I was approached by an acquaintance recently who asked me to review the structure of his Seychelles International Business Company.

It’s something I get asked to do occasionally (and I expect will happen more frequently in future – see below) and I have to confess I do find it interesting to see how other Offshore Service providers construct and package their product.

This was your bog standard IBC nothing unusual about that… it had been set up to own a substantial web based business with a strong UK sales focus.. nevertheless I have to confess I was appalled once I saw the whole one size fits all approach of how it had been put together.

It had a nominee director based in BVI and the company owners (UK residents for tax purposes) were both shareholders and general power of attorney holders.

Would this company have withstood review by onshore revenue authorities?

Not a snowflake’s chance in hell.

All sign posts pointed in the same direction ie that it was a hastily arranged (effectively managed and controlled from onshore) factory produced IBC… put together without regard for the client’s individual situation or needs. If reviewed it would have taken the authorities all of about 5 minutes to find that the company is owned and controlled from onshore and to see that it had been set up in a thinly disguised attempt to evade onshore taxes. (Nett result: default tax assessment + penalties and possible criminal investigation of the owners).

Sadly from my 9 years + experience in International Corporate structuring the above scenario is all too common. Cowboy IBC manufacturers in poorly regulated jurisdictions have probably formed hundreds of thousands of companies like this over the years leaving an extraordinary amount of people at risk of punitive tax assessments and criminal sanctions. All of which could have been avoided had the formation agent simply taken the time to review the client’s individual situation and make appropriate “insurance” suggestions as to how such risks could be avoided.

My gut feeling is that these kind of business practices will start to disappear over the course of the next few years (as a matter of necessity) as both company owners and industry professionals (inc regulators) alike come to the realization that (with the use of offshore centers coming under increasing scrutiny) that substance now needs to rule over form. Hence any nil or low tax “offshore” company, moving forward, will want to be able to point to a substantial connection to the country in which it is incorporated to avoid being taxed onshore.

Bottom line?

Ensuring that your nil tax or low tax company is properly structured such as to ensure that it is seen to be managed and controlled from offshore is going to become of critical importance moving forward as the onshore authorities’ blow torch starts to get applied to more and more IBCs.

Think I’m wrong?

Watch this space…