How To Set Up a Tax Free Bitcoin Exchange Offshore

A Bitcoin/Cryptocurrency Exchange Business (ie an Enterprise that offers to buy Cryptocurrencies paying for same in either hard currency or some other form of Cryptocurrency in return for a Commission) lends itself well to an “Offshore” Corporate Structuring Plan.


In principle here’s how it can/will work:


  1. A nil tax offshore company (commonly an International Business Company “IBC”) is incorporated
  2. A website is created and tailor made software developed – the IBC will be the owner of this website and the software and all the hardware required to run it
  3. The IBC owns/operates the 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)
  4. An Offshore account (which received payments via a merchant account) is set up in a nil tax banking centre
  5. Ideally the server is located in a country which does not tax business on the basis of server location (eg Singapore)
  6. Customers contracts with and agreed to pay the IBC a commission on all sales concluded as a consequence of buyer/seller introductions enabled by the site.
  7. All such monies are banked free of tax in the first instance
  8. You or your local company would be contracted by the IBC to manage sales or provide accounting services or do website maintenance/whatever.
  9. 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.
  10. Often there is some kind of intellectual property (“IP”) created or behind such a 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
  11. 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 this page for details of how that can work:


Additionally if you live in a country which has CFC laws (see below which explains what CFC laws are) and/or if you don’t want your local tax authorities to become aware of your Offshore Company’s Bank Account (and, incidentally, your position as “beneficial owner” of the Company) you’d be wise to include a Foundation as part of the Corporate structure. See below “Why set up a Foundation” which explains how/why.


What is a Controlled Foreign Corporation Law?


A Controlled Foreign Corporation (or CFC) Law is one which purports to tax onshore income or capital gains made by Companies incorporated Offshore but which are controlled from onshore. Most western countries have them (see below which lists ALL countries with CFC laws presently).


Essentially how a CFC law works is if an individual owns or has the capacity to own the overriding majority of shares in an Offshore Company (the percentage of which varies from country to country) the that person is required to declare in his local tax return profits made by the Offshore Company.


How CFC laws came about was around 30 years ago the big western countries began to realise that certain of their citizens were using nil tax Offshore companies to avoid having to pay tax at home on their non-local sourced (ie international) income. In particular the CFC laws target the use of Nominee Shareholders and Directors. If you live in a country which has CFC laws (regardless of whether you are the director/shareholder of the Company or not) if you have the capacity to own and control the company by reference to shareholdings then you would be required to declare and pay tax at home on your Offshore Company’s earnings.


There are several ways to get around CFC laws. Historically clients used commonly to deploy an Offshore (Discretionary) Trust to own the shares of the Offshore Company. However with more and more “Onshore” tax systems claiming tax from any Trust with an onshore resident beneficiary discerning clients these days choose to establish Private Foundations (in particular Seychelles Foundations) as the ultimate holding entity as such entities should not caught by CFC laws or by CFT (Controlled Foreign Trust) Laws. For more detail click on these links:


Why Set Up a Foundation?


If an IBC alone is used to own/operate your Bitcoin/Cryptocurrency Exchange Business you will still be liable to declare and pay tax at home on your IBC’s earnings if/when you live in a country which has a Controlled Foreign Corporation (“CFC) law. Failure to do so would most likely constitute tax evasion.


What you might do then is set up a Private Interest Foundation to own the shares of the Offshore Company.


We used to use Offshore Trusts for such purposes back in the noughties but the problem there is that you have someone (ie a Trustee) holding property for the benefit of 3rd parties who are inarguably beneficial owners of that property and probably/potentially entitled to the income/capital of the Trust (which can have tax consequences onshore).


A Foundation is very similar to a Trust in that it’s set up by a Founder (like a Settlor in the case of a Trust) and managed day to day by a Councillor (like a Trustee in the case of a Trust) who manages the Foundation property for the benefit of the beneficiaries of the Foundation. A key advantage of a Foundation is that it’s a separate legal entity in its own right (ie the Foundation actually owns the assets held by the Foundation – unlike a Trustee who holds property for someone else ie the beneficiaries) and generally speaking the beneficiaries are not entitled to the income or capital of the Foundation until it’s actually received.


What this means as a beneficiary is that you should be able to defer paying tax at home on the income of investments held by the Foundation enabling you to reinvest 100% of that income not just the after tax component. (One jurisdiction ie Seychelles has even taken this a step further by specifically stating in their law that the legal and beneficial owner of any asset held by the Foundation is the Foundation itself).


Seychelles Foundations


If you are a resident or citizen of a country which has the ability to track Offshore Bank account beneficiary details and you would like to keep private details of your Offshore earnings (or if you plan to set up a very sensitive business eg one that might illegal if owned/operated from where you live) again a Seychelles Foundation can help:


How so?


It all comes back to the legal structure/operation of the Seychelles Private Interest Foundation.


Bottom line is notwithstanding that individuals (or a class of beneficiary) may be named as beneficiaries in the Regulations:


  1. The beneficiaries have no legal or beneficial interest in property owned by the Foundation (unless or until such time as that property is transferred to them – see section 71 of the Seychelles Foundations Act attached).
  2. The Foundation is a legal entity in its own right not a mere Trustee (See section 23)
  3. The Councillor of the Foundation owes no Fiduciary duty to the beneficiaries (see section 63)


As such there is no “beneficial owner” of the Foundation. The beneficial owner of any property/asset owned or held by the Foundation is the Foundation itself. Hence when we open a bank account for your Company, if the shareholder of the Company is a Seychelles Foundation, your name shouldn’t be written into the bank’s records as “beneficial owner” of the Company.


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How To Transfer Ownership of Bitcoin 2 an Offshore Company

If you’re looking to trade or invest in Bitcoin/Cryptocurrency using a tax free Offshore Company chances are:


(a)  you’ll already have a stash of Bitcoin/cryptocurrency; and

(b)   you are wondering how you could or should go about transferring ownership of that currency to your tax free Offshore Company, once incorporated.


However you go about it you’ll want to ensure that at the point when you realize your gain (eg when you convert the Cryptocurrency into Hard Currency) that, at that point in time, the Cryptocurrency is owned by – and the gain occurs in the name of – your tax free Offshore Company (“IBC”).


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


Timing is of critical importance – It is clearly preferable for the IBC to acquire the  Cryptocurrency (for example, Bitcoin) at the earliest possible time before the Cryptocurrency becomes highly valuable. That way the capital payment for the acquisition of the Cryptocurrency 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 IBC to use subsequent gains to fund the cost of the Cryptocurrency).


If a deal is struck for the IBC to buy the Cryptocurrency before the Cryptocurrency gains traction in the market, ownership of the Cryptocurrency might even be transferred for nominal consideration enabling you to transfer legal ownership of the Cryptocurrency to the IBC before the Cryptocurrency experiences significant appreciation in value.


Alternatively, you might transfer ownership of the Cryptocurrency to your tax free Offshore Company for an agreed price but subject to a deferred or gradual payment basis. How that would work is you would transfer ownership of the Cryptocurrency up front and agree for the IBC to pay you in stages in consideration of a price premium and/or in consideration of the IBC engaging you in an ongoing/consultancy capacity.


However you transfer ownership of the Cryptocurrency to your IBC the transaction should be seen to be on commercial terms for fair market value.


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