Pros and Cons of Offshore Incorporation in 2024

Only a couple of decades ago, setting up an offshore company was seen as a smart move. Back then, registering a business in a tax-free country almost guaranteed multiple benefits, with complete anonymity, aggressive tax savings, asset protection through questionable legal means, and hiding profits as just a part of them.

However, by 2024, things have changed a lot. It is now a lot more complicated to evaluate the pros and cons of offshore company registration. Recent economic trends have made it hard to find significant advantages with businesses incorporated in tax-free jurisdictions. Due to de-offshorization, financial and tax information sharing, ending banking secrecy, and introducing a minimum corporate tax, offshore businesses have become risky, potentially unprofitable, and possibly illegal. But is the devil really as black as he’s painted?

The answer largely depends on how you plan to use your offshore company. If you want to run a business, protect and diversify assets (important for investors), legally save on taxes, or enter new markets, the benefits may still outweigh the drawbacks. If not, the disadvantages might be greater. So, your evaluation of offshore company pros and cons should be based on your particular circumstances. In any case, it’s not correct to say that doing business in tax-free jurisdictions has no potential in 2024.

Offshore companies come with several notable benefits:

• These entities often allow you to earn income without paying taxes.
• Establishing an offshore company is usually less expensive compared to onshore or midshore business setups.
• Profits can be transferred to shareholders so that the latter will avoid taxes in their home or tax residency state.
• Offshore companies usually face fewer regulations in their incorporation jurisdiction.
• In most cases, owners have greater control over their company operations.
• With an offshore company, you will enjoy global business prospects.

Offshore incorporation: benefits

Just like with any other business instrument, you need to first evaluate several important factors before you proceed with setting up a company in a tax-free jurisdiction. This way, you can be sure your business operates legally and efficiently. Before registering an offshore company, be sure to determine its intended purpose. This decision will guide your jurisdiction choice, the entity’s legal form, its management structure, as well as any extra company features you might need.

Tax-free profits

An offshore company is not a tax resident in the founders’ country of residence and has no physical substance there. As a result, you generally do not need to file any tax returns. Basically, this means that all profits from offshore business operations can be distributed to shareholders with no deductions.

Key considerations:

• Founders and shareholders of an offshore company may have personal tax liabilities in their country of residence or permanent residency.
• Dividends from foreign subsidiaries may still be subject to taxation.

Cost-effective registration

Starting a business in an offshore jurisdiction is usually more affordable. It implies lower government fees, licensing costs, and office rental expenses. Besides, offshore accounts often come with lower minimum balance requirements, which helps with asset protection.

Key considerations:

• Opening a bank account for an offshore (a.k.a. non-resident) company can be pretty challenging.
• While initial registration costs are low, ongoing maintenance expenses might be quite high.

Confidentiality benefits

Using a nominee service can help keep the connection between the company and its beneficiaries hidden. This makes it difficult to prove ownership of an offshore business, especially if a beneficiary register is not maintained or kept confidential.

Key considerations:

• In many developed economies, it is a serious offense to hide the fact you own a company abroad from tax authorities, even if your jurisdiction has no CFC (Controlled Foreign Corporation) regulations.
• Achieving complete anonymity is pretty challenging due to trends towards de-offshorization and greater transparency.

Reliable asset protection

Offshore companies are excellent for both business operations and asset protection. Sometimes, registering a trust or foundation instead of a traditional LLC or LTD offers strong protection against any claims, regardless of whether they come from third parties or law enforcement agencies.

Key considerations:

• Setting up and maintaining such a trust or foundation is both costly and legally complex.
• If asset protection is your main goal, some useful business features, like nominee services, might become less advantageous.

Flexible business ownership

Registering an offshore company provides significant flexibility when it comes to structuring your business. Should your circumstances or goals change, you can easily adjust the legal entity to meet your new needs.

Key considerations:

• You will find similar flexibility in most developed countries.
• Changing the company’s structure translates to additional work and costs.

Limited liability

Offshore business founders are shielded from their company’s debts and obligations. This means that in unforeseen circumstances, your personal assets, which are legally separate from the business, will stay safe.

Key considerations:

• Limited liability is a standard feature of traditional LLCs, whether the jurisdiction in question is an offshore, midshore, or onshore one.
• Some legal structures other than LLCs or LTDs may not offer limited liability protection.

New business opportunities

When set up in an offshore jurisdiction, a company boasts higher business potential. This is especially useful for cross-border businesses, the high-tech sector, financial operations, as well as asset protection and diversification.

Key considerations:

• The above additional business opportunities are not always necessary.
• Operating an offshore business comes with certain limitations.
• In some cases (say, when the reputation of the company or its owners is a crucial factor), offshore jurisdictions may not be the best choice.

Offshore setups: things to be aware of

In the business world, there are no universal solutions. What seems to be advantageous today can become a drawback tomorrow as circumstances change. Hence, if you consider setting up an offshore company, be sure to look at the whole picture, not just the benefits this decision is associated with.

Here’s what potential drawbacks to consider include:

• Double Taxation: This happens when both the offshore jurisdiction and your home country want to tax your company’s global income. Shareholders might also have to pay personal income tax or taxes on their passive income. The main problem here is that Double Taxation Avoidance Agreements (DTAAs) often don’t work well for offshore setups.
• Difficulties Opening Bank Accounts: While it’s usually easy to open a bank account for a local company, it may be tough for a business registered in another country, especially if it is an offshore one.
• Transparency and De-offshorization: Using companies incorporated in tax-free jurisdictions for aggressive tax optimization is now outdated. Schemes that worked 15 to 20 years ago are no longer effective and often illegal. Each year, the gray areas shrink. However, if your business is legal and transparent, you are unlikely to face major issues
• Strict Reporting Requirements: In offshore jurisdictions, rules for doing business are getting tougher by the day. This includes preparing and submitting reports, keeping records of beneficiaries or shareholders, meeting real economic substance requirements, and banning nominee services.
• Reputational Costs: A company’s reputation can vary greatly depending on its location. For example, a company in Switzerland might be seen differently than one in Dominica, even if they perform the same functions. As your business grows, this difference might matter less, but if reputation is important to you, it’s something to think about.

Summing up

Are you contemplating an offshore company setup? If so, remember to look at the big picture. Don’t be in a hurry to reject a promising project just because it involves incorporating a company in a tax-free jurisdiction. Just between you and us, it isn’t always a wise decision.

Offshore companies are tools for your business and not the end goal. If a company pays its taxes by the due date, has a clear management structure, faces no issues from tax authorities in the founders’ home country, and keeps accurate accounting records, there should be no issues. Even in Europe, there are places known as tax havens, let alone traditional offshore jurisdictions. If saving on taxes is what you aim for, there are legal ways to do it.

With any offshore setup, it is utterly important to understand the purpose of offshore company formation, as this is exactly what guides your choice of country and the company’s legal form. Should you experience any troubles with decision-making, remember that International Wealth experts are here to help you select the best tax-free jurisdiction, open a bank account, and obtain the necessary licenses. With us, your business life will thrive!

Companies created just for aggressive tax savings won’t last in 2024, especially if they only exist on paper. Do you have any questions left? Don’t hesitate to book an individual consultation and get detailed answers to all of them!