5 Ways Small Businesses can Benefit from Offshore Company Setup
5 Ways Small Businesses can Benefit from Offshore Company Setup
One of the biggest expenses a small business incurs is — you can guess it — taxes.
Taxes are the necessary evil, meaning that paying taxes can theoretically help your local community to flourish, with well-maintained facilities and all. An excellent local community means good business to your local business.
Alas, in practice, taxes put burdens to small businesses. Too many burdens, actually, in such a way that many small businesses end up with almost nothing after paying for everything, including taxes. That said, it’s only natural that a small business owner wants to reduce their taxes, thus reducing the overall business overheads.
The problem is, how to do it legally?
Indeed, reducing your tax burdens can be done in many ways. Unfortunately, most of the ways involve playing tricks that could get your small business in trouble if you got caught. If you are in the U.S., then you’re really playing with fire, as you face hefty fines for evading taxes.
There’s a better solution of only a few available, though. Using this solution can help you in avoiding taxes.
The primer: Avoiding taxes vs. evading taxes
As you may have noticed, we mentioned ‘evading taxes’ and ‘avoiding taxes’. Did you know that those are not the same thing?
Tax evasion is essentially the practice of reducing your tax obligations illegally. At the other end of the spectrum, tax avoidance is the practice of reducing your taxes legally.
It’s quite obvious that the latter is what a small business owner should focus on the former.
Tax avoidance: How?
If you ask your tax attorneys and consultants (which is something you have to do, actually) they may present you with ways to avoid taxes. One of the most popular suggestions is tax avoidance through setting up a company overseas.
By ‘overseas’, we mean that the company needs to be set up in another jurisdiction — an offshore jurisdiction — that can help you in your tax planning endeavors.
“But what are the benefits of doing all the hassle?” you asked. ‘Glad you asked. Here are the benefits of forming an offshore company.
1 — Get low tax rates — even getting tax exemption
Some offshore jurisdictions are business-friendly. Not only it’s easy to set up a company in the jurisdictions, but they also have low corporate tax rates.
You can also focus on offshore jurisdictions that allows you tax exemption for overseas operations. Your company — or companies, as you might need to set up more than one company to make it work, depending on the type of business and the needs of your small business — should be set up in a jurisdiction which is basically allowing you to get an exemption from overseas operations. This means that you pay little or no taxes on your actual business operations, while paying no taxes locally because, obviously, you don’t have any business operations in the jurisdiction where your company is set up. How is this possible? The answer is by setting up a company in an offshore jurisdiction which has rule and regulations that allow you to do so.
Jurisdictions like Hong Kong allow you to get tax exemption on business operations outside HK.
2 — Get reputational benefits from your company ‘headquarters’
If you set up your company in, say, Wyoming, USA, you’ll get US address, which means that your company is, basically, a US-based company. Depending on your type of business, having a US address attached to your business can give you some sort of ‘boost’ in term of reputation — regardless of the actual operations of your business.
This is particularly beneficial for an online-based small business that sells worldwide but don’t have a headquarters that worth bragging about (e.g. your garage or basement.)
3 — Reducing your paperwork and/or concealing your identity
Some offshore jurisdictions like Belize don’t require an audited financial report, which means that you don’t have to build a report to ‘please’ your tax authority. What you need is an internal financial report — not for-tax report.
Along the line, you can also use the offshore structure to conceal your identity for whatever reasons. Setting up a company in Bulgaria, for example, allows you to hide directors and shareholders information from the public record. You can do this by appointing a nominee who will have his/her name, instead of yours.
4 — Allow you to expand overseas and be taxed effectively
If your small business is ready to expand overseas, setting up a company in a jurisdiction that allows you to sell in that region effectively can help you reduce your taxes and operational costs, while meeting the legal requirements for you to do so.
For example, if your small business is expanding to the EU market, one of the must-have is an Intra-Community VAT number. It allows you to do business in the EU region legally. To acquire the number, your headquarters must be located in an EU country. The problem is, forming a company in an EU country is not that simple.
With some exceptions, of course — such as Cyprus and Bulgaria. Setting up a company in the jurisdiction will grant you an Intra-Community VAT number, PLUS the low tax rates (Bulgaria tax rates is 10% — the lowest in Europe, while Cyprus’ tax rates are 12.5% — also among the lowest in Europe)
5 — Using the excess cash flow to foster business growth
It’s pretty obvious, actually. Fewer taxes mean more of your cash flow, which means that you can use it for growing your business.
Conclusion
Those are just five of many benefits a small business can get by getting incorporated in an offshore jurisdiction. As you can see, there are plenty of upsides to it, which is something you should explore as a business owner.
To learn more benefits, especially legal benefits, of doing so, consult with your trusted lawyers and consultants. You can also consult with us for the best offshore strategy for your business.
