Practical Forms of Using Offshore Companies
Offshore companies formed in Panama, BVI are useful for several main purposes:
1. Investment Holding Corporation
Both corporations and individuals make substantial use of offshore companies as vehicles to protect and hold investment portfolios. Such portfolios may consist of stocks, bonds, cash, and other investments. Cash assets held by offshore companies may earn deposit interests free of tax.
Personal offshore holding companies are often used by high net worth individuals to hold investments made in different markets and countries. Personal holding companies also provide the confidentiality required by the sophisticated investors; while at the same time, saving in professional and other fees associated with other structures.
In such a structure, tax is not payable on income generated from the investment holding company’s assets, thereby increasing the amount available for other purposes.
2. Finance Corporation
Offshore finance companies can be established to fulfil a personal or corporate group treasury management function. Interest payments from group companies to the offshore finance subsidiary may be subject to withholding taxes usually lower than corporate taxes levied otherwise. On the other hand, the interest paid would be a deductible cost, for taxation purposes, and so consolidating interest payments in the offshore finance company may provide a tax saving benefit.
Offshore finance companies are often utilized as part of structures for acquiring foreign entities, real estate and other investment related projects.
Other benefits of such a company to the multinational entrepreneur are:
* Protection of capital funds introduced from abroad to foster a self-owned project.
* Tax relief on the cost of borrowing the funds.
* Freedom to return interest on funds lent to the tax haven, so they can be reinvested at the best tax-free advantage.
3. Real Estate Holding Corporation
The ownership of overseas real estate and land by an offshore company can often create many tax advantages. Additionally, using a trust or a Panama Private Foundation to own the shares in the offshore company can give rise to additional tax advantages in the client’s country of residence and simplifies procedures in the event of the client’s death.
The main benefits are:
* Avoidance in most cases of local inheritance taxes on the property in the event of death of the beneficial owner.
* Avoidance in most cases of local succession laws which can, in certain countries, stipulate to whom the property must pass.
* Elimination in most cases of local transfer and capital gains taxes upon resale of the property.
* Simplification of procedure upon resale of the property through the sale of the real estate holding company to the buyer saving both time and costs.
* Exclusion of foreign exchange controls restrictions, in certain countries, in the event of the beneficial owner taking up residence in the property.
* Ease of transfer to heirs in the event of the beneficial owner’s death.
* Confidentiality of ownership.
4. Trading Corporation
Offshore trading companies are a proven efficient vehicle to expatriate capital and eliminate exchange controls restrictions through over-invoicing or under invoicing export/import transactions.
If an offshore trading company were to procure products from one country, and then sell them to another country, the profits arising our of the transaction may be accumulated in the offshore company, free from taxation in the offshore centre.
Another common use of an offshore trading company is for bulk purchasing. Such a structure is typically established by a group of associated or unrelated companies to benefit from economics of scale and reduced administrative costs, plus significant tax savings.
Significant benefits achieved by this arrangement, include receipt of bulk buying discounts and accumulation in a tax-free area of the net mark-up on resales to the manufacturing units.
Additionally, factoring trading debts of a company in a high tax jurisdiction through an offshore company established in a low tax jurisdiction may assist in transferring funds to the low tax jurisdiction.
Our Corporate Services Group provide management to several offshore factoring and international trading companies engaged in trading debts and re-invoicing operations.
5. Venture Capital Corporation
Offshore companies are regularly employed to raise venture capital through
equity or debt issues in capital markets. Many corporations have sough to mitigate risk by accessing markets
through offshore companies while at the same time reducing certain taxes.
This technique is a refinement of the offshore investment holding company. With prudent management, it can prove very profitable by itself, apart from accumulating tax-free profits.
6. Intellectual Property, Licensing or Franchising Corporation
Intellectual property, including computer software, technical know-how, patents, copyrights and trademarks can be owned by or assigned to an offshore company.
Upon the acquisition of rights, the offshore company can then enter into license or franchise agreements with companies interested in the exploitationof such rights around the world. The income arising from such arrangements can be accumulated offshore.
7. Plant Rental Corporation
If a company in a service industry operates affiliated companies in various countries, the formation and financing of an offshore company to acquire capital equipment used in its operations could prove beneficial. The equipment is rented to the affiliate at market rates, and net income is left to accumulate in the offshore company. Alternatively, it can be attractive for a company in a high tax area to purchase the capital equipment, claim the usual allowances, and lease the equipment to the offshore company at commercial rates. Hence, profits are generated, which are not liable to tax assessment, while rental payments in most cases are tax deducible in their countries of origin.
8. Shipping Corporation
An offshore corporation may own or charter ships, profits from which can be accumulated in tax-free area.
9. Personal Services Corporation
Many individuals engaged in the provision of professional services in the
construction, engineering, aviation, finance, computer, film, and entertainment industries can achieve considerable tax saving benefits through the establishment of an offshore personal service company.
The offshore company can contract to supply the services of the individual outside the country in which he/she is normally resident and the fees earned can accumulate offshore, free from taxation in the offshore centre. Payments to the individual can then be structured in such a way to minimize income tax.
10. Employment Corporation
Many companies utilize offshore companies for the employment of staff working on overseas assignments. This helps to reduce the costs associated with payroll and travel expense administration, and may provide a tax and social security saving benefit for the employees.
While not providing any specific legal or tax counsel, nevertheless for some individuals or companies, offshore companies may offer specific tax advantages over other jurisdictions. Any potential client seeking any of these structures should consult with their individual legal or tax advisor.