Common Offshore Corporate Strategies

Offshore Companies and Trusts, and in particular International Business Companies (“IBCs”), can be used in a number of different ways.

 

With the increasing (and internet driven) advent of globalisation – and with the right professional guidance – it is now possible to live in one country, do business tax effectively in another and bank privately in a third country, all in the same day and without ever leaving home!

 

Having said that the path to creating effective asset protection (and to achieving the lowest possible tax bill from such ventures) is a rocky one littered with hidden landmines for the unwary. Especially if you are new to Offshore Corporate Structuring you will want to make sure you have an experienced, reliable professional Offshore Company Formation Agent by your side (preferably with an understanding of International Tax Law) to help light the way.(You’ll be pleased to note that OCI offers a free ongoing consultancy service for any client in need of advice as to how to use, manage or structure his or her IBC).

 

Below we have set out a number of practical examples as to how Offshore Companies and Trusts are used in the international commercial world. The list is by no means exhaustive as there are a multitude of ways in which an IBC or Trust can be used (+ in our experience people are forever finding new and creative ways to make or save money via the establishment of an Offshore Company).
 
Please contact us for guidance if you have any questions about the below examples (or if what you have in mind for your Offshore Company isn’t covered by any of the below scenarios).

 

The below are generic examples and are not country specific. Local laws may have an important impact on your particular situation. Consequently we recommend that you seek local legal and/or tax advice before incorporating or using an Offshore Company for such purposes.

 

  1. Advertising and marketing service based businesses
  2. There are many ways in which Offshore Companies can be used to facilitate tax effective international commerce. Some of the more popular activities conducted from Offshore include service based activities such as advertising and marketing, as well as the sale and distribution of information-based products.

     

    Take Facebook for example. Australia is one of Facebook’s most successful markets with 11 million users, or about 68 per cent of the internet population.

     

    The media buying consortium Group M estimates this year Facebook will earn $55 million in advertising revenue from Australian users. But the vast majority of that will be billed via Facebook Ireland, where the commercial tax rate is less than half that of the 30 per cent levied in Australia.

     

    Google also bills Australian users of its advertising system via its Irish subsidiary. That has allowed it lawfully to pay $74,176 in tax on revenue of $201 million – a figure industry sources say might be as little as a tenth of its real revenue.

     

    Once the revenue from selling merchandise and currency for gaming apps such as FarmVille is taken into account, marketing industry sources say the true figure of Facebook’s Australian business could be closer to $100 million.

     

    Because Facebook does not file its accounts in Australia no one but the company knows how much, if any, tax it should pay to the Treasury.*

     

    The key to the successful use of Offshore Companies for such activities centres on the service being seen to be provided from Offshore (+ the service must be billed at a commercially realistic rate). This requires particular attention to be paid to the wording of sales and other commercial agreements.

     

    Additionally, it is vitally important to ensure that the Offshore Company is not seen to be operating from onshore. For example it would not be advisable for the Offshore Company in this instance to have a permanent physical office in any of the countries where its customers are based.
     
    Contact us to learn more.

     

  3. Mail order or website based businesses
  4. This is another example of a Trading Operation that can work tax efficiently from Offshore. Commonly Mail Order (and many website based) businesses never actually physically take supply of that which they sell. Hence there is no need to keep stock warehoused. (Most mail order businesses in fact are middlemen whose speciality is marketing).

     

    How it works is the business receives an order (either via a website hosted, or in response to a print ad that they have placed from, offshore). They pass on the particulars of the order to the manufacturer who then fulfils the order and packages the product (using the Mail Order or Website based business’s branding) for mail or courier direct to the end user buyer.

     

    Provided the order is seen to have been taken from Offshore, the difference between the cost and sale price can potentially be receipted Offshore, tax free.

     

    Again for this to work the mail order or website based business needs to be seen to be managed and controlled (and to be taking orders) from Offshore (which requires considerable skill and experience on behalf of the IBC supplier/manager).

     

    Contact us to learn more.

     

  5. Offshore “Captive” Insurance Companies
  6. If you would like your business to be able to claim the maximum tax deduction possible for payment of insurance premiums or if you would like to be able to access insurance premiums at wholesale rates you might wish to consider setting up your own “Captive” Insurance Company Offshore.

