OFFSHORE ASSET PROTECTION STRUCTURES – THE BELIZE LLC

An LLC (Limited Liability Corporation) is, effectively, a hybrid of a Limited Company and a Partnership.

 

An LLC is like a Company in that that liability of the Company is limited to the capital invested and assets purchased by the Company.

 

Like a partnership an LLC is a flow through entity: An LLC does not have to file a tax return; the nett profits are passed through to the members of the LLC (members are to an LLC what shareholders are to a Limited Company) who are responsible for taxes (if applicable) in their country of tax residence (ie same tax treatment as Partners in the case of a Partnership).

 

From a member/partner’s viewpoint, in terms of liability, an LLC is superior to a Limited Partnership (“LP”) because in the case of a Limited Partnership (which is constituted by a Limited Partner and a General Partner) one partner can be made liable for the debts of the partnership. In the case of an LLC the liability of the members is limited to the extent of the member’s capital contribution (unless a personal guarantee has been given by a member to a supplier of the LLC).

 

LLC members can fully participate in the management of the LLC (which is different to an LP – in the case of an LP the Limited Partner usually can’t participate in the management of the enterprise without risking his/her Limited Liability status).

 

Key Benefits of the Belize LLC include:

 

  • Privacy: There is no public register of owners/members or Directors/Managers in Belize
  • Tax Effectiveness: Belize LLCs are not liable for corporate tax or business tax or any other form of tax in Belize
  • Simplicity: There is no requirement in Belize to prepare annual accounts or appoint an auditor
  • Flexibility: Belize LLCs can be used to own/operate a wide range of businesses as of right
  • Asset Protection: Before you can sue a Belize LLC you have to pay into Court a deposit being an amount equal to the greater of (i) one half of the amount claimed or $US50,000 whichever is the greater

 

Other features of the Belize LLC Law include:

1. A Belize LLC:

(a)   can be structured according to its own rules rather than being dictated to by statute

(b)   is a legal entity with separate rights and liabilities distinct from its members & managers. This means no-one other than the LLC itself can be made liable for the debts of the LLC, (save for the case of a personal guarantee)

(c)    Somebody suing a Belize LLC member at best can only have the members rights assigned to him/her; he/she can’t participate in the management of the LLC

2. Belize doesn’t recognize foreign judgments. Only a judgment made by a Belize Court can be executed against a Belize LLC

3. LLCs from other jurisdictions can migrate to Belize and vice versa (ie a Belize LLC can redomicile and become eg a Nevis LLC)

4. Civil legal proceedings against a Belize LLC must be held in private (and there are penalties for unauthorised disclosure).

 

How To Set Up a Mobile App Business Offshore

There has been a huge explosion of mobile app businesses in the past few years (including businesses which might operate in a similar way to Uber or AirBnB).

 

Such a business (ie a predominantly Online Business – where services are both produced and delivered online) lends itself particularly well to an “Offshore” Corporate Structuring Plan. See below “HOW TO SET UP AN ONLINE BUSINESS OFFSHORE” which explains in simple/general terms how it can work.

 

Structuring Options

 

These kind of businesses usually operate in one of two ways:

 

  1. Where all the marketing and service delivery is done online and the customer deals with one central Trading (nil or low tax jurisdiction incorporated) Company
  2.  Where the business has its headquarters Offshore but for credibility/marketing reasons (or for licensing reasons) needs an on the ground presence in each of the country/s where it is selling/providing services

 

In the latter example a local subsidiary company is usually incorporated to market to or liaise with the customer but certain key functions are exported to (and a large chunk of the sale price diverted to) the business’s Trading Company (or a tax haven subsidiary thereof)

 

In either example what you normally have is a twin company structure at the top of the tree ie a Trading Company + an IP Company.

 

How and Why To Set Up An Offshore IP Company

 

Intellectual property (“IP”) is a creation of the mind and includes things like inventions, literary and artistic works, designs and symbols, software code, names and images used in business.

