Offshore Company vs. Offshore Income: What You Need to Know

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Over the years, setting up an offshore entity has been one of the chosen ways for businesses to enjoy better asset protection and reduce their tax burden legally.

But very often, people tend to confuse an offshore company with offshore income. While offshore income is primarily a concept relevant to taxation, an offshore company is merely a structure for carrying out business.

Having said that, an offshore company may also benefit from favorable taxation laws regarding offshore income.

This article tells you everything you need to know about the two.

What is an offshore company?

An offshore company refers to a corporate entity incorporated outside the jurisdiction where the operations are primarily carried out, and the stakeholders reside.

The term offshore means something that is located outside or abroad.

Setting up such a company for business activities that comply with the law is perfectly legal.

Suppose you are based in Singapore and decide to incorporate a company in Hong Kong. In that case, your Hong Kong company will be an offshore company.

Similarly, if you are located in Hong Kong and decided to set up a company in Malaysia, it will be an offshore company.

While you can set up an offshore entity in a jurisdiction of your choice, some destinations work better than the rest due to attractive tax structures and corporate compliance requirements.

It is always better to evaluate the pros and cons of setting up an offshore company in the destination of your choice before you move ahead with the incorporation process.

A few pointers to keep in mind when you are considering incorporating an offshore company:

  • What is the purpose of your offshore company?
  • Do you want to set up your offshore company in a common law or civil law country?
  • Are there any restrictions on the type of activities your offshore company can carry out in the jurisdiction of your choice?
  • Is it easy for an offshore company to open a bank account in the country you are considering?

Features and benefits of setting up an offshore company

When you register an offshore company it’s important to understand factors that will be able to benefit you from setting one up.

Here are some of the key features and benefits of setting up an offshore company:

It can help you save on taxes

Reducing tax liability legally is one of the key concerns for business owners across the globe.

Typically, offshore structures are chosen for the attractive taxation regime of the country of incorporation.

For example, setting up a Hong Kong offshore company means that dividends declared will not attract taxes, making Hong Kong a preferred choice for doing business.

There is also no capital gains taxes in Hong Kong. This means no tax is levied on the profits from the sale or disposal of an asset unless facts establish that the disposal was in the nature of a trade.

Companies set up in Hong Kong that have operations generating profit outside Hong Kong don’t have to pay profit tax in Hong Kong.

It offers better confidentiality

Several offshore jurisdictions have strict privacy laws that prohibit government authorities and financial institutions from disclosing the details of company directors, shareholders, company bank accounts, etc., other than in exceptional circumstances.

This is especially beneficial for new players in the market who do not want their competitors to know about their operations or expansion plans.

Business owners enjoy better asset protection

When you park your assets in a different jurisdiction, you create a protective structure around them to prevent them from being seized due to frivolous litigation or seizures by the government.

For most business owners, setting up an offshore company is one of the preferred ways to safeguard their assets from creditors, attorneys, and plaintiffs.

Some offshore jurisdictions have debtor-friendly laws that make it easy to set up LLCs and trusts to protect the investor’s assets.

If someone wants to enforce a judgment passed against the investor in their home country and access their assets for setting unpaid debts, they would have to go through a circuitous path to get access to the offshore assets.

You enjoy relaxed corporate compliance

Corporate law regimes for some parts of offshore company jurisdiction are not strict in terms of taxes, which makes it easier to set up companies.

In some countries, there are no minimum paid-up capital requirements to be met. Offshore companies also have less stringent auditing and financial reporting obligations.

Moreover, some jurisdictions do not have any foreign exchange control regulations, making it easy to freely repatriate any income earned in those countries to any other destination.

Your assets can benefit from political stability

Setting up an offshore business can be a great move for asset protection, especially when if you find the chosen destination to be economically stable.

Carrying out business in a country engaged in civil war or facing a huge recession means constantly fearing external activities completely disrupting your business transactions.

What is a concept of an offshore income?

An offshore income refers to any income generated through activities performed outside your home jurisdiction.

For instance, if you’re a tax resident in that jurisdiction, this counts as offshore income.

Suppose you are a resident of the US and you have an offshore company in Hong Kong. Hong Kong tax laws levy a profit tax on only Hong Kong-source income.

So if you can demonstrate that the earnings of your company are through services rendered in the US, such income can be called offshore income.

Whether you can claim any tax benefits on your offshore income varies depending on the country where you set up an offshore company.

For example, suppose a Hong Kong company wants to claim tax benefits for offshore income. In that case, it should actively seek exemption when filing a profit tax return or obtain an advance ruling before commencing business activities.

Only if the Inland Revenue Department accepts the claim can a company benefit from the exemption.

So earning offshore income doesn’t mean it is automatically tax-free. You may still be taxed by your home country.

What are the factors you need to consider for offshore income?

If you want to take the tax benefits associated with offshore income, consider choosing a jurisdiction that follows a territorial tax system while setting up your offshore company.

Only such countries have tax exemptions on offshore income or foreign-earned income.

So, when you set up a company in a country with territorial taxes, you don’t have to pay any taxes on any income earned outside that country.

Another important factor to consider when selecting a jurisdiction with favorable offshore income tax laws is to see whether they have been flagged as a non-cooperative jurisdiction for tax purposes by the European Union.

The list, which has existed since 2017 and is updated regularly, identifies jurisdictions that do not have good tax governance in place to fight off tax evasion and avoidance.

Since such jurisdictions may change their tax regimes to comply with the EU requirements, businesses should not solely choose a jurisdiction for their offshore income tax treatment.

There is a possibility of such countries amending their tax laws to align with international tax standards, and one must evaluate the potential impact of the changes on their tax treatment.

For example, although, at present, only income sourced in Hong Kong is subject to profit tax, the Inland Revenue Department is in the process of updating the tax regime.

As part of proposed changes, dividends, disposal gains from shares or equity interest, interest income, and income from IP, which are foreign-sourced income, may be subject to profit tax:

  • When such income is received in Hong Kong; and
  • The relevant taxpayer fails to meet the requirements set out by the Inland Revenue Department

Bottom Line

Whether you want to reduce your tax burden, protect your assets, or enjoy better privacy, setting up a company in a foreign jurisdiction is a great option.

While there are several countries you can consider for offshore companies, make sure to pick one that meets your requirements. Don’t opt for the most popular destination.

If you’re considering Hong Kong for your next offshore venture, it can be an excellent choice for corporations looking for a new home for their business.

Get in touch with Air Corporate and let our experts help you start your offshore business in Hong Kong the right way.

When is it illegal to set up an offshore company?

It is illegal only when you intend to use the offshore entity to evade taxes or money laundering activities.

How long does it take to incorporate an offshore company?

The incorporation process varies depending on the jurisdiction you choose.

Typically, most countries offer a hassle-free process of setting up an offshore entity in a bid to attract more foreign companies.

For instance, you can complete the entire process of setting up a Hong Kong offshore company in just a few days.

I pay taxes in the country where I live. Do I have to file my tax return in the country where I have set up an offshore entity?

This depends on the tax laws of the country where you have set up the company. Always make sure to seek proper legal, tax, and accounting advice to stay in compliance with the law.

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Vivian Au

For many years, I worked at big accounting and company secretary firms in Hong Kong. I started Air Corporate to make the life of entrepreneurs and SMEs easy.

Vivian Au

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