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11 REASONS TO USE AN OFFSHORE COMPANY FOR BUSINESS

In the past, individuals operating in offshore circles have used fake names and fake stock photos to make questionable claims about the true value and purpose of international decentralization.

Their secretive approach has not helped the reputation of offshore activities.

Some people are still skeptical. It takes time to overcome decades of bad press. But the good news is that there are many legal reasons for offshore activity, including offshore investments, offshore banking, second passports, and even offshore companies.

I recently came across a presentation by a charity and tax lawyer that divided the reasons for setting up an offshore company into three categories: red — harmful, yellow — challenging, and green — common.

Their purpose was to discuss which parts of setting up an offshore company are morally acceptable and which are truly shady business practices.

It is also not legal.

While I do not agree with the moralistic approach to the offshore debate, I do believe that a line needs to be drawn and that one side needs to be held firmly. It is either legal or illegal. I am not here to judge you, but to tell you where the line is drawn.

But other people will still criticize, and that is why I help people who come to me to understand how they can present their strategy to people who matter — to the bank, for example.

While the tax authorities are very good at telling you where the line is, they also have little or no experience of the bank itself. They don’t know what the bank wants, only that they should approve your contract… in theory.

But it depends on how you present your story.

Even if you are doing something perfectly legal, you need to be prepared to explain it to those who suspect offshore activity. And this is where a plan is extremely valuable. Even if you have a perfectly legal offshore structure, you need to prove its legality.

So let’s look at all the possible reasons for using an offshore company in your business and, if necessary, discuss how these reasons fit into the wider story you need to tell to prove the legality of your offshore activities.

LEGAL REASONS FOR USING AN OFFSHORE COMPANY

1| FINANCIAL PRIVACY AND SECURITY

I believe you have a right to privacy. However, I also think that some people go too far with privacy. I am not a privacy freak who goes around with a foil on my head. I use Google. However, I understand that financial privacy and security are important.

Many people don’t understand that privacy doesn’t always mean wanting to hide your money. This is another problem with the moralization of offshore activity. The fact that something can be used for immoral purposes does not make it inherently immoral.

For example, one of my Mexican clients explained to me that he needed more privacy because in Mexico if you have $100 000 or more in the bank, your name is quickly leaked to people who start calling your house and threatening you to find out where you live and how they find you and your money.

2| MEETING LEGAL REQUIREMENTS

A probable motivation for building up an offshore company is to meet the statutory requirements of the people where you require to acquire the property. For example, I own property in Malaysia, where it is possible to own property through a selected offshore company. In many countries, this is not possible.

Instead, you have to buy a property through a local company — an offshore company. For example, if you want to use funds from your US company to buy a factory in Nicaragua, the Nicaraguan government will not allow you to do so. You can’t list it by name. You have to set up a Nicaraguan company in which your US company can be a shareholder — that is, it is a subsidiary — and then you can make the purchase.

This is a legitimate reason to set up a foreign company.In many cases, it is useful to own property in your name. US citizens who own businesses abroad have traditionally had a reason to invest through corporate structures. This incentive has diminished somewhat with recent tax reform, but for the ordinary person who wants to own a property abroad in his or her name, the tax structures of many foreign countries are more advantageous than owning in one’s name.

3| INVESTMENT FUNDS IN NEUTRAL TAX JURISDICTIONS

An investment fund managed by several persons living in different locations may need a neutral jurisdiction where they can pool capital from different sources.

The Cayman Islands are often the most popular choice for investment funds because of the relatively relaxed rules and the fact that the fund does not have to deal with, for example, the Securities and Exchange Commission. This means that these funds often have access to a range of investments that US funds do not.

A tax-neutral residence can also offer other benefits in addition to tax advantages.4.

If you live in a country where things are chaotic and everything is inefficient, as, in the Mexican example, you may not mind paying more tax to get a better legal framework.

There are countries where taxes are relatively low, but starting and running a business can be extremely bureaucratic and inefficient. Remittances can also be complicated. In such cases, setting up an offshore company is not a tax problem.

3| INVESTMENT FUNDS IN NEUTRAL TAX JURISDICTIONS

An investment fund managed by several persons living in different locations may need a neutral jurisdiction where they can pool capital from different sources.

The Cayman Islands are often the most popular choice for investment funds because of the relatively relaxed rules and the fact that the fund does not have to deal with, for example, the Securities and Exchange Commission. This means that these funds often have access to a range of investments that US funds do not.

A tax-neutral residence can also offer other benefits in addition to tax advantages.

4| A GOOD REGULATORY FRAMEWORK

If you live in a country where things are chaotic and everything is inefficient, as, in the Mexican example, you may not mind paying more tax to get a better legal framework.

