Offshore Company, Offshore Corporation and Offshore LLC Formations

An Offshore Company refers a corporation, LLC or similar class of entity formed in a foreign country to that of the principals of the organization or one that can only operate outside of its country of formation.

Offshore means located or situated beyond one’s national boundaries. The term Offshore Company has two definitions depending on its perspective. From the standpoint of the principals of the company, it is a company that has been filed outside of the country where its principals (officers, directors, shareholders, members, partners) reside. From within its country of formation, it is a company that has been formed for the purpose of operating outside of the jurisdiction where it was originally filed.

One of the main offshore company benefits is that they are generally “tax neutral” meaning they are often tax exempt in the country of incorporation or they pay a low or nil effective rate of taxation when used as a holding company receiving dividend income for instance.

Disclaimer:  Xenia highly recommends clients seek professional advice as to what type and jurisdiction an offshore company should be setup for their individual situation.  Xenia does not offer corporate services. Xenia does NOT endorse any provider. The following list of providers is provided as informational purposes and convenience. Clients should do their own due diligence and research on any provider they choose to work with.

AC Management / i-Account (Seychelles LLC)   

A & P Intertrust Corporation – Serena R

Dentons – Randall Martin

George Town Trust – David Drummond

One Offshore Company – Graham Wooton

Offshore Company Corp

Premier Offshore – Christian Reeves

 

 

Below is content written by Christian Reeves of Premier Offshore…

The formation of an offshore company is an effective asset protection and tax mitigation tool. But these structures are also extremely misunderstood.

Many people who have read and researched offshore companies on the web, or spoken with advisers or online incorporation mills, and they are often filled with inaccurate and potentially dangerous information on the legitimate uses of offshore companies. This is especially prevalent in those who seek cheap advice from international advisers who are not experts in the US tax laws affecting their offshore company.

The following will help dispel these myths and explain the proper uses of offshore companies in a simple and straightforward manner.

A professionally structured and tax compliant offshore corporation can reduce or eliminate U.S. tax on an expat’s ordinary business income, while a non-complaint offshore company is the quickest way to land in hot water with the IRS.

Keep the following definitions in mind.

Offshore company or offshore companies are generic terms for an incorporated offshore structure.

An offshore corporation or offshore IBC is an offshore company organized and taxed as a corporation.

An offshore LLC is an offshore company organized as a flow-through entity for tax purposes.

A disregarded entity is a single member offshore LLC that is ignored for tax purposes. These offshore companies are generally used for asset protection or to hold IRAs

An offshore LLC with more than one member is incorporated and taxed as a partnership. These are offshore companies taxed as partnerships rather than corporations

Reasons to Form an Offshore Company

Operating through an offshore company allows you to conduct your business, bank transactions and/or personal financial affairs with maximum tax efficiently and a level of privacy and anonymity. Placing assets into an offshore company and incorporated legal structure provides a strong layer of protection from future liabilities.

Holding bank accounts and assets in an offshore company, rather than in your name, maximizes privacy and protection. In many jurisdictions, the company officers, shareholders and beneficial owners are not public record and their privacy is guaranteed by statute.

There are four primary uses for an offshore corporation or offshore LLC.

If you are an American living outside of the United States and operating a business, an offshore corporation can provide significant tax savings and deferral opportunities. These benefits require that you qualify for the Foreign Earned Income Exclusion discussed in the taxation section of this site. Tax benefits from retained earnings do not apply to an offshore LLC.

An offshore Self Directed IRA LLC can facilitate investments in to international markets and gives you control over your retirement assets. Likewise, an offshore corporation added to this structure may have significant tax benefits for the sophisticated investor. Please review the Self Directed IRA section of this website for additional information.

Placing your after tax assets in to an offshore LLC provides one level of international asset protection and, when combined with a foreign trust or foundation, maximum privacy and security can be realized. Advanced asset protection structures are discussed in the International Trust section of this website and a wide range of techniques are covered in my newsletter.

An offshore LLC can open bank accounts and Brokerage accounts around the world to facilitate currency and investment diversification.

Offshore Corporation or Offshore LLC

An offshore corporation, also referred to as an International Business Company or Offshore IBC, is an entity separate and distinct from its shareholder(s) while an offshore Limited Liability Company is tied to its members as a pass-through entity for U.S. tax purposes. Both structures provide the same level of asset protection but are treated differently by the tax code.