 

IP is commonly protected in law by way of patents, copyright and trademarks which enable the person who came up with the idea to securely earn recognition or financial benefit from whatever it is he/she has invented or created.

 

An Offshore IP company is an ideal vehicle for the administration and management of licenses and intellectual properties including computer software, technical know-how, patents, copyrights and trademarks.

 

Practicalities

 

So how does it work from a practical perspective?

 

At core the Offshore IP Company (which is usually set up in a nil or low tax country) is used to divert income from Trading Companies or Businesses trading in developed or high tax countries.

 

The first step is to transfer ownership of the IP rights to the Offshore Company/Entity.

 

Once that’s done the Trading Business then enters into a legal agreement (contract) with the IP Company whereby, in return for being allowed to use the IP, the Trading Company agrees to pay the Company royalties or license fees. The income arising from these agreements can then be accumulated offshore in a nil or low tax environment.

 

Timing is of critical importance – It is clearly preferable to acquire the IP (for example, a patent) at the earliest possible time (e.g. at the patent pending stage) before the IP becomes highly valuable. That way the capital payment for the acquisition of the IP (e.g. patent) can be set at a lower amount i.e. before its true worth has been determined in/by the market. (These capital payments may even be deferred and or staggered by way of an instalment contract such as would enable the IP Company to use subsequent royalty payments to fund the cost of the IP).
If a deal is struck for the Offshore IP Company to buy the IP before the IP gives rise to a product or service which is offered/advertised in the market the IP might even be transferred for nominal consideration enabling the IP inventor/creator to transfer patent, copyright or trademarks in favour of the low/nil tax company before the IP suffers significant appreciation in value.

 

Businesses Who Pay Royalties or License Fees for the use of IP

 

Once it has acquired the Property the Offshore IP Company can then issue (IP) sub-licenses or exploitation rights to appropriate third party structures.
For example, a majority of software companies license their users through companies which are established in an offshore jurisdiction, or through a firm, which is not established in a classical offshore jurisdiction, but is owned or controlled by such a firm.

 

Typical examples of businesses that might pay license fees to a nil/low tax Offshore Company include:
- Software companies
- Companies doing business in information technologies
- License and copyrights to books, articles, music, films, etc.
- Users of Franchise operating systems

- Trademark product (e.g. Clothes/Consumer Goods/Accessories etc. Brand) manufacturers and or retailers

 

In some circumstances the royalties may be subject to withholding tax at source, however, the interposing of a second company in another jurisdiction may reduce the rate of tax withheld at source (a carefully selected jurisdiction can withhold taxes on royalty payments with the commercial application of double tax treaties).

 

Structuring Options

 

Another option, whilst you are still in the process of creating a new piece of intellectual property, is to involve or engage an offshore (nil tax) company as a foreign partner or financial sponsor. Participation in development at this early stage would entitle it to register as the owner or co-owner of the property.

 

If you involve an offshore company later, you have to sell or assign the title to the property to the offshore company, and these kind of transactions requires at the least that a fair market price deal be apparent as if no associated parties were involved (+ the transfer may involve the incurring of some CGT on the part of the inventor/creator of the IP).

 

Benefits of an Offshore IP Company


There are numerous benefits that an IP holding company can deliver including:

 

  • By placing your IP in one entity you are able to streamline the internal processes for inter-group licensing
  • Cross-jurisdictional tax issues become simpler as you will be regularly licensing IP between the same jurisdictions
  • You can justify staffing that entity with people who have the skills to manage the same so protecting valuable assets of the company further, simplifying the licensing process
  • Assets can be valued due to the income stream that accrues for the benefit of the IP holding company
  • The value of the shares in the entity can be included into the accounts which will benefit the shareholders of the holding company
  • You can split your income streams in two enabling you to sell one chunk of your business first up (i.e. the operational business) whilst retaining the other (i.e. IP) arm of the business which would entitle you to receive passive income
  • If your business or trading company ever gets sued and the IP is owned by a 2nd (e.g. Offshore) Company the most precious asset of your business can/will not be lost.
  • You get to retain ownership of your IP in a highly private environment where no one knows what you own or how much the IP is worth. (There have been many documented cases of inventors and artists who rise suddenly to fame only to lose their fortune just as quickly via a law suit filed by a disgruntled gold digging ex-lover or confidante… The chances of that happening if your IP is owned by a privacy haven company are GREATLY reduced)
  • You can significantly if not dramatically reduce the tax that your operating/trading company would otherwise have to pay