     

    If you own a Captive Insurance Company you would, in the ordinary course of business, ensure (via the Captive) your various risks at the highest conceivable premium (ie within the bounds of commercial reality). Thereafter the Captive would re-insure those risks elsewhere at a lower rate. The profit made by the captive on the differential would be realized and receipted offshore potentially tax free.

     

    Another advantage of owning an Offshore Captive Insurance Company is that you can use it as a vehicle to invest in a wider range of financial products than you could otherwise access if you were to set up the Captive onshore (wherein you would be limited to the confines and limitations of the onshore investment environment).

     

    Moreover with the Captive being incorporated in a nil tax jurisdiction the returns on its investments would be receipted, (and could also be reinvested) Offshore, potentially tax free.

     
    Contact us to learn more.

     

  7. Debt Factoring Businesses
  8. Debt factoring is a process whereby a capital flush company buys a debt from a cash strapped business for less than face value (say 80% of what’s owed) which debt it then collects in full pocketing the difference (in this example 20% of the debt) as its operating profit. Its stock in trade is capital which can be kept, managed and supplied from offshore.

     

    Say you have a business that gives its customer 30, 60 or even 90 days to pay following supply of goods or services. That business could set up a subsidiary ie a debt factoring company offshore (which ideally no one but the partners would know the true owner of) in a nil tax environment. To maximise cash flow the business could resolve to sell each debt, immediately it makes a sale, to the Debt Factoring Company in return for an immediate payment of say 80% of the debt.

     

    The Debt Factoring Company would of course proceed to collect 100% of the debt. The net outcome would be that 20% of each sale is receipted Offshore potentially tax free.
     
    Contact us to learn more.

     

  9. Investment in Offshore or Hedge Funds
  10. Many if not most “Onshore” Fundsare limited in terms of what they can invest in and what they can offer the retail investor. Plus high regulation makes set up and maintenance costs of such Funds significant which costs are ultimately passed on to the consumer.

     

    Offshore Funds by contrast are quicker and cheaper to set up (and maintain). Plus (because they are not registered in high regulation “nanny” states) they are usually less controlling in terms of what they will allow the Fund Manager to invest in. This is attractive to investors with a higher than average risk appetite eg those in search of higher (say, double digit) returns.

     

    A lot of Offshore Funds however do not allow “Onshore” investors to participate,sophisticated investors excepted (eg persons with a net asset pool of $US2million or an annual taxable income of no less than $US 200,000).

     

    By setting up an Offshore company you can gain access to the hitherto inaccessible world of alternative investments. However to avoid falling foul of onshore regulations Offshore companies established for such purposes need to be structured and/or managed in a very specific way.

     

    Please contact us for further information on what’s involved and on how we can assist you to broaden your investment horizons.

     

  11. Offshore Wills & Estate Planning
  12. An Offshore Estate plan can be conceived in such a way that the individual’s estate is passed at death to an Offshore Beneficiary, typically an International Trust. The Beneficiary is usually created for the sole purpose of benefiting certain nominated persons, without ever giving unfettered control of the deceased’s assets to those persons. Such a plan provides comfort to the client who can continue his life’s work safe in the knowledge that his hard won assets won’t be wasted once he’s no longer around!

     

    Additionally unlike passing those assets to a Trust pre-death the client also benefits from the fact that he can still enjoy (and retain complete control over his assets) for as long as he wishes.

     

    Another benefit of nominating an Offshore beneficiary to receive your estate post death is that you make it extremely difficult for disgruntled family members, in-laws or creditors to fight over your estate once you’re gone as they would most likely have to take action in a foreign court – which is rarely an easy (and almost always an extremely expensive) exercise.

     

    Contact us to learn more.

     

  13. Insolvency and Divorce Insurance
  14. With the post GFC worldwide recession beginning to bite hard rates of divorce and business bankruptcy are again on the rise.
    Persons wishing to protect their assets from a greedy ex-spouse or from Insolvency claims can effectively do so by establishing an Offshore Vehicle designed exclusively for the purpose of taking possession of key assets.

     

    If professionally structured (and at the right time – don’t wait til your spouse sues for divorce or you can’t pay your bills to set up a protective structure!)one may be able to annex certain assets from division by the Divorce (or confiscation by the Insolvency) Courts by setting up an Offshore Corporate structure to hold such assets.

