Offshore Companies are commonly used to own/operate Software Development and Computer Programming/Coding Businesses. In principle here’s how it usually works:
- A nil tax offshore company (commonly an International Business Company “IBC”) is incorporated to own/operate the business
- You design/launch a website which is owned by the Offshore Company
- The IBC owns all proprietary items (including also the/any Trademarks, Operating software/systems, soft products to be delivered to customers etc)
- The website ideally should be hosted in a nil tax/private Jurisdiction (Iceland is currently the most popular destination for such web hosting, Singapore is also often favored)
- The clients find you and/or contact you via the web
- The IBC is seen to be managed and controlled from (and ideally beneficially owned from, see below) Offshore. This is achieved via the appointment of a (nil tax jurisdiction based) “Nominee” director.
- Your standard client agreement/terms and conditions should provide (a) that the contract is not formed until the customers offer is accepted by the IBC and (b) that the source of the income is the contract
- Acceptance would be provided by the Director signing the client service agreement or ratifying the Company’s entry into the service contact in question; In simple terms what that means is the situs of the Contract (ie the place where the contract, at law, is formed) is the director’s location ie a nil tax environment…
- Hence the income – from which the contract is the source – has been/is derived, prima facie, in a zero tax jurisdiction
- The client hires the IBC to do the coding/engineer the required software
- All services would be, and would be seen to be, provided/delivered by the IBC, via the web or via email ie in a revenue neutral environment
- An Offshore account (which can/will also be set up to receive card payments via a merchant account) is opened in a nil tax banking centre
- Customers/clients contract with and pay the IBC; All such monies are banked free of tax in the first instance
- You or your local company would/could be contracted by the IBC to manage sales/delivery of product/website maintenance/whatever
- (If you need a regular income) 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 expenses against this income (eg home office, equipment, travel, phone/internet/utilities etc) to significantly reduce the amount of tax payable on this income
- Often there is some kind of intellectual property (“IP”) created as part of, or underpinning, such a business (even if it’s just the website/design/logo). 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 which gets paid by the Clients) pays license fees periodically to the 2nd IBC which fees would be receipted tax free. This could be useful 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
- Ideally once you start to grow – and to add substance – you would be wise to set up your MD/Board and or a sales team to take orders and receive income in a low tax onshore environment (eg Hong Kong, Ireland, Singapore, Cyprus etc as per the Amazon/Google model).
As alluded to, in order to minimise the chances of the IBC being taxed onshore, ideally, the IBC should/would be (and be seen to be) managed and controlled from Offshore. How this can be achieved is by including a Nominee Director as part of the Corporate structure. For details of how that can work click on these links:
Ideally – so you can swear on oath in the event of a tax investigation, law suit or regulatory inquiry – I am not the beneficial owner of this Company, (which could get you around what might otherwise be a substantial tax or legal liability) you will want to set up a Private Foundation to act as the shareholder of your IBC. (This should also assist you to get around CFC rules ie if you live in a country which has such regs).
With a bespoke legal/admin structure in place you should only be liable to declare and pay tax on income paid to you by the company (and/or on any distributions paid to you by the Foundation); The rest of your software development earnings you should be able to bank, and or invest, Offshore in a nil tax environment.
Similarly, if a project goes bad and a client tries to sue you the good news is your personal assets should not be at risk as the client has contracted with a limited liability Company (ie the Company carries the legal risk, not you personally). Moreover, having your business incorporated Offshore in a foreign/strange land is of itself a deterrent to would be litigants. (Have you ever tried to sue/get money out of an “Offshore” Company? It’s the Litigation Lawyers equivalent of climbing Mount Everest!)
Local laws can have an impact. Hence you should seek local legal/tax/financial advice before committing to set up an IBC for such purposes.
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