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Confidentiality is a primary concern of many offshore practices, particularly asset protection.
When it comes to utilising an offshore company for trading however, a whole new category of priorities must be considered. These are the priorities of your trading partners and the attitude, outlook and sophistication of onshore authorities.
Today legality and appearance -- and not reliance on the grey-area laissez faire and ignorance of yesteryear -- are the essential requisites for the offshore entrepreneur.
Gone are the days of the businessman who carelessly slapped his Panamanian letter-box company down in the middle of a business transaction and raked off a share. These days, such sloppy schemes can lead to a spell raking the leaves in a prison yard.
In many circumstances, it is not desirable to raise invoices in the name of an exotic offshore company, nor is it possible to ask your offshore company's clients or trading partners to make payments to a bank in an obvious offshore tax haven.
Remember that the books of your customers or trading partners are open to scrutiny by their local tax authorities and dealings with offshore havens -- even though legal -- are viewed with scepticism, if not suspicion.
Tax authorities of high-tax nations are aware that offshore companies can be used for illegal tax evasion by businesses that need to "reduce" their taxable profits before year-end. After all, the ownership of an offshore company is difficult and often impossible to establish. This allows dishonest business owners to incorporate a company in an offshore haven and use it to siphon money offshore, usually by having the offshore company raise invoices payable by the onshore business.
Consequently, trading directly in the name of a tax haven company can cause loss of business as many prospective customers feel uneasy about being wrongly suspected of participating in such false invoicing schemes.
In many developed countries, tax authorities do not even allow or recognise payments remitted to companies based in offshore tax havens. This reflects the opinion that anyone entering into a transaction with an offshore company is not doing so out of genuine commercial need, but solely for reasons of tax mitigation -- if not tax evasion.
Of course, there are times when an offshore company can be used to close a one-off deal if both your trading partners and the relevant tax office feel happy about the arrangement. But entering new markets or marketing products or services to unknown customers under the name of Tropical Island Trading Corp., incorporated in the Turks & Caicos, is a tall order nowadays -- unless, of course, you really are exporting conch shells or lobster.
Even though the image of an offshore company has taken such a battering over the years, this does not mean that an offshore company is all but useless for the international entrepreneur. Far from it.
Near-zero tax trading is still possible through an offshore company, but keeping a low profile is essential. In other words, the offshore company itself is best obscured in such a way that to an outsider it appears as if no offshore company is involved at all.
Sounds complex? Not at all. Whilst the minute legal details call for specialist knowledge, the underlying idea is usually simplicity itself: it involves the use of a respectable onshore company to "front" transactions on behalf of an offshore company in return for a commission.
Let us look at a typical example of a cross-border trading structure that benefits from low-profile, "respectable" appearance yet operates under a near-zero tax regime:
Two separate companies are formed -- one in an offshore zero-tax haven, the other onshore, in a "respectable", low-profile but high-tax country.
For example:
 Offshore tax-haven company | ||
 | ||
| Company name: | Tax-Free Offshore Company Ltd. | |
| Incorporated in: | British Virgin Islands, Reg. No. 12345 | |
| Reg. Office: | Wickhams Cay 1, Road Town, Tortola, British Virgin Islands | |
| Bankers: | Antigua Overseas Bank Ltd., St. John's, Antigua | |
| Tax rate: | 0% | |
| Onshore company | ||
| ||
| Company name: | Respectable European Company Ltd. | |
| Incorporated in: | England, Reg. No. 56789 | |
| Reg. Office: | 123 Regent Place, London, England | |
| Bankers: | Lloyds Bank plc, London, United Kingdom | |
| Tax rate: | up to 30% | |
After incorporation, Respectable European Company Ltd. agrees to act as an agent for Tax-Free Offshore Company Ltd. A contract between the two entities is drawn up under which Respectable European Company Ltd. agrees to conduct business in its name but on behalf of Tax-Free Offshore Company Ltd.
In effect, Respectable European Company Ltd. serves as a "front-end", or a clearing centre, for the worldwide operations of Tax-Free Offshore Company Ltd.
Respectable European Company Ltd. receives commissions from Tax-Free Offshore Company Ltd. as its fee for providing the clearing centre services.
As agreed, Respectable European Company Ltd. handles all trading operations in its name, from its British-based offices.
Respectable European Company Ltd. will:
Although Respectable European Company Ltd. acts under the direction of the principals of Tax-Free Offshore Company Ltd., no invoices or other documentation ever mention the BVI-based offshore company. End customers and trading partners only "see" and do business with the "front-end" UK company. The agreement between the "front-end" company and the offshore company is a private matter between the two.
The matters of respectable appearance dealt with, let us turn our attention to taxation of such a structure.
Respectable European Company Ltd. -- being a mere agent for Tax-Free Offshore Company Ltd. -- keeps only small transaction commissions in its British account. The majority of funds received are immediately forwarded offshore, to the account of Tax-Free Offshore Company Ltd. where they remain free of any taxation.
Naturally, profits of our Respectable European Company Ltd. -- that is commissions earned for its efforts on behalf of Tax-Free Offshore Company Ltd. -- are taxable in the UK.
It is important that a realistic level of commission is chosen if the "fronting" arrangement is to stand up to the scrutiny of the UK tax authorities. A commission of 3 to 5 per cent seems to satisfy this requirement. Of course, any expenses reasonably incurred in the course of the UK company's business -- such as office rental, secretarial expenses and so on -- are deductible from the tax bill. Consequently, the final taxation level can be as little as 1 per cent of turnover.
Any tax mitigation structure must ensure compliance with the law. If mistakes are made, not only can any tax-saving benefits be lost, but heavy penalties can be incurred.
The structure described above depends for its success on several factors:
Respectable European Company Ltd. is clearly a worthwhile investment for the principals of Tax-Free Offshore Company Ltd.; the desired onshore profile is attained without sacrificing the attractions of an offshore tax regime.
It is worth mentioning that Respectable European Company Ltd. can also register for VAT in the United Kingdom; this appeals to entrepreneurs wishing to operate within the European Union.
Although we have used the United Kingdom and the British Virgin Islands to "incorporate" our example companies, there are many other jurisdictions to choose from when arranging a trading structure such as this.
Our Tax-Free Offshore Company Ltd. could be formed in a number of offshore tax havens, and its corporate agent -- Respectable European Company Ltd. -- could well be registered in a non-European country. The intended business activity and geographical markets in question will be the deciding factor here.
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