The information below is a general guide to set up an offshore company. The actual procedure and what you can and cannot do will vary between tax havens (for example, as to whether bearer shares can be issued, the minimum number of directors and whether you can use nominees).
However, the following list will give you a useful insight into how an offshore company is set up:
The first step will be choosing the country in which to form your IBC. Hopefully, after reading this article, you will have some idea as to which country is best for you. You’ll have to take into account not just the tax environment of your chosen country but also what the offshore company will be used for, the setup and ongoing costs, and privacy and confidentiality issues.
Next, you’ll need to think about the type of offshore company that you want to form. Many offshore jurisdictions will offer different types of IBC companies, for example exempt companies, non-resident companies, holding companies, as well as other entities such as LLPs and LLCs.
With respect to IBCs the key differences will usually be in terms of filing requirements and annual fees but you should ask your incorporation agent about the differences between the various types of entity.
Next you will need to choose your offshore company’s name. You’ve got pretty much a free rein here although you’ll need to be guided by your incorporation agent to ensure that the name does not break any restrictions in the country of incorporation. Note that if you form a ready made company, you will need to change the name of the company to one that you want.
Next the articles of association will need to be drafted. These are basically the rules that govern the operation of the offshore company and are often provided by your incorporation agent in the form of standard pro forma documents. You could however draft customized ones if preferred. However for most people the standard articles should be fine.
You will then need to think about the share capital and method of funding. When you complete forming an offshore company you may need to transfer some money into that company. There are essentially two different ways to do this, either as a loan or as share capital. The advantage of a loan is that it allows a tax-free extraction of funds in the future by way of a loan repayment.
Note that many developed countries (for example, the UK) have special rules (known as ‘thin capitalisation’ rules) that prevent overseas individuals forming companies with low share capital and large loans.
Because interest on loans is tax deductible, but dividends on shares are not, offshore companies could gain an easy tax advantage by forming UK subsidiaries with large loan accounts. The taxman therefore restricts the tax deductibility of interest unless the debt/equity ratio of the company is realistic (in other words, would a third party bank lend the funds to the company in question?). Of course for the nil-tax offshore jurisdictions the thin capitalisation rules will not be an issue if there is no tax charged on the profits.
When we’re looking at share capital usually the amount that you initially subscribe is low (for example, $100) and this nominal share capital bears no relation to the underlying value of the offshore company.
For example, a $1 share could easily be worth $10,000 — the value of the share will depend on the level of assets and profitability of the company.
There are various types of shares (or, more correctly, classes of share) that could be issued by the company and you’ll need to decide which shares your company will issue.
Bearer shares — These are shares that give the holder of the share certificate the rights of ownership. In theory if you lose the share certificates you would then lose the ownership over those shares.
The benefit in issuing bearer shares is that there is no disclosure of the real owner’s name in the shareholders’ register. This makes bearer shares ideal where anonymity is important.
In practice, bearer share certificates aren’t issued in many non-offshore jurisdictions (and where they are, the share certificates are usually kept in a locked safe). So bearer shares are not permitted in the UK, US, Australia, Cyprus, Barbados and Singapore. All shares in these jurisdictions must be registered.
The advantage of bearer shares is that they offer excellent privacy. However, the same rights and responsibilities apply to this type of share as to any other and just because the shares are held as bearer shares doesn’t alter the tax position. You would still be liable to tax on either any dividends received or on a gain on disposal, subject to the tax rules of your country of residence.
Preference shares — These usually offer the shareholder a fixed dividend receipt paid in preference to ordinary shareholders. They do not usually give owners the right to vote on company affairs.
Class A & B shares — Having different classes of share allows you to give different rights and benefits to different groups of shareholders.
You could, for example, grant class A shares to be held by you with full voting and dividend rights and class B shares with no voting rights but full dividend rights to be held by someone else. These could be gifted or subscribed for by your children, allowing an entitlement to income with no influence on the operation of the company.
Of crucial importance is deciding who will be the directors of the company. You’ll need to ensure that the minimum number of directors is met (usually 2-3). Often it will be you and your wife or other family members/business partners who will be acting as directors.
If you’re looking at establishing an offshore IBC you may need to consider using the services of nominees to act as directors.
A lot of the offshore incorporation agents will try and convince you to use them for this purpose. Aside from the fact that they will charge you for this service, you need to realise that they will have control over your company.
If you’re keen to establish that the company is controlled from overseas a good option is to arrange for the company to be owned by an offshore trust, with control passed to a professional trust management company.
You could then be a beneficiary of the trust and, provided the trust exercised control overseas, the company could be argued to be non-resident.
If required, the trustees could even act as directors of the company. This would make it easier to establish the company as non-resident.
How Long Does it Take to Set Up an Offshore Company?
This will depend on the country in question and will vary from between one week and one month.
You’ll often be offered an off-the-shelf corporation as a fast option. You need to be careful here as you do not know the company’s history. In other words, whether the company was engaged in something that will come back to bite you later on.
Given that the incorporation process is usually pretty straightforward it usually makes sense to incorporate from scratch.
How Much Does it Cost to Set Up an Offshore Company?
As you’d expect, the cost will vary tremendously depending on which country you choose and which incorporation agent you use. You’ll be looking at an IBC in Costa Rica or Panama for as little as £500. By contrast, incorporating in Bermuda will cost you several thousand pounds.
You need to be careful as there are a number of offshore company formation and lawyers that charge outrageous amounts of money to set up and maintain both foundation, trust and IBC structures. Some of these prices are way out of line but most people do not know any better and end up paying quite a bit.
As with everything, do your research before committing yourself.