Offshore companies are business entities created outside of the jurisdiction of the United States. They can be used as an effective tool for avoiding taxes and regulations. They are also used by criminals to launder money and avoid prosecution.
Offshore Companies Pros
1) Tax-Free Income
An offshore company is a legal entity that does not have any physical presence in the U.S. This means it cannot pay taxes or file tax returns, so all its profits are passed on to shareholders without being taxed. The only income that may be subject to taxation is dividends from foreign subsidiaries.
2) Low Cost
Setting up an offshore company is cheaper than opening a traditional bank account. You do not need to open a checking account with a $10,000 minimum balance for example. Most of the time, the tax-free income alone makes it worthwhile to register in another country.
You own your company’s records; they are stored off-site, out of reach of the IRS. There is no way to link you to the company if there is ever a problem.
4) Asset Protection
You own everything about your company – its name, address, bank accounts, employees, etc. No one has access to them except you. If something happens to your company, you lose nothing but time.
5) Ownership Flexibility
You can change the ownership structure whenever you want. For example, you might decide to sell your shares to another person after two years, when their credit score improves.
6) Limited Liability
If you set up an offshore company in Panama, you won’t face personal liability for debts incurred by the company.
7) Business Opportunities
An offshore company is an excellent way to start your own business because you don’t need to worry about complying with complicated local laws. It doesn’t matter where you live, since the company will operate legally anywhere in the world. However, speaking outside of just taxation, why not utilize the benefit of the offshore
However, keep in mind that offshore companies come with some disadvantages too. Generally speaking, the Cons will differ in a case-by-case situation.
Offshore Company Cons
1) Double Taxation
The country where the company is registered will impose corporate income tax on its worldwide income. In addition, the company will be required to report its worldwide income on its home country’s tax return.
The process of setting up an offshore company is more complex than establishing a regular corporation. It requires registering the company with the local government, finding a lawyer, and filling out numerous forms.
3) Compliance Costs
In order to comply with various rules and regulations, offshore companies incur extra costs. These include filing fees, annual accounting fees, and other administrative expenses.
4) Reporting Requirements
Companies must file reports with local governments and financial institutions such as banks. Failure to comply could result in fines or even imprisonment.
5) Lack of Control
Once the company is established, you have little control over how it operates. Any decision made by the board of directors becomes final.
6) High Fees
Fees charged by lawyers and accountants can add up quickly. However, these services are necessary for running a successful offshore company. There are some exceptions where governance aspects of your offshore company can be handled by legal entities such as Hong Kong’s company secretaries which handle all your corporate reporting to the government even if the company is not in Hong Kong.
7) Lack of Transparency
As mentioned earlier, offshore companies don’t have to disclose anything about their owners or operations. They also don’t have much information available online.
8) Non-Resident Status
Non-residents aren’t eligible to serve on the boards of directors of offshore companies. This means that non-resident shareholders may find themselves excluded from important decisions affecting the company.
9) Poor Reputation
Some people believe that offshore companies are used by criminals to hide money or avoid paying taxes. Others think they’re only useful for hiding assets.
10) Lack of Support
Many countries offer limited support for offshore companies. For instance, there are no reciprocal agreements between most countries and offshore jurisdictions like Bermuda, British Virgin Islands, Cayman Islands, Curacao, Isle of Man, Jersey, Malta, Netherlands Antilles, Panama, Seychelles, Singapore, Switzerland, USA, etc.
11) Limited Liability Protection
If you run into any problems while operating your offshore company, you won’t be able to sue anyone but yourself. You’ll lose everything including your personal possessions.
12) You’re Liable for Money Taken Out
Setting up an offshore company doesn’t provide any savings since you still pay tax on your worldwide income. If you want to reduce your global tax burden, you should consider establishing multiple companies instead of one offshore entity. Once you move money out of an offshore location, you will be liable for that income in your home country.
13) Difficult to Operate
The process of setting up an offshore company involves many steps so it might take months before you see results. It requires a lot of time and energy especially if you decide to do it yourself.
14) More Complexity
Offshore companies come with more complexity than domestic corporations. In addition to complying with foreign law, you must comply with foreign tax authorities. Even if the offshore location offers great or even no tax incentives, you still need to report to this country’s tax regime annually.
An offshore company allows you to receive benefits like privacy, confidentiality, asset protection, and ownership diversification without being subject to taxation or financial disclosure. The trade-off is that offshore companies incur fees, costs, and other cons.
However, if you plan to incorporate offshore, then you should know about the pros and cons of incorporating offshore. Every location and jurisdiction is different, and it’s difficult to really know the true efficacy of an offshore company for your business.
Hong Kong is one of the most popular offshore jurisdictions for a lot of companies. If you’re interested in weighing Hong Kong as an option, contact us for more information and one of our experts will walk you through Hong Kong as an offshore incorporation option.