An offshore LLC with only one member is treated as a disregarded entity. This investment and asset protection structure has simplified U.S. reporting requirements and selecting the offshore LLC entity classification with the IRS will reduce your annual maintenance costs. A single member offshore LLC is best suited for the following:

To manage your IRA. The Self Directed IRA  LLC allows IRA income to flow-through to the retirement account, thereby maintaining the exempt or deferred status of the plan.

To hold an offshore bank account for a U.S. resident seeking asset protection. A person living in the U.S., who does not qualify for the Foreign Earned Income Exclusion, receives no tax benefit from being offshore. Therefore, the simplified reporting of an offshore LLC is preferred.

To hold an international business that is expected to generate net profits that are less than the Foreign Earned Income Exclusion amount and/or does not want to retain profits in the offshore company. Even if you qualify for the FEIE, the simplified tax reporting of a single member offshore LLC is preferable to the complex tax scheme of offshore companies if net profits are unlikely to exceed $97,600 for one owner or $195,200 for a husband and wife in 2013.

A multi-member offshore LLC is also a flow-through entity for U.S. tax purposes. However, it is reported as a partnership and requires a complex tax return. Offshore LLC partnerships are primarily used in joint venture arrangements.

An Offshore IBC or offshore corporation is best suited to hold an active business that will generate net profits in excess of the Foreign Earned Income Exclusion amount and for complex offshore IRA structures. If you, as the owner of a business, are living and working abroad, you may be able to defer U.S. income tax on net operating profits by retaining income in an offshore IBC. How to achieve this level of tax efficiency is covered in detail in my Expat Tax and Business Guide.

Diversified Offshore Companies Structure: Five Flags Approach

The key to a tax efficient offshore companies structure is diversification of entity, operations and banking. Likewise, the key to maximum asset protection is diversification of jurisdiction, offshore structure portability, and of your portfolio. A well designed offshore company structure will allow you to achieve personal freedom, privacy, and protection. If you are living and working abroad, this same approach may allow you to live tax tax-free, thereby increasing the quality of your life and reduce your cost of living.

A complete approach to offshore planning takes in to account five primary factors, and is typically referred to as the “Five Flags” approach. The five flags you must plant to achieve freedom, privacy and protection are:

Residency. Living and/or working in one country (where you pay little or no tax).

Offshore banking. Doing your banking in another country (where you can feel secure your deposits are safe).

Foreign Investments. Making investments in a third market (such as real estate, maintaining a brokerage account, storing gold, etc.).

Passport. Holding a passport in another jurisdiction, such as your country of origin or a “second” passport. For information on passport programs, see the Second Passport section on this site.

Offshore Company. Incorporating your business or protecting your assets in a country separate from any of the ones above. A diversified structure with multiple offshore companies is one of the best asset protection and tax planning solutions.

In most cases, the first flag to be planted is a bank account held by your offshore company. This opens up a number of investment and diversification options and will get you started on a complete Five Flags approach.

Offshore Company Selection Guide

When designing an offshore companies plan, start with a country with a history of strong privacy and protection laws and that will not tax your investment or business income. If you are operating a business, incorporating in a jurisdiction separate from where you live to minimize taxes in your country of residence.

Second, there is the question of whether you require an offshore LLC or an offshore corporation or offshore IBC. Most countries offer corporations, but only a few, such as Nevis, Seychelles, and Cook Islands, have U.S. compliant single-member LLC statutes. Other countries, such as Belize and Panama, offer LLCs but require at least two members, and are thus akin to U.S. partnerships and not disregarded single member offshore LLCs.

Next, here is a short list of possible domiciles, analyzing the primary motivation for the incorporation.:

If you are focused on simplicity, ease of administration, and privacy, you may wish to consider Seychelles, Nevis or Belize.

If you are focused on asset protection, you may wish to consider the Cook Islands.

If you are operating a business, or wish to create a hybrid corporate / foundation model, consider Cayman Islands or Panama.

If you are doing business in Asia, start with Hong Kong or Singapore.

If you are looking for a financial services or ForEx licensed entity, consider Belize, Panama, Cayman Islands or New Zealand.

If you will invest in a hedge fund, or require maximum transparency / compatibility with U.S. regulatory agencies, Cayman Islands is highly recommended.

Finally, consider your banking, business and residency situation before selecting the best jurisdiction for your offshore company.

Country Guide

Panama

The preferred country from which to operate a business is Panama. Panama City is a first world metropolis with first world amenities and technology. Employment costs are about 25% of the United States and English speaking labor is abundant.