 

Proprietors Holding Entities

 

By the time each of the business owners becomes entitled to a share of the profits he/she would be wise to have already in place a nil tax entity to hold his/her interests in the business.

 

For many clients all that they will need is a Full Nominee IBC (For those who live in countries with Controlled Foreign Corporation Laws a Foundation should be included as part of the Corporate Structure). Such an entity can enable you, during the lifetime of the business, to avoid paying tax at home on all but the monies the business pays you (eg by way of wages or consulting fees or profit share). The nett result is tax deferral (ie you avoid having to pay tax on the business’s profits until the business is sold or shut down. Meanwhile (without having to pay tax each year on the business’s profits) your capital/asset base should have  grown massively thanks the power of compounding.

 

How To Set Up An Online Business Offshore

 

Offshore Companies are commonly used to own/operate online businesses. Please check out these links for some examples of how certain kinds of businesses can be set up “Offshore”:

http://offshoreincorporate.com/common-offshore-corporate-strategies/#1

http://offshoreincorporate.com/common-offshore-corporate-strategies/#2

 

In principle here’s how it can work:

 

  1. A nil tax offshore company (commonly an International Business Company “IBC”) is incorporated
  2. The IBC owns/operates the web based business (eg ownership of the web-domain and the website/artworks or trademark/s or any sole distributor rights are held by or transferred to the IBC)
  3. An Offshore account (which received payments via a merchant account) is set up in a nil tax banking centre
  4. Ideally the server is located in a country which does not tax business on the basis of server location (eg Singapore)
  5. Customers contract with and pay the IBC. All such monies are banked free of tax in the first instance
  6. You or your local company would be contracted by the IBC to manage sales/delivery of product/website maintenance/whatever.
  7. You would invoice the IBC periodically (eg monthly) for this service which income would be assessable income in your home state – though a smart Tax Accountant should be able to assist you to claim a series of expense against this income (eg home office, equipment, travel, phone/internet/utilities etc) to significantly reduce the amount of tax payable on this income.
  8. Often there is some kind of intellectual property (“IP”) created or behind the website based business (even if it’s just the website/design). It may be advantageous to you down the track if ownership of the business and the IP were held by 2 different entities. What you can do there is set up a 2nd IBC to own the IP. The first IBC (ie the Trading Company) pays license fees periodically to the 2nd IBC which fees wold be receipted tax free. This could be advantageous if you wanted to bring ownership of the web-business onshore or if you wanted to sell the business but keep a passive (potentially tax free) income stream
  9. Ideally once you start to grow you and to add substance you would be wise to set up your MD/Board and or a sales team onshore to take orders and receive income in a low tax onshore environment (eh Hong Kong, Ireland, Singapore, Cyprus etc as per the Amazon/Google model)

 

To minimise the chances of the IBC being taxed onshore ideally the IBC should be (and be seen to be) managed and controlled from offshore. How this can be achieved is including a Nominee Director etc as part of the Corporate structure. See these pages for details of how that can work:

http://offshoreincorporate.com/faq/should-i-engage-nominees-or-should-i-direct-and-hold-the-shares-in-my-offshore-company/

http://offshoreincorporate.com/faq/how-can-i-protect-my-underlying-ownership-of-my-offshore-company-where-a-nominee-is-engaged-to-act-as-director-or-shareholder/

 

As always local laws can have an impact, so be sure to seek local legal/tax/financial advice before committing to set up an Offshore Company for such purposes.

