25 July 2020
How To Set-Up Your First Offshore Company
At some point, every company owner considers to go offshore and it is usually because of two reasons: a huge tax burden that can take up half of the earnings or the desire to secure their income.
Still, less than half the entrepreneurs decide no to do so because they are limited by the fear of the unknown, scarce knowledge on how to start and persistent by myths that have grown up about offshore businesses.
In this article we are going to introduce and explore all aspects related to doing business offshore, point out the differences and give you advice on how to recognize your own needs.
From the beginning – What is an offshore company?
Offshore company refers to a corporation, limited liability company, business company or similar class of entity established and operating outside of its home country. For instance, an offshore company based on St. Vincent may have a bank account in this jurisdiction (or in another country), but it cannot conduct business on the St. Vincent territory.
How to choose the right jurisdiction and the perfect entity?
There are many similarities between offshore companies thus making them seem almost identical at first. However, each entity offers slightly different solutions and each jurisdiction has its own law and is aimed at different activities.
Why is it so important to choose the right jurisdiction and company?
We can illustrate this in an example of a person who would like to handle crypto exchange and trading. He can basically open his company in Panama, Estonia, Cyprus or St. Vincent.
Will his business have the same chances to succeed everywhere? Unfortunately, no.
In the first three countries he will have to face strict regulations of the Stock Exchange, while the last country does not impose heavy restrictions on this activity.
That is why it is so important to clearly define your needs and find the right solution for them.
How to determine your needs?
Begin by considering what your main goal is; will your future business be used exclusively to protect the current assets or perhaps you plan to use it to generate further income?
According to future plans one can choose between dozens of companies e.g. Trust, Foundation, IBC, BC or LLC.
If you intend to generate profit, you most likely need IBC (International Business Company) or LLC (Limited Liability Company). These companies share 2 key similarities: both are legal entities and they limit a member’s responsibility to his participation as a shareholder or partner.
However, the IBC requires at least 3 Directors and 1 or more shareholders who can enjoy participation privacy – for this reason, IBCs are also known as Anonymous Corporations.
On the other hand, the LLC requires a minimum of 2 Managers and 2 or more Partners. Their names must be publicly disclosed in all registration documents, thus providing more transparency. This is usually a requirement in a partner’s country of origin.
The most popular choice for those looking to protect their assets and/or real estate planning is the Trust or (in the case of Panama) the Private Interest Foundation. As we explain in the Offshore Trust, Everything You Should Know, a Trust can take various forms and not only guarantee the protection of the property even in the case of lawsuit, but it also allows benefits from better taxation and increased freedom of investment.
You must also determine what your ideal taxation is – do you want your business to be tax free or do you wish to pay a low tax rate?
We know no one likes to give away their hard-earned money and the first thought is obviously ‘I prefer not to pay any tax’. Let’s take a closer look at this option; jurisdictions known as ‘tax havens’ (Belize for example) give you the opportunity to have zero tax rates and zero reporting requirements in exchange for a small annual fee. This is good as long as you do not need to open a bank account in another jurisdiction.
For example, Singaporean banks automatically reject owners of companies located in Belize who do not pay any tax. Therefore, paying a minimum tax rate can sometimes be better than reducing them completely. This system is used, for example, in the highly respected British Virgin Islands, where due diligence is more rigorous and taxes are minimal but still apply.
How to incorporate?
The opening of the company can be divided into several stages.
First, choose the name of the company. Be aware that some countries prohibit or do not accept certain words in a company name, for example: Royal, University , Bank, Trust, Insurance, Imperial, Municipal, Casino, Fund, Securities, Pharmacy etc.
In addition, the name should be unique and not identical or similar to any existing or already registered company name in the Companies Register.
When filling out the company file, you will be able to come up with three preferred names and the authorities will choose the one that is available.
Then you’ll have to go through the KYC (Know Your Client) and Due Diligence process.
This process will vary from one jurisdiction to another, but the requirements for basic documents are the same everywhere and include: Certified copy of passport, Certified copy of a second ID , Certified copy of utility bill and a reference letter from a professional.
The last step will be to submit the corporation documents. In this stage one has to specify what kind of shares are to be issued (most common options are: “Registered” Shares and “Bearer” Shares) and also determine the director(s) of the company. You can nominate yourself or use the “Nominee” to remain completely anonymous. Additionally, you must choose the shareholders and the secretary.
When your company is set-up you can think about opening a bank account, our article Get Started with Offshore Banking will surely help you with this process.
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