necessarily mean that all banks and payment service providers, as well as all regulatory authorities, consider the business underlying such a corporate structure to be appropriate or even viable. 

Tax and Compliance Risks to Understand Before Going Offshore

Moving offshore does not mean that all your tax liabilities will disappear. Before incorporation, you must fully understand the tax regime that will apply to you, your employees, and how your business will operate abroad.

Tax Residence and CFC Rules

The country in which a corporation is incorporated is not necessarily the same country in which that corporation is considered a tax resident. The tax residence of the founder(s) of the corporation, as well as the CFC (Controlled Foreign Corporation) tax provisions of the country in question, can significantly impact the amount of income earned by a foreign entity that is subject to tax by the founder(s) in their country of tax residence.

Cross-Border Operations and Payments

While a company may incur tax liabilities due to the existence of a permanent establishment (PE) of a related company, for a startup, the main consideration for cross-border transactions involving related parties is the risk of transfer pricing and/or withholding tax. The impact can be extreme when intellectual property, operations, and senior management are split across entities within a group.

Substance and Transparency

Offshore entities must demonstrate adequate economic substance in the jurisdiction in which they are incorporated. Entities may be required to disclose beneficial ownership information and further shareholder information. Offshore entities are also subject to cross-border information exchange. Consequently, you must establish an appropriate offshore structure within a genuine and lawful business activity, and strictly adhere to all legislation.

Under Pillar Two of the OECD, the 15% global minimum tax will apply to large multinational companies. The minimum tax will not apply to start-up companies within the first 5 years of operations.

How to Choose a Jurisdiction: A Practical Framework

These founders should ask not “Which country has the lowest tax?” but “Which jurisdiction (legal, tax, banking, or business) is best for my venture now and in the future?” A useful comparison would then look something like this:

The important part is to compare the whole structure, not one tax rate.

How to Set Up an Offshore Company for an IT Business

Analyzing the requirements of starting a technology business first and then selecting the appropriate jurisdiction:

1. Determine your business model: Is your company a SaaS provider, software developer, IT service provider, AI provider, fintech company, or Web3 provider, or does it license software?
2. Verify the tax residence of the founder: In which country is the founder personally a tax resident? Are there foreign-company regulations that apply?
3. Map the markets: What are the locations of your customers, employees, contractors, etc., and do you plan to expand into any of these markets?
4. Identify the IP: Who owns the software developed by the business? Who owns the source code? The Trademarks? Patents? Datasets? Licenses? Transfer intellectual property between related entities?
5. Banking and payments: Identify which banks and methods of payment the company will need prior to incorporation.
6. Compare Jurisdictions: Evaluate tax, corporate form, substance, banking, and other key factors your company will need to grow and trade overseas.
7. Implement a compliance framework: Once the jurisdiction is selected, establish all aspects of the business’s required compliance structure, including accounting practices, tax filings, and maintenance of all requisite corporate documents, including beneficial ownership. Also, establish all required KYC/AML and related contracts.
8. Review the structural decisions as the business develops: after funding, in new markets, when employing staff, when IP is being developed, when establishing subs, when the founder’s tax residence changes or when planning a sale. 

Common Mistakes Tech Founders Make 

Pitfalls that tech founders experience when considering international setups for their startups.

• Relying on the lowest tax jurisdiction: Remember that the lowest tax rate is not necessarily the lowest overall cost of doing business. Banks, accounting, compliance, and substance—all these factors must be taken into account.
• Many people have misconceptions about the anonymity of offshore companies. Many people believe offshore companies can be formed anonymously. However, all offshore companies today must disclose the beneficial owner and comply with the Anti-Money Laundering (AML) laws and regulations of the country in which they are incorporated, as well as Know Your Customer (KYC) requirements.
• Including incorporation of a company in your initial investigation into banking in a foreign country: Huge variations exist from country to country in the ease with which companies can open bank accounts in that country.
• Omitting the founder’s tax residence — how the founder files tax returns for overseas entities and income is a critical issue to assess before establishing overseas entities.
• Many of these challenges arise from the simple act of moving intellectual property from one country to another — e.g., a founder registers a company in a nice tax haven and moves their software there, thinking they have done a good job of designing a structure to grow their startup.
• Simply registering a registered office does not complete the task list above — further substance requirements will typically need to be satisfied.
• Building a structure that cannot scale: A good structure for your startup needs to support company growth, future investors, international team members, potential subsidiaries, and more.

Final Thoughts

Offshore incorporation can offer several advantages to an international tech business. These include enabling cross-border ownership, enabling efficient intellectual property management, enabling investment oversight, and enabling asset protection. However, the term “offshore” is often mistaken for tax avoidance and secrecy. The optimal offshore structure depends on a variety of factors, including the business model, the owner’s tax situation, intellectual property, banking, customers, investors, and the level of compliance required.

Care should then be taken to understand all aspects of the proposed offshore structure, including how to best set up the ownership and IP structures and how these interact with proposed tax and banking strategies. Many factors influence future growth, and setting up a company in one jurisdiction simply because of low tax rates or incorporation costs is not wise.

Frequently Asked Questions