There are countries where taxes are relatively low, but starting and running a business can be extremely bureaucratic and inefficient. Remittances can also be complicated. In such cases, setting up an offshore company is not a tax problem.

5| BETTER BANKING INFRASTRUCTURE

Better banking is one of the reasons to use an offshore company.

The right offshore company can give you access to better banks.

When I look at some of the companies people set up in these small jurisdictions, I have to shake my head. A lot of people call me and explain that they want to start a business in Labuan or the Marshall Islands, and I have to warn them that their company’s banking options may be limited.

The opposite may also be true. If you live in Peru, you may have difficulty getting banks to approve your Peruvian company, so you can set up an offshore company, which will give you better access to banks.

A bank may not take your Peruvian company, but they will take a Bulgarian, Cypriot, or Hong Kong company. These countries may or may not be tax-neutral, but they offer you a better banking infrastructure and that advantage alone is enough.

6| ASSET PROTECTION

Based on asset protection, here are four reasons to use an offshore company that I found on the yellow list. Again, I feel that they moralize this practice, which I generally don’t find problematic.

Many people set up an offshore company to protect their assets from creditors, plaintiffs, lawyers, family members, former friends, etc. In places like the US, where people are sued based on arbitrary pursuits, it can be much more beneficial to set up an offshore company than to set up a trust or offshore fund. An offshore company can provide adequate asset protection.

7| AVOID CAPITAL GAINS TAX

Each country is different and each country has different capital gains tax laws. The purpose of this post is not to provide tax advice, but it appears that some countries allow structures to avoid capital gains tax on indirect transfers of assets.

If you are a US citizen, you cannot avoid capital gains tax, especially if you live in the US. Therefore, while in other countries you may be able to avoid capital gains tax on transfers of assets, US citizens do not have this option.

8| LOWER TAX RATES

I disagree with the argument that it is wrong to seek lower tax rates. I support lower tax rates not only because they benefit me, but also because I understand that other countries have lower tax rates for a reason. Often it is because they want to encourage development in their own country. And who is the United States to say that Lithuania or Estonia should lose business?

But can you set up your business abroad to get a lower tax rate? Absolutely. And if part of your business is in a low-tax country and part is in a high-tax country, I have no objection to the respective tax revenues being allocated where they belong.

9| ACCESS TO DOUBLE TAX TREATIES.

In my work, we don’t deal much with tax treaties because I don’t like working with big corporations. I work with individuals who become nomadic and whose companies are nomadic, but tax treaties are there for a reason, so that’s an opportunity for some companies.

10| TAX AVERSION

Tax avoidance is the traditional offshore approach, which consists of opening a numbered Swiss bank account and not declaring the money. Numbered bank accounts no longer exist. And reporting is now clearly and legally the responsibility of all US citizens.

In the age of transparency, we have FATCA, FBAR, huge IRS fines, and CRS (Common Reporting Standard) for the rest of the world, with 104 countries ready to share information from 2018.

The time for hiding money is over. Transparency is here.

So, of course, are there other ways to do it? There probably are. There are many silly schemes where people try to put their friend’s name on something to get around the reporting requirements. But more often than not, even these “brilliant” ideas backfire and the friend is left with a tax problem.

Am I suggesting hiding the nature of the money, or the actual borrower, or the tax evasion? I am not suggesting that.

Tax evasion is what is legal. It’s up to you to decide whether it’s moral. And in my opinion, if you can create your business through a legal activity, I see no reason not to.

What is not legal is tax evasion — hiding money, not declaring income, etc. Of course, it’s illegal. And it is certainly not recommended.

11| CRIMINAL ENTERPRISES

This is what the media would have you believe people are doing abroad: hiding assets from law enforcement, engaging in corruption, hiding the proceeds of crime, funding terrorist activities, laundering money, etc.

And, of course, it is illegal.

But the reality is that there are millions of people who simply live abroad. They travel, they are digital nomads, they are expatriates, and they choose the most convenient place to base their activities, which is often not their home country.

YOUR REASONS FOR USING AN OFFSHORE COMPANY

Most of the reasons for using an offshore company are legitimate. Half of them are legitimate and potentially tax neutral. Most of the other reasons are legitimate, if morally questionable. And only two of these reasons are completely illegal.

The small number of reasons that are truly harmful and illegal tend to be so exaggerated that everything else on this list that is legal and legitimate seems to be a dubious, even criminal, activity.

The moral debate is, in my opinion, stupid. Politicians make the laws. We do not. We simply follow the law. So if politicians want to complain about people following their laws, that’s their problem.

Of course, people who want to get free money from the state or some other body want to moralize about it. But frankly, when I pay taxes, I want to pay taxes in a place where my values are respected and I am respected. Looking for a developer to outsource your project there are many software outsourcing companies in India that may help in building your project.

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