 

When To Add a Trust or Foundation to Your IBC

As alluded to in my last article if you’re going to set up securely Offshore – particularly if you live in a country which has Controlled Foreign Corporation (“CFC”) Laws – you will probably want (and/or need) to include an Offshore Discretionary Trust or (even better still) a tax free Private Foundation as part of your Corporate Structure.

 

Briefly, how the dual structure works is the Company does the business ie it buys and sells, incurs debt, employs staff etc. The Foundation (or Trust) is completely passive ie it just holds the shares of the Company. It’s there to (a) get around CFC laws and (b) so that (ie in the case of a Foundation) you can honestly answer no if anyone ever asks are you the beneficial owner of XYZ Offshore Company Limited?

 

I’m often asked Can I set up a Trust or Foundation later?

 

The answer is yes you can but it might not be the smartest way to go about it. Here’s why:

 

  1. Until such time as the Company is owned by the Foundation (or Trust as the case may be) there is no question that it’s being managed and controlled from onshore and would be classified as a “Controlled Foreign Corporation”. This means almost certainly (until such time as the Trust or Foundation owns/holds the shares of the Company) you would be required by local laws to declare and pay tax at home on the Company’s earnings. If you live in such a country (ie most countries) failure to so declare would be tax evasion the penalty for which is jail time (it’s not worth the risk…AND you’ll sleep better at night).
  2. For a Limited Company to be validly formed shares need to be issued. If you decide to set up your Foundation (or Trust) later (ie after you incorporate your Offshore Company) you would presumably start with a Nominee Shareholder and then transfer ownership of the shares to the Foundation (or Trust as the case may be). When you do transfer the shares:

(a)    A Share Sale/Purchase agreement should be entered into on reasonable commercial terms and signed by the outgoing and new shareholder

(b)   The Foundation/Trust will need to be seen to have paid for the shares

(c)    The price paid for the shares by the Foundation or Trust will need to be seen to be fair market value. If the company has done well in the meantime this could be quite a lot of money (which brings into question another quandary ie how do you get money to the Foundation to buy the shares???)

 

The bottom line is if the above boxes are not ticked the transfer could be set aside later as a sham transaction leaving tax liability in the hands of the former owner (ie you). Hence the wisest thing to do would be to form your Foundation (or Trust) before you incorporate your Tax Free Offshore Company.

 

Local laws can also have an impact. Hence you should seek local legal/financial advice before embarking on a venture such as that described above.

 

SECURE OFFSHORE COMPANY FORMATIONS

There has been much speculation in the press on the likely impact of the Panama leaks on the use of Offshore Companies moving forward.

 

No doubt many people are wondering (possibly even yourself dear reader) is it possible to securely setup Offshore?

 

The short answer is yes it is still possible to set up a secure Offshore Company but as ever the key is attention to detail (no cutting corners!).

 

If I was looking for a Secure Offshore Company Formation/Setup here’s what I would do:

 

 

  • Avoid TIEAs: You will want to ensure that you set up a tax free Offshore Company in a country which has NOT signed a TIEA (ie Tax Information Exchange Agreement) with your home state. Why? Because if you do incorporate your Offshore Company in a country which has a TIEA with your home country (and say the government sees you communicating with or being paid by said Offshore Company) your country’s authorities can simply send an email to the government of the country wherein your Company is incorporated demanding to know the name of the beneficial owner of the Company (and they will be given this info, as of right). Even if what you’re doing is legal the approach governments take here is you are guilty until you prove yourself innocent (which can costs hundreds of thousands of dollars in legal fees). Don’t give your government a free hit. Set up your IBC in a country which has NOT signed a TIEA (ie Tax Information Exchange Agreement) with your home state.

 

 

  • Flexibility: You will want to ensure that you incorporate your company in a country which allows redomiciliation to another tax/privacy haven – this will enable you to keep the company alive but change its nationality if your country’s government decides it wants to sign a TIEA with the government of where your IBC is incorporated (most if not all of the “Offshore” jurisdictions we work with meet this criteria)

 

  • Avoid CFC/ laws: A Controlled Foreign Corporation (“CFC”) Law effectively says “we don’t care who the Director or Shareholder of your Offshore Company is; If you own or have the capacity to own 10% or more of the shares of an Offshore Company it is deemed to be a CFC (in which case you’d be liable to declare and pay tax at home on the Company’s worldwide earnings). If you live a country which has a CFC law – and even if your Company is set up with a Nominee Director and Nominee Shareholder – (unless you have set up a Private Foundation to own/hold the shares of the Company –see below) there can be no argument that you are liable to declare and pay tax at home on the Company’s worldwide earnings (failure to so declare would be an act of tax evasion which is a crime punishable by imprisonment).  Briefly a Foundation should steer you around CFC laws because (a) a Foundation is not a Company and (b) under the general law the beneficial owner of any asset held by a Foundation is the Foundation itself (a Foundation, unlike a Trust is separate legal entity in its own right)

 

  • Avoid AEOI: 82 countries (out of a possible 196) have agreed once each year to automatically share with each other the names of non-resident bank account holders (including corporate bank accounts where the beneficial owner of the Company is a non-resident). This is known as AEOI (Automatic Exchange of Information). To get around this there are 2 things you can do: (a) set up your bank account in a country which has not agreed to be party of the treaty cartel and/or (b) set up a Seychelles Foundation to hold the shares of your Offshore Company. Why? Because Seychelles uniquely has included in its Foundation law a specific provision which expressly says that the legal and beneficial owner of any asset held by a Seychelles Foundation is the Foundation itself. What this means is (and even if you are named as a beneficiary of the Foundation) if anyone ever asks are you the beneficial owner of ZYZ Ltd Offshore Company Ltd you can put our hand on the bible and honestly answer “no”

 

  • Commercial Reality: Make sure your relationship with the Company is clearly documented. The most common way to achieve this is be ensuring that there is an arms length Consultancy Contract in place between you and the company which accurately describes the work you will do for the Company and what you will be paid for that work. That way, if ever asked, you can justify why from a commercial perspective you are communicating with or getting paid by an Offshore Company.

 

  • Choose a low key provider: Why were Mossack Fonseca selected as the target? Because they have a huge presence in the Offshore world and have probably incorporated more Offshore Companies than any other provider. The vultures knew they could do the most damage by hitting the biggest target. Simply put they were an easy target. If you want to minimise the chances of your data being leaked make sure you choose an Offshore Company Formation Service which doesn’t fly so far above the radar

 

  • IT Security: Whatever Offshore Company Formation you choose check to make sure that all their devices, database etc are protected by military grade encryption and that they use a VPN (Virtual Private Network) to hide their IP address when on the nett. (FYI OCI ticks both these boxes)

 

  • Email security: Whatever Offshore Company Formation you choose check to make sure that they offer you the chance to communicate with them via encrypted email Such examples of encrypted email services include GpG/PgP, Protonmail, Safe-mail, Tutanota. Hushmail, Safe-mail etc (FYI OCI assists clients to set up secure email accounts and we insist that clients communicate with us via encrypted email – in fact we have email accounts with all of these providers thereby affording our clientele the widest choice of encrypted email service)

 

I’ve been telling clients for many years, the days of setting up an IBC and just hiding behind the privacy veil (most IBC jurisdictions do not have a public register of shareholders or directors) to get around having to pay tax at home are long gone. You have to be prepared for the worst case scenario ie that your personal details might be hacked or leaked to an outside source such as what happened in the case of Mossack Fonseca.

 

At the very least you will want to be able to raise a legal argument for why you’ve setup (or for why you’re connected with or communicating with or getting paid by) an Offshore Company . (You DO NOT want to risk being charged with tax evasion and sent to jail).  Hopefully the above paragraphs explain (in easy to understand language) how that might be achieved.

 

As always, local laws can have an impact, so be sure to seek local legal/tax/financial advice before committing to set up an Offshore Company.