Offshore Companies in More Depth


#1

Offshore Companies in More Depth:

International Business Companies (offshore corporations) have many features, which have proven to be very attractive to both businesses and individuals. For example, offshore corporations can defer taxation of most types of income while also providing maximum privacy for its shareholders.

The term “offshore” generally refers to any jurisdiction, which offers little or no taxation to foreign investors. There are presently almost 40 countries and territories around the world, which market themselves as “tax havens”. Most of these jurisdictions allow foreign nationals to structure a corporation, which can carry on business, at very low rates of taxation, or without any taxation at all. When used properly an offshore corporation can act as an effective tool in an individual’s asset protection and/or tax planning arsenal.

Taxation of IBCs: The IRS’ Position

There was a time when U.S. taxpayers (corporations or individuals) could defer taxes simply by establishing an offshore corporation. Since the corporation was a foreign entity, its shareholders had to pay no U.S. income tax until they received dividends. Unfortunately, times have changed. The IRS now looks through offshore corporations and taxes US citizens on the company’s earnings. More importantly, if the corporation’s income is primarily “passive” income, such as securities or interest income, the IRS imposes penalty charges on the corporation’s shareholders.

Fortunately, there are exceptions to these rules. First, the “look through” rule only applies to controlled foreign corporations (CFCs) who deal in passive business activities. Thus, if you de-control your company, i.e. spread the ownership among a group of people, you are not subject to the rule. Alternatively, you can defer taxation of income from non-passive activities such as real estate management, international trade, or manufacturing. Thus, there are still some strategies, which can be used to defer your tax liability indefinitely.

Nonetheless, even if you beat the “look through” (CFCs) rule by de-controlling your company, there is a second set of rules, which the IRS uses to tax offshore profits. These are the Passive Foreign Investment Company (PFIC) Rules. In order to avoid classification as a Passive Foreign Investment Company, and its penalties, at least 30% of your income must be “active” income. Active income can include any of the non-passive income categories described above, plus any fee income charged by your company.

Fortunately, there are also some exceptions to the PFIC rules. Companies which have been granted banking or insurance licenses are treated differently by the IRS. These companies are generally exempt from the PFIC rules.

Although obtaining a banking or insurance license is not an easy task, such licenses are not limited to large banking or insurance institutions. Where a group of investors can demonstrate sufficient wealth and banking experience, coupled with an adequate business plan, many jurisdictions will issue, at least a restricted banking license. Similarly, where there is a demonstrated need for a company or group to self-insure or otherwise have a common insurance fund pool, many jurisdictions will issue restricted insurance licenses.

Privacy and Asset Protection

Most jurisdictions with IBC legislation, do not keep or publish any records of either Directors, Officers or Shareholders. Many jurisdictions allow offshore corporations to issue bearer shares. Bearer shares are certificates of stock, which do not name the individual owner. Rather they have a number, which the corporation registers so that the owner’s name is never revealed. The holder redeems the share much like a bond. Countries permitting bearer shares include Antigua, Austria, Bahamas, British Virgin Islands, Cayman Islands, Costa Rica, Germany, Liberia, Liechtenstein, Malta, Netherlands Antilles, Panama, Saudi Arabia and Switzerland. For U.S. tax purposes, bearer shares are treated as stock. If you own them, it is your responsibility to report them as you would any other stock.

When asset searches fail to identify any substantial source of funds, many plaintiffs’ attorney decline to pursue the matter. In this manner, the offshore corporation can act as a simple asset protection mechanism.

Conclusion and List of Jurisdictions

The following jurisdictions have enacted legislation allowing for the operation of IBCs or similar entities.

Andorra
Anguilla- Overseas Territory of the UK
Antigua and Barbuda
Aruba - Kingdom of the Netherlands
Commonwealth of the Bahamas –UK
Barbados
Belize
British Virgin Islands – UK
Cayman Islands – UK
Cook Islands - New Zealand
The Commonwealth of Dominica
Gibraltar – UK
Grenada
Guernsey – UK
Isle of Man – UK
Jersey – UK
Liberia
The Principality of Liechtenstein
The Principality of Luxembourg
The Republic of the Maldives
The Republic of the Marshall Islands
The Principality of Monaco
Montserrat – UK
The Republic of Nauru
Netherlands Antilles - Kingdom of the Netherlands
Niue - New Zealand
Panama
Samoa
The Republic of the Seychelles
St Lucia
The Federation of St. Christopher & Nevis
St. Vincent and the Grenadines
Turks & Caicos – UK
Vanuatu


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#2

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