Today we discuss why offshore companies can be powerful tools to protect your assets, optimize your business and drastically increase your net profits.
Why your Tax Residency matters
Contrary to what is said, do not expect to incorporate an offshore company and automatically slash your tax bill to 0.
It is not that simple.
Implementing an offshore company strategy without planting the proper tax residency flag can lead you to several issues and it might not have any upside from a tax standpoint.
For instance, let’s say that you are a Spanish tax resident and you incorporate in the Seychelles. You will enjoy some benefits related to asset protection and achieve a certain degree of privacy, but you won’t have any tax benefit.
This is due to CFC (controlled foreign companies) laws, which we discussed in previous letters, and corporate tax residency laws.
If you are resident of a country with CFC laws, profits retained in your offshore company may be attributable and taxed, even if they have not been distributed.
Often, corporate tax residency is not only deemed by where a company is incorporated, but also by its place of effective management.
Following the previous example, if you manage your Seychelles IBC from Spain, it can be considered a resident for tax purposes and therefore subject to the Spanish corporate income tax rate of 25%.
Incorporating offshore only is not the magic solution to minimize your tax burden.
Also, depending on the nature of your business, incorporating in the wrong jurisdiction can lead to serious headaches and negative effects.
However, having a proper offshore corporate structure tailored to your circumstances and the nature of your business can make a phenomenal difference.
It can take you near to the 0% promised land, legally reduce your compliance burden while protecting your assets and allow you to grow your business exponentially.
Get your offshore strategy right
For instance, if you provide online professional services, you can incorporate your company in the British Virgin Islands.
An international company in the British Virgin Islands is free from all kind of taxes, that is, you will not have to pay a penny in corporate taxes.
In addition, reporting requirements are minimal. You will not have to file your accounts and there is no public record of shareholders or directors, so your privacy is assured.
Since the British Virgin Islands has a reputable regulatory environment, banks of jurisdictions such as Singapore might be willing to work with them.
Opening a corporate and personal bank account in Singapore (one of the most reputable financial and banking centers worldwide) will allow access of 1st world banking options. Your clients will be able to wire you money issue-free too.
You could establish your tax residency and managing your business from Thailand, and ensure that your BVI Company is not considered a resident for tax purposes.
Thailand only considers companies incorporated in Thailand as tax residents and does not have CFC laws.
Furthermore, at the personal level, foreign-source income is only taxable when is remitted to the country the same year in which it is accrued.
Therefore, if you only remit money to Thailand to cover your daily expenses or you remit profits after one year, you can reduce your total income tax significantly, in some cases close to 0%.
This is a simple high-level example of how implementing a correct offshore strategy may increase your net income significantly. This is not legal or tax advice, consults with a professional to assess your strategy according to your personal circumstances.
If you want to market your products online in Europe and need a payment processor such as Stripe or PayPal, you might want to incorporate a UK LLP, a neutral tax entity with which it will be easier to get a payment processor and its income will flow tax-free (as long as you do not have UK clients) to parent offshore companies, which in turn are not subject to taxes.
If you start your fintech business and need financing, Singapore or Hong Kong might be valid options for you as they have attractive tax schemes and pro-business regulations for start-ups and a great angel investor and venture capital scene.
If you are seeking a logistic hub, with affordable energy costs, a strategic geographical location for trade, a solid financial sector and a vast network of trade agreements and tax treaties, you might consider incorporating your tax-free company in a UAE free trade zone such as Jebel Ali (Dubai).
Or you might want to look at Malta or the UK to establish your holding company for your European investment subsidiaries as there is no withholding tax and dividends received and distributed by the parent company might not be taxed at the corporate level, subject to certain conditions.
It might also make sense to structure your business combining an offshore company with an onshore entity.
Setting up an onshore company has its benefits. You may establish your physical headquarters and offices, taking on loans or venture capital, hiring staff, health insurance, greater reputation and potential for M&A or exit opportunities, and compliance with local laws and regulations.
Establishing onshore may allow you to immigrate, get a work permit and tax residency. In addition, doing business with an onshore entity removes the stigma or difficulty of offshore business.
With the right corporate structure, you can benefit from both the onshore and offshore world.
If you combine an onshore company with an offshore company, and is properly structured with transfer pricing standards, you might still benefit from a 0% or low taxation but with greater reputation, more options and ease of doing business.
As we can see there is no one size fits all solution and what works for another may not work for you.
Also, tax laws and regulations change periodically and you want to be well-informed when making a decision.
At Flag Theory we design a holistic and customized offshore strategy considering all factors and caveats to find a solution for each one of them.
We are at your disposal to have a call and discuss your options according to your specific circumstances and goals.