     

    You can also transfer ownership of key assets to an Offshore Corporate entity whilst retaining some degree of control over or access to the asset. (The rich learned generations ago that ownership isn’t everything; being able to use the asset at a time convenient to you is what counts most).

     

    Some particularly clever Corporate structures are also available Offshore that, once you perceive that divorce or bankruptcy is looming (or even before that time), enable the Offshore Vehicle to automatically take complete control over the most vulnerable assets, thus shielding those assets from division by the Divorce Court and/or from creditor’s claims.

     

    If structured carefully such Offshore Corporate Vehicles can also provide investment growth potential as well as reductions in future tax liabilities.

     
    Contact us to learn more.

     

  15. Group Finance Companies
  16. Thin capitalisation rules onshore often limit the amount of tax deductions that can be claimed for the cost of funds borrowed by one member of a group of companies from another.

     

    Provided the structure meets the present commercial and operational objectives of the relevant company a particular Offshore Corporate structure can be established such as can facilitate arms-length financing for a company or group of companies beyond the application of local laws (the application of which would otherwise limit the amount that can be claimed at home by way of tax deductions for loan fees or interest payments).

     

    How it can work is funds are passed to an Offshore entity that, in turn, via an Offshore Finance Company, on-lends those funds to the onshore resident company. In certain situations it is even possible to claim a tax deduction for the initial payment of funds overseas as well as for interest payments made to the Offshore Finance Company!

     

    As ever for such a venture to work clear commercial objectives need to be apparent from the get-go. Moreover this is a particularly sophisticated system of offshore structuring and formation and deployment of such a plan will require the engagement of specialized professional assistance.

     
    Contact us to learn more.

     

  17. Offshore Labour Hire and Recruitment Agencies
  18. Establishing an Offshore Recruitment Agency in a nil or low tax centre is a clever way for contract based workers to save on tax.

     

    How it can work is the contractor agrees to work exclusively for the agency in return for the agency guaranteeing him,by written agreement, a minimum volume and/or rate of work (think about it from a commercial perspective…why would you want to agree to work exclusively for one agent otherwise?).

     

    The next time the contractor finds a job that he’d like to take on he simply tells the prospective employer that he works exclusively for The (Offshore based) XYZ Employment Agency Ltd. Say the contract is for $100,000. The employer signs a contract agreeing to pay The XYZ Employment Agency Ltd $100,000. The XYZ Employment Agency Ltd then subcontracts the job to the contractor for say $50,000 (whatever the lowest rate could conceivably be for work of that type – the contract price cannot be seen to be commercially unrealistic; that’s where these things can really come unstuck). The result? Half the contract price of $100,000 is receipted offshore potentially tax free.

     

    But that’s not all… The ability of the Offshore Recruitment Agency to assume responsibility for non-wage obligations means the employer often no longer needs to worry about things like payroll taxes, employee superannuation (retirement plan) payments, worker’s compensation insurance, training costs or fringe benefits tax.This makes it even more attractive for the would be employer to hire the contractor!

     

    In addition the introduction of VAT/GST in most countries has meant that many companies and businesses can benefit financially from exporting (or importing) services that would otherwise be obtained from onshore.

     

    Outsourcing (Or “Offshoreing” as it is sometimes known) is now big business. The rapid growth of the E-Commerce sector and the emergence of websites such as freelancer.com (which enables contractors in developing countries to bid for jobs put up for tender by businesses in wealthy countries) means that many services can now be obtained from any part of the globe. Hence businesses can effectively outsource many jobs(that would normally be carried out by costly local personnel)without having to worry about non-wage labour costs that would otherwise apply were they to hire onshore resident staff.

     

    Similarly, the ability to sell services offshore may allow businesses to obtain the benefits of tax credits without having to incur a VAT/GST liability.

     

    Contact us to learn more.

     

  19. IT Consulting
  20. This is another line of work that lends itself particularly well to Offshore structuring as often the work is done by a person living in country “A” for a client based in another country altogether (ie country “B”).

     

    Rather than having his onshore company take up the IT consulting contract the savvy IT Consultant or Developer these days will have an IT consulting company in a nil or low tax centre take up the contract in question and then subcontract the work to him at a cheaper rate. The difference again is receipted and banked offshore potentially tax free.

     
    Contact us to learn more.

     

  21. Intellectual Property Holdings
  22. Offshore companies are widely used by Intellectual-Property-rich companies as a means of protecting their unique ideas or branding and to save on taxes. Industrial businesses also frequently exploit their technological innovations by transferring such Intellectual Property (“IP”) to an Offshore Licensing Company. The key is to sell or transfer the IP to the Offshore company at an early stage. Whatever the Offshore company pays for the IP it must be seen to be a commercially realistic price. (Ideally the transfer of IP would happen shortly after the business launches in order to minimize transfer costs).

     

    Thereafter royalties, license fees and other sums attributable to the use of the IP may be receipted by the Offshore Licensing Company from related (as well as non-related) Companies,potentially tax-free, Offshore thus reducing the overall tax burden of the group.

     

    Not only can tax benefits flow but by wrapping IP in the protective coating of an Offshore Corporate shell, you also make it much harder for people to sue you (a) because they have to sue abroad in an unfamiliar and often sinister legal environment and (b) because it’s often impossible to know pre-trial whether the offshore company has any assets from which recovery can be milked. (One wonders if Mark Zuckerberg had transferred ownership of the Facebook name/brand to an Offshore company early in the peace whether he would have faced the multitude of law suits that have latterly befallen him ie post mega-success).

     

    Whilst law changes in certain countries have made deployment of such strategies more challenging, effective means of holding and exploiting intellectual property through Offshore corporate structuring still exist, provided that the appropriate structure can be put in place (hence, again, the importance of making sure you choose an experienced, knowledgeable Offshore Company Formation Service Provider).

     
    Contact us to learn more.

     

  23. Offshore Employee Welfare Funds
  24. With increased regulation traditional Employee Share/Option Plans and Employee Bonus Plans are becomingly increasingly costly to both establish and administer from “Onshore”.

     

    An Offshore Registered and Managed Employee Fidelity Structure or Welfare Fund on the other hand can provide benefits similar to an Employee Share/Option Plan or an Employee Bonus Plan but at a much more economical price.

     

    Traditional Employee Welfare Funds are very restricted in terms of where monies held by the Fund can be invested (eg often they can only be invested in shares of the employer company).

    Offshore superannuation/ Retirement Funds on the other hand are usually able to operate outside of the restrictive regulations of most local superannuation schemes and are thus able to invest in a wide range of investments (including in high yield/risk investments such as Currency Trading, Bonds, Derivatives etc).

     

    As an Offshore fund has a much greater choice of where how and when to invest the fund can also be utilized as a high returning investment vehicle for both employer and employee alike (ie in addition to benefiting the employees by their receiving tax-preferred treatment on retirement or termination). Additionally because the Fund is incorporated in and managed from a nil tax environment and doesn’t have to account for tax every year it is able to grow its capital base much faster via the power of compounding.

     

    Tax deductions may also be available in certain countries for payment of contributions by Employers to non-resident Employee Superannuation/Retirement/Welfare Funds.

     

    Contact us to learn more.

     

  25. Offshore Indemnity Funds

In certain countries now the law expects employers to keep funds aside to cover contingencies such as redundancies or employee related legal liability (eg some former hotel owners are now being asked to pay damages, decades later, to former employees who contracted lung cancer after working for years in smoky bars).

 

There are clear advantages to setting up such a Fund Offshore. For example as an Offshore entity has a much greater choice of investments an Offshore Indemnity Fund can be utilized meantime as a high returning (potentially tax free) investment vehicle for the employer (ie provided the Fund abides by its constitution and keeps aside at all times a prudent amount such as might be required to fund potential liabilities in the future).

 

Additionally because the Fund is incorporated in and managed from a nil tax environment and doesn’t have to account for tax every year it is able to grow its capital base much faster via the power of compounding.

 

Tax deductions may also be available in certain countries for payment of contributions by an Employer to a non-resident Indemnity Fund.

 

Upon winding up of the onshore business the proceeds of the fund might be paid back to the employer (potentially tax free eg if the employer is then tax resident in a country that doesn’t tax such receipts).

 

Contact us to learn more.

 

Also please visit these links:

 

Who We Are

The OCI Difference

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Client Testimonials

Products & Services

Common Offshore Corporate Strategies

How to use an offshore company

 

To learn more about How Offshore Companies Can Be Used please Contact Us

*Source: smh.com.au 27.5.12