While it is true that there will always be instances of shady offshore deals, the vast majority of offshore investment are perfectly legal.
Offshore investment is often demonised in the media, which paints a picture of investors stashing their money with some illegal company located on an obscure Caribbean island where the tax rate is next to nothing.
Moving or setting up companies offshores are often associated with tax benefits. The common reference to an offshore company is a company which is incorporated in a tax-free or low jurisdiction that can trade across international borders with no or low tax bills and without the need to file accounts.
While this is attractive, the major risk in many offshore jurisdictions is the fact that almost all corporate and legal service providers do not accept cases that are suspected to be involved in facilitating money laundering or illegal transactions and activities.
By and large, a typical use of an offshore company are mainly for mainstream business activities such as trading, investment holding, intellectual property, management, fund management, property owning, shipping and aircraft leasing, insurance, personal or consultancy services, employment, group holdings and banking.
Some distinct benefits of using offshore jurisdictions for businesses include asset protection, because many offshore jurisdictions do not allow the enforcement of civil orders from other countries. This includes proceedings related to bankruptcies.
This is one of the main reasons many companies use offshore companies as a haven for protection against creditors because it is very safe, save where the asset derived is from criminal or illegal activities or fraud of creditors. You get some degree of asset protection as long as you are not into illegal activity.
Another is privacy and confidentiality. Offshore jurisdictions have very strong privacy protection in most jurisdictions. There is no public registry to search for information such as the names of shareholders. This is also one compelling reason why people choose to go offshore.
Then there is the tax savings. This is the major attraction for companies or individuals to go offshore, because some offshore jurisdictions offer very attractive tax rates, with even zero tax rate regimes.
If you use an appropriate offshore structure, it will usually result in tax savings. For example, Labuan allows a choice of 3% tax on net profit or a flat RM20,000 if you operate under the status of Labuan Business Activity. But in order to put the correct structure in place, you will need to consult a tax expert who is familiar with the offshore tax regime.
Before a structure us put in place, it should also be reviewed by a tax expert familiar with offshore tax legislation and by the client’s own local tax advisor. One of the key areas that need to be looked into would be the avoidance of the incidence of double taxation.
Next is for business or investment holding purposes. Even if it is offshore, the business needs have a permanent establishment. Let us say in Labuan, you will need to have an office or staff stationed there to prove that the set-up is not a sham.
Functions of Offshore Businesses
A common use of offshore companies is in trading, i.e. the buying and selling of goods. The offshore company trades in its own account and is an actual party to a trading transaction and facilitating shipment of goods is directly between the seller and the end buyer.
The offshore company may act as an intermediary who buys from the supplier and sells to the customer or it may act as a marketing agent, handling documents without handling shipment. The benefit of this is that it helps build profits that would otherwise be taxed at a higher rate.
For example, Hong Kong is a popular destination for offshore trading companies as it is an ideal place with a respected legal system, low taxation and world class communications, banking and shipping facilities.
As a property owning companies, an offshore entity could be set up to hold the group’s assets. The benefit is that they can avoid taxes like capital gain and inheritance tax (in certain jurisdictions). It also makes the transfer of ownership in the properties a lot easier through the offshore company, besides avoiding stamp duties, legal fees and unwanted publicity.
Another is professional services companies. A professional services company could employ individuals who earn substantial fees from giving out consultation work; for example, consultants, writers, sports people and entertainers.
Steps could be carried out to form an offshore company, have a contract of employment with the company and the pay out in the form of consultant fees or salary in the most tax advantageous way for the individual. This is ideal for consultants who charge a substantial fee.
For example, an European oil and gas consultant may provide consultation to his clients who are situated in the Asia Pacific, West Africa and Middle East. Without proper tax planning in place, he would have to invoice his clients from his base in Europe. As a result, he will be subjected to the high taxes in Europe.
But if he has formed an offshore company in Labuan, he can now issue invoices through the offshore company. He could still conduct his consultation as usual to his clients based in Asia Pacific, West Africa and Middle East. But his clients will now pay to his offshore bank account outside of Europe and he is able to save a huge amount of tax.
Offshore companies can also be used as an investment holding company, to take advantage of the double tax treaty arrangements to reduce or eliminate withholding tax. For companies seeking intellectual property rights, offshore company purchases of rights to intellectual property such as copyrights, patents or technical know-how could then be sub-licensed.
In this situation, it may be desirable that those intellectual properties are held by the offshore entity, if the royalties are subjected to withholding tax in a high tax country.
When we look at a target country for potential investment, we first need to understand the implications of the taxation that is applicable in the jurisdiction.
For example if you are looking to invest in China, the ideal vehicle to do so would be via a Hong Kong registered company. This is because China and Hong Kong have a very favourable double tax treaty agreement in place that allows the money from China whether in the form of royalties, interest, dividends or capital gains, to be brought back to the Hong Kong investment vehicle with the least tax impact.
When selecting an appropriate offshore haven, some of the aspects that you may need to find out and be clear about include:
- Minimum/maximum number of directors/shareholders allowed
- Exchange control regime
- Approximate time to incorporate
- Taxation rules on foreign profit
- Ability to hold directors and shareholders meetings offshore
- Requirement of local directors/secretary
- Requirement to file annual returns or similar disclosures
- Registered office/agent
- Disclosure requirements, if any, of beneficial ownership
- Setting up annual fees and tax planning advisory fees
Despite the many pitfalls of offshore investing, it can still pay off to shift some investment assets from one jurisdiction to another. As with even the most insignificant investments, do your research before parting with your money – unless you’re prepared to lose it!
No comments:
Post a Comment