Also, a preferred jurisdiction for an offshore IBC or an international Foundation for asset protection purposes is Panama. Panama’s legal system is well developed and tested, professional local counsel is available, and their advanced corporate code allows for maximum protection.

Finally, Panama’s Foundation law provides a cost effective alternative to the Cook Islands asset protection trust.

Nevis

The most common jurisdiction for single member offshore LLCs is Nevis. This Eastern Caribbean nation was a pioneer in the offshore formation industry and offers simplicity and maximum privacy and protection to both offshore IBCs and offshore LLCs.

Nevis also offers a very adaptable offshore trust code that allows you to create your own licensed trust management company, something not available in any other jurisdiction. As a leader in privacy, Nevis offers many unique planning opportunities.

Belize

Like Nevis, Belize provides a very efficient corporate, LLC and trust code which can be adapted to just about any situation. Their LLC is suited for local investments and requires two officers, akin to a U.S. partnership.

Belize also offers the simplest residency program around and has a nice array of small business banks with excellent records on privacy and stability / capitalization. Both of these factors are beneficial to the American abroad looking to qualify for the Foreign Earned Income Exclusion.

Belize is ideal for those seeking for an offshore structure with minimal maintenance and who are investing or doing business in Panama, Mexico, or South America.  Belize is also good for those considering to develop a licensed currency trading platform.

Seychelles

The most popular offshore company among U.S. lawyers these days is the Seychelles IBC. Seychelles is lesser known than Nevis, but just as effective. Seychelles’ flexible tax exempt company is best utilized as a personal services corporation, holding company, royalties/patents/copyright company, or investment company (real estate, equities, commodities, ForEx, etc.).

Seychelles lawyers are experienced in European Union transactions and a Seychelles IBC is the most efficient entity through which to open an account at an E.U or offshore U.K. center (Isle of Man, Gibraltar, etc.).

Cook Islands

The Cook Islands are the preeminent asset protection jurisdiction. Their trusts, legal configurations, statutes, and court system based in New Zealand, are the most tried and tested around.

Formation of a Cook Islands offshore company is a cost effective way to access this asset protection legal history, and gives you access to New Zealand banking facilities. For example, a Cook Islands LLC can open an account at ANZ Bank (click here), a bank not available to company from any other jurisdiction.

Cayman Islands

Cayman Islands is a UK Territory and a well respected and well regulated jurisdiction. Back in the day, the Cayman Islands were the original offshore jurisdiction. Now, this island is closely aligned and transparent with the U.S. government and IRS. As such, a Cayman offshore corporation is popular with large fund formations and investments, individuals seeking entry to the most compliant banks, and is the jurisdiction of choice for large offshore IRA structures…and apparently home to Mitt Romney’s offshore structure.  Cayman is also a Level 1 IGA FATCA / CRS participating country.

80% of USA Hedge funds are administered out of the Cayman Islands, helping to make the Cayman Islands is the largest offshore banking center with 350 banks and deposits worth more than US$5 trillion. It is second in captive insurance after Bermuda with assets worth $20 billion and it is believed that the island’s trust sector manages more than $500 billion.

Hong Kong

Hong Kong has long been the door to mainland China. If you are looking to do business in China, or in the RMB, Hong Kong is the place to start. I have been forming offshore corporations in Hong Kong for a decade and have cultivated strong relationships in the region.

Hong Kong imposes no withholding tax, sales, tax, capitals gains tax, net worth tax, or VAT and there is no tax on investment income or capital gains. Its companies require annual financial statements, thus local directors and tax and business counsel are required.

Singapore

Singapore is one of Asia’s most important financial centers. Its concentration of financial institutions and efficient capital markets make it a leader in global finance. Since its abolishment of currency exchange controls in 1978, Singapore has evolved into one of the world’s premier banking centers. Indeed, in recent years, substantial capital has moved into Singapore from traditional European banking centers due in large part to new regulatory requirements promulgated by the European Union and the shredding of Swiss banking secrecy by the U.S.

A Singapore corporation requires two local directors and at least two individual shareholders or one corporate shareholder. Bearer shares are not permitted. Accounts must be audited by a qualified resident examiner. General meetings must be held annually and a local company secretary is required.

Therefore, annual costs in Singapore are significant when compared to traditional offshore jurisdictions. Like Cayman, Singapore offers top flight legal, tax and business counsel, and is a popular jurisdiction for large cooperatives and investment accounts.