A Quarterly Newsletter from UAE and Oman Offices

VOL 12, Issue 2 April 2010

OFFSHORE UPDATE

Back to basics – what is an offshore company?

At a time when the market mantra seems to be “getting back to basics” and “revisiting your roots”, for most corporate houses, here is a re-look at some basic FAQs about offshore companies.

What is an offshore company?

The term offshore company is quite generic and ambiguous. It may refer to either a company incorporated outside the jurisdiction of its primary operations regardless of whether that jurisdiction is an offshore financial centre (also known as a non-resident company) i.e. a UK company would be ‘offshore’ for the purposes of a Brazilian national ; or, any company incorporated in an offshore financial centre. Typically, the requirements for company registration under the relevant provision for non-resident status, would be pursuant to some or all of the following criteria:

  • incorporated from outside the jurisdiction in question;
  • not allowed to trade within the jurisdiction in question;

It is worth mentioning here that taxation of a company somewhere other than its place of incorporation is not by any means a concept exclusive to the offshore world. e.g., a UK company which traded exclusively in Belgium – if the directors of this company were based in Belgium, the company would be subject to tax in Belgium.

What are the typical benefits of an offshore company?

Taxation – In most jurisdictions, regulatory authorities will typically not seek to tax companies which they treat as non-resident save perhaps for a nominal fee in some of them like Isle of Man, Jersey, etc.

Simplicity in Incorporation and Reporting requirements – Except for regulated businesses, some jurisdictions make it relatively simple to set up and maintain companies especially with reference to lesser reporting requirements than the “onshore” jurisdictions. The level of information of course would vary from jurisdiction to jurisdiction.

Legal / Asset protection – some jurisdictions have stricter provisions for allowing a court to pierce the corporate veil, and in many cases, corporate governance rules require the laws of the jurisdiction where the corporation is incorporated, rather than where it is being litigated against, to apply.

Anonymity – by carrying out transactions in the name of a private company, the name of the underlying principal / beneficial owner may be kept out of documentation since the company is a separate legal entity. Having said that, current anti-money laundering regulations often require banks and other professionals to look through structures. Disclosure of beneficial ownership in companies is now mandatory in most jurisdictions. This will always be the case for any reputable bank but this does not render ineffective the use of corporate structures, rather it ensures they remain legally compliant.

Thin capitalisation – Some offshore jurisdictions tend not to impose “thin capitalisation” rules on companies (except on banks and insurance companies), allowing them to be formed with a purely nominal capital investment.

What are the typical uses of offshore companies?

Property Ownership – There are often significant advantages in using an offshore holding company for the purpose of holding property. The advantages of such an arrangement include the avoidance of inheritance tax, capital gains tax and the ease of sale which can be achieved by transferring the property owned by the company and reduction of property purchase costs to the onward purchasers.

Investment Companies – Funds accumulated through investment companies set up in offshore areas can be invested or deposited throughout the world and whilst generally returns or interest payable in respect of these funds will be subject to local taxation, there are a number of offshore areas in which funds may be placed as bank deposits where the interest and/or the capital gains are paid and kept at gross levels. Offshore jurisdictions are typically less invasive allowing for free enterprise.

Copyrights and Trademarks – Offshore companies can purchase or be assigned the right to use copyright, patent and / or trademarks. Royalties can then be accumulated offshore although often royalties may suffer withholding taxes at source. An interposing holding company in some cases may allow a reduction in the rate of tax withheld at source.

Privacy – A high net-worth individual or corporate group can save unwanted publicity by owning property or other assets through an offshore company.

Nominee arrangements – To provide for the transfer of assets for the next generation in an efficient and discreet fashion. Nominee directors and officers can allow conduct of business transactions while the client remains anonymous.

Possible demerits:

  • Offshore companies are usually prohibited from conducting business in their jurisdiction of incorporation though this very much depends on the jurisdiction in question and type of company.
  • For regulatory reasons, there are often certain restrictions on the type of business which an offshore company can engage in without the need for a license. In practice this is no different from trading ‘onshore’.
  • Due diligence in reputable offshore centers tends to be more strict than most onshore areas. For example, to open a bank account in the name of an offshore company, in order to comply with relevant anti-money laundering regulations, the bank will normally require documents verifying the identity of the signers on the account to be notarized and may require one or more professional reference letters from an attorney, accountant and/or banker who knows the client.
  • Certain countries have “anti-tax haven” legislation which makes it difficult to conduct business in those countries using an offshore company.
  • When a shareholder of an offshore company dies, it is usually necessary to have the will admitted to probate in the offshore jurisdiction as well (or, if intestate, to have the letters of administration re-sealed in that jurisdiction), which can add to cost, delay and inconvenience in administering the deceased’s estate.

Some prominent offshore jurisdictions

It is possible to incorporate offshore companies in many jurisdictions. In some onshore jurisdictions, there are particular types of companies which offer many of the advantages of typical offshore structures. Here’s a list (not exhaustive) of some of the jurisdictions:-

Anguilla; Bahamas; Barbados: Belize; Bermuda; British Virgin Islands; Cayman Islands; Cyprus; Guernsey; Hong Kong; Isle of Man; Jersey; Mauritius; Jebel Ali Free Zone (Dubai, UAE); Ras Al Khaimah Free Zone (UAE); Seychelles; Singapore; United Kingdom; Vanuatu.

(This article is contributed by S.D.Pereira, Partner and Chaitanya Kirtikar, Asst. Manager – Offshore Department.).