About Offshore

Offshore is a word commonly attached to another word or phrase. It simply means anything outside a country's jurisdiction. If you are in your own country it is considered onshore, any other country outside of your jurisdiction is referred to as offshore.

An offshore company is a company which rarely conducts business in its country of incorporation and one which is incorporated in a country where taxation is lower and reporting restrictions are more flexible than the country in which you reside. Other common names for this type of company are ‘non-resident company' or ‘IBC' (International Business Company).

Offshore business is about using the possibilities offered by countries (commonly known as jurisdictions), whose legislation allows for certain advantages (tax, confidentiality, company structure, etc.) to be used by non-residents. This means that a country, or jurisdictions, will allow registration of a company and offer them certain tax freedoms in exchange for an annual licence fee. It is normally a legal requirement that the registered company must not conduct any business or own any assets in the jurisdictions of incorporation.

This in turn allows companies to be set up in that jurisdiction, sometimes resident, sometimes not (depending on the legislation), to trade on an international basis taking advantage of the easier flow of money on the international markets. These jurisdictions often allow another company to be appointed as the Director and Shareholder of a company. Most countries today still partake in the idea that the flow of money in or out of the country has to be restricted, regulated, or at least monitored, and of course, taxed.

Legitimate uses of offshore companies:

  • International trading, especially where the owner has no fixed residence
  • Asset protection
  • Captive insurance
  • Yacht registration
  • Tax avoidance
  • Protection of intellectual property
  • Succession planning
  • Confidentiality (non-criminal)

Illegitimate uses:

Historically the activities of offshore companies have included activities that were or have become illegal.
These include:

  • The finance of terrorism
  • Money laundering
  • Tax evasion
  • Fraud (including investor fraud)
  • Protection from current or future creditors (including taxation authorities and spouses)
  • Irregular trading practices (such as increasing margins on deals by interposing clandestinely controlled offshore companies as apparent third parties)

Importance of choosing a legitimate jurisdiction:

 The situation has much improved since the 1970s and 1980s largely due to increased regulation and general changes in commercial practice. However some traces of these abuses persist today in both offshore and onshore jurisdictions.

Many offshore jurisdictions are regarded by banks, the OECD and other bodies in the finance industry as being regulated either as effectively as or better than their onshore counterparts whilst others are known to be areas of dubious legitimacy.

Unfortunately gone are the days (if ever they existed) where the distinction between onshore and offshore equated to legitimate or illegitimate. The current position is that there is no correlation between legitimacy of jurisdiction and tax status. For example Nigeria would not be regarded as offshore but perpetrates much of the world's advance fee fraud whereas Switzerland would be regarded as a highly respectable jurisdiction.

It is no longer possible for illegitimate jurisdiction to operate in light of the OEDC and the FATF as well as current and pending US legislation (13/06/09). It is very much in the interest of most offshore jurisdictions to ensure their house is in good order as this failure to comply and subsequent sanctions could lead to the total economic collapse of a country dependent upon its international reputation.



Features of offshore companies:

  • Memorandum and articles of association or bylaws - these documents are fundamental to the existence of the company. The Articles detail the rights of the members, the objectives of the company and the internal processes of the company and the Memorandum states the type of Company and its capital.
  • Certificate of Incorporation - this is issued by the Registrar of Companies or their equivalent, and is serves as proof that the company has been brought into existence. Other information may be necessary to prove that the company has not been liquidated or struck off such as a certified of incumbency or good standing.
  • Registered Agent - it is often the case that an agent must be appointed in the jurisdiction in which the company is incorporated for the purpose of dealing with official communications with the registrar. The Agent will have to be licensed and will assume some level of responsibility for the company's activities.
  • Registered Office - this is the official address of a company, to which official documents are sent and legal notices received. It is normal for the registration agent to provide a registered office. A company may have other business and correspondence addresses.
  • Shareholders or other members - these are the legal owners of the company. For administrative simplicity, or for anonymity, a corporate service provider may supply nominees who will hold shares on behalf of a beneficial owner, and act on his instructions.
  • Directors, Managers or their delegates - the individuals who manage the day-to-day affairs of company. In many jurisdictions it is possible for companies to be directors of other companies. Corporate service providers in offshore jurisdictions will often provide directors, provided they are able to control, and be satisfied with, the activities of the company. The company is generally considered to be resident for tax purposes at the place where the decisions are made. In many cases if a person is acting as a director they will be considered de facto to be a director in spite of not having recorded this with the relevant body.
  • Shadow directors - in some cases, it has been shown that the formally appointed directors merely act as the alter ego of others, blindly following their instructions. In these cases, the courts have considered that those instructing the named directors really control the company, and that the named directors merely rubberstamp decisions. Companies managed in this way will be tax resident in the jurisdiction where the shadow director is resident.
  • Company Secretary - this is the person or body corporate who is responsible for ensuring that the company meets its statutory obligations. Corporate service providers usually provide this service.
  • Statutory Records - a company is obliged to maintain registers setting out certain information about the company. The mandatory records vary from jurisdiction to jurisdiction, as does the level of public access to the information contained in the records. Many jurisdictions require that the records are kept within the jurisdiction in which the company is incorporated. The records required may include minutes of meetings, registers members, directors, officers and charges.
  • Bookkeeping - directors are generally required to keep proper records. They may be required to prepare audited accounts. Specific requirements vary between jurisdictions and may depend on the nature of the company's activity. For example all banks will need to prepare audited accounts, whereas a private investment

Examples of offshore companies include the International Business Company (IBC). More recently new legislation has been enacted in a number of Jurisdictions, such as the British Virgin Islands, to replace the IBC type of company with the Business Company (BC).

The following types of company are common in both onshore and offshore jurisdictions:

  • Company having a share capital - these companies issue shares. Once the initial cost of a share (capital and premium) has been paid, the shareholders have no further obligation to the company. The shares may, subject to the rules of the company, be sold or transferred, and the shareholders have the right to enjoy the profits of the company or any proceeds of a liquidation. The liability of the shareholder is therefore limited to the amount invested. Shares are assets.
  • Company limited by guarantee - the members of the company agree to pay up to a maximum limit in the event that the company becomes insolvent. They may acquire certain rights against the company, such as the rights to a dividend and the specific rights will be set out in the rules of the company. Membership may terminate on death, and guarantee companies have been used for not for profit organizations. There are also sophisticated estate planning schemes which make use of guarantee companies. Membership is a liability.
  • Hybrid - a combination of the above two classes - i.e. a company have bother liability class shares and asset class shares.
  • Protected cell companies - some jurisdictions permit cellular companies, where particular assets and liabilities are segregated into "cells", in such a way that the assets of one cell cannot be used to satisfy the liabilities of another. Cell companies are particularly used for umbrella mutual funds or unit linked insurance bonds. In this instance the separate cells are effectively distinct legal entities.

It is important to note though that the above is a gross oversimplification of the near infinite variety of types of company most sophisticated jurisdictions permit. Shares themselves come in many different types with the rights in respect of dividend, preference, voting etc. being determined by the constitution of the company to which they relate. Also, it is by no means uncommon for companies to utilise many different classes in particular when they are soliciting for investment from third-parties.

However, many offshore jurisdictions offer increasingly specialised forms of companies (as well as specialised trusts and partnerships seeking to increase their share of the market. Examples include limited duration companies, unlimited liability companies, companies limited by guarantee and with a share capital, restricted purpose companies and hybrid entities such as limited liability partnerships, which are more akin to companies to actual partnerships, and foundations, which are nominally trusts but are more akin to companies than trusts.

Merger:

The traditional method of merging companies is for one company to acquire the assets of a subsidiary on its liquidation. This sometimes creates contractual difficulties, and requires third parties to accede to the transfer of obligations from the liquidated company. Some jurisdictions have tackled this issue by permitting companies to merge, forming a new combined entity, which represents a continuation of the businesses of each former company.

Relocation of companies:

Some jurisdictions permit companies to redomicile. They may do this to take advantage of particular features of the new jurisdiction, such as merger legislation, or tax treaties with other countries. The law in both the old and new jurisdictions must permit redomiciliation. The business of the company is deemed to continue without interruption on redomiciliation.

This is usually not a complicated process, but it might be slow and involve some paperwork; it can be used when the cost of the transfer of domicile is less than the tax consequences of transferring the assets of the company in question to a company newly incorporated in the desired new jurisdiction.