August 11, 2022

Is an Offshore Structure Right for you?

Is an Offshore Structure Right for you?

Offshore companies and banking often get a lot of bad press, from media publications to Hollywood blockbusters, offshore companies are often portrayed as an essential tool for the bad guys of the world. While these offshore entities can be used for nefarious purposes, the vast majority of business conducted offshore is for legitimate and legal reasons.

Offshore structures and banking are not reserved for the ultra-rich, many high-income professionals can benefit from these structures.   Some of the benefits include; privacy, legacy and estate planning, asset protection and tax optimisation.

Although travel has come to a screaming halt during the covid pandemic, many expats have spent a long career travelling around various countries and continue to do so. With each country having their own unique tax rules, a simplified offshore consulting firm and/or holding company can make sense. The challenge many globe-trotting expatriates face is complying with so many tax rules, which is why getting solid tax advice is essential.

Advantage: Tax Optimisation

Many countries that lack natural resources or thriving export economies offer tax incentives to foreign owned companies. These companies generally are not allowed to participate in domestic business and thus are not required to pay the same tax as a local company. With substance requirements being put in place, these foreign owned “international business companies” also create jobs for locals.  Many offshore companies will hire a corporate secretary and an accounting specialist, to assist in the required administration of the company while creating jobs in the country.

Through treaties, many established countries around the world offer tax concessions to attract offshore investment.

Advantage:   Asset Protection

Offshore jurisdictions are very effective for asset consolidation and protection. Many people use offshore trusts, foundations and companies to protect against lawsuits, bankruptcy, divorce and a whole myriad of other potential creditors. Given the assets are no longer held in the home jurisdiction, it makes it an arduous task for would be creditors to gain access to the assets of the offshore entity.

Advantage: Confidentiality

Many favoured offshore jurisdictions offer strict secrecy legislation. These countries have laws in place that cover both corporate and financial confidentiality, these rules are  taken very seriously as their continued confidentiality is a main attractor of wealth to these jurisdictions.

Despite what the media and Hollywood may have you to believe, the main reasons for the secrecy laws are around corporate acquisition and disposal of assets in a private manor. These structures do not offer any protection for illegal activities like money laundering or drug trade.  

There is an added layer of protection and secrecy given that foreign governments do not have jurisdiction in other countries, for example, the United Kingdom government has no authority in the Caymans.

Cons: Cost

Establishing an offshore company may seem cheap at first but there are many considerations people often overlook.  Tax substance requirements generally require a physical presence in the form of an office, the days of having a P.O. Box as an address are just about over. In addition to this, you generally need 2 employees to work in the office. On top of these fees you will also need to consider professional fees like book keeping, corporate secretarial fees, tax advice, certification of documents and introductions for bank account openings and maintenance. Whilst a drop in the ocean for the ultra wealthy, these are serious considerations for high income professionals considering an offshore structure. The tax savings need to be compared to the ongoing costs of maintaining an offshore entity.

Cons: Regulatory Scrutiny

There is ever increasing regulatory reform surrounding offshore entities.  Although, there are still plenty of options available, it can be an expensive task keeping up to date with tax reform in multiple jurisdictions.

Summary

In summary, offshore structures can and will continue to serve an essential role for high-net-worth individuals. The primary consideration for high net worth professionals needs to be around long term planning and tax savings vs the cost of compliantly operating and maintaining an offshore company.

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