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An Offshore Corporation: Is It For You?

Before we delve into this subject, a couple of things need to be made clear.

First of all, the information in this chapter – as in all of this book - should be taken as being informational in nature, and not meant to represent any sort of bona-fide legal counsel. Incorporation in a foreign country while continuing to operate inside the United States is a highly complex process that requires uncommon legal and financial expertise. Given the current geopolitical environment, Federal agencies are taking a hard look at individuals and small businesses who attempt to set up in offshore locations. Mistakes in the process can incur scrutiny from Federal agencies that you may not want, and in some cases, can land you in prison (or worse).

Secondly, you may have heard that many large U.S. corporations are based off-shore in order to escape U.S. tax liabilities. Without getting into the ethical questions this raises – mainly, the internalization of profits and enjoying free use of U.S. infrastructure while externalizing the costs of maintaining that infrastructure onto the backs of the average U.S. worker – remember that these corporations have far more economic clout than many small nations. For the past quarter century, abandonment of anti-trust laws and deregulation has made many of these corporations laws unto themselves, backed by a small army of lobbyists in Washington DC who are paid millions of dollars every year to influence members of Congress to pass laws that favor them – not you.

While most of this lobbying activity over the past quarter century was completely within the law, a good deal of it was not – and the U.S. electorate finally lost patience. If the elections of 2006 were any indication, change is in the wind. These changes tend to take place very slowly however, and it may require another generation or more as well as an entire cultural shift of values before true social responsibility becomes a legal requirement of engaging in free-market capitalism.

Since most of these laws are written for large, multi-national corporations, chances are good that setting up your small company in say, the Bahamas or the Cayman Islands will probably not afford you any benefits you couldn’t enjoy by simply incorporating in Delaware or Nevada. On the other hand, if you have the time and the money as well as access to expert legal advice, are not troubled enjoying the benefits of using American infrastructure while putting the responsibility for maintaining that infrastructure on someone else and are fairly confident that your operation has nothing to hide from the Federal government, read on…

According to Rhiannon Williamson, who is the proprietor of Shelter Offshore (http://www.shelteroffshore.com), incorporating offshore can incur one or more of five benefits to the member(s):

1. Simplified operations. Depending on where the corporation is chartered and the nature of the business, auditing and accounting procedures are far less demanding. (This is not true of financial service industries, incidentally.) Basically, you’ll spend less time doing paperwork.

2. Simplified reporting. As you remember from the last chapter, every state

has its own reporting requirements, whether or not you actually operate inside that state. Since business activities of an “offshore” corporation rarely take place in the jurisdiction of incorporation, there are generally far fewer reporting requirements. In addition, you most likely won’t need to provide much in the way of personal information about your company’s director(s) - in other words, yourself.

3. Reduced taxation. Most rules state that a company set up in a particular jurisdiction must pay taxes only on income derived from the local economy – so if you’re set up in the Bahamas yet never make any actual money there, you can legally operate tax-free. Basically, the way large multi-national corporations operating in the U.S. do it is to use an offshore company as part of their overall international business structure, then post their profits in the offshore jurisdiction – thereby incurring no tax liability.

4. Asset protection. Incorporating in a jurisdiction different from the one in which you actually do business can enable you to shield assets from potential lawsuits and actually keep business transactions out of view from potential competitors.

5. Personal privacy. Not only are reporting requirements far less stringent when it comes to personal info on the company’s owner(s) and members, many jurisdictions allow you to protect your own identity by appointing proxies for your offshore corporation.

Popular Offshore Jurisdictions

Most of these are located in the Caribbean, with a handful in Asia. At least one of these jurisdictions – Puerto Rico – actually offers the best of both worlds. An entity can operate under the protection of U.S. law while enjoying many of the benefits of an offshore jurisdiction (see below).

When selecting an offshore jurisdiction in which to incorporate, you’ll need to ask yourself several questions, as each jurisdiction has its own set of rