Offshore companies are set up for one of 2 reasons. The business is either involved in some kind of international trade or it is used as some kind of investment vehicle (holding co.), the latter of which has gotten more difficult to establish.
Creating a holding company to hold investments is attractive because of the 0% tax rate. One can invest all he wishes and pay nothing on the gains. This is great and perfectly legal, and as a matter of fact I set up a holding company in the Marshall Islands for that exact purpose.
Since 2013-2014, more and more banks are unwilling to open offshore bank accounts for holding companies. Governments at that time (mainly US) were fighting hard for more transparency from offshore districts, making it very difficult to open new offshore company accounts at all major banks. The industry has since then focused mainly on servicing businesses involved in some kind of international trade.
Setting up a corporate account
During the application process of opening an offshore corporate account, you will be asked to provide invoices and recent payment receipts from clients. If you do not have this, most banks will not even consider your application. The reason for this is they want to see that you are already involved with some kind of international trading, and not setting up a ‘holding’ account to make investments. Ideally, its best if you already have clients at an existing business elsewhere, as they accept receipts or proof of payment made to your other business (or even your personal name).
On establishing an offshore company
Cost: $3,000 – $10,000 USD
If I learned any one thing from my experience setting up an offshore company, it would be that it is extremely easy to set up an offshore company, but difficult as hell to open a bank account for it. And if you cannot open a bank account for it, your company is more or less useless.
If I were ever to establish another company in an offshore district, I would do it in reverse order:
First, find an international bank that you like and want to bank with. Take your time, because this is important. Talk to staff, ask them questions. Make sure you trust these guys and they can provide you with everything you need.
Next, set up a company in that district. The offshore district which you register your company does not matter. As long as the tax rate is 0%, whether it be BVI, Marshall Islands, Belize, Labuan, or any other district, they are all the same.
Now, the reason you want to set up a company in the same district as your bank is as follows: When you set up a company, you will do so through a lawyer or accountant specialized in setting up those businesses. The cost will be anywhere from $3k USD to $10k depending on your choice of lawyer and jurisdiction (You can find better prices in less mainstream areas like Labuan). Along with that fee comes a complementary introduction to a bank to open your bank account for your company. If all goes well, you will be able to register your co and open the bank account all in one shot. The banks that your lawyers will have access or connection to are generally in the same country as the company they set up for you. This is not always the case, so you should check with your lawyer first if they can introduce you to the bank you want or not.
In the event that your lawyer is unable to introduce you to a bank to set up the bank account, this complicates the process by a factor of 10. The due diligence done by the bank for new account applicants is very strict and the lawyer takes care of half the work. If you were to apply for a bank account on your own without an introduction, you would need all sorts of references from other lawyers and accountants that are much more difficult to get.
Don’t forget, there is a yearly-recurring registration fee of $700~ (depending on country)
Is it worth setting up an offshore company?
It depends on your business. If most of your clients are from the same country (consulting etc.) then an offshore corp doesn’t make much sense. Where an offshore corporation really adds value is if you:
1. Trade products between different countries
2. Spend a lot of time in different countries and pay a significant amount of taxes from investments
1. Say you have a business that sells packaged seafood from Japan to Taiwan. You neither make the seafood in Japan nor use the seafood in Taiwan. You simply buy from a Japanese factory and sell to a Taiwanese supermarket chain. An offshore business makes perfect sense. You play the intermediary that is neither in Japan, nor Taiwan, and in doing so pay no taxes on your business activity.
2. If you have investment income that greatly exceeds the costs (both time and money) listed above, it is definitely worth exploring whether or not you can set those investments up offshore.
Hong Kong and Singapore
Are both considered offshore jurisdictions, but not really. Businesses can be exempt from taxation, but comes with certain caveats.
In Singapore, the corporate tax rate is 22%. The catch, however, is that income from foreign sources is taxed at 0%, therefore making ‘offshore’ status applicable to a scenario like the one above.
The same applies to Hong Kong. The corporate tax rate there is normally 17.5%, but drops to zero for foreign income. In addition, there is also another caveat for Hong Kong offshore companies that states that companies cannot have any affiliation with Hong Kong (no employees, no office, no clients in HK) to enjoy this ‘offshore’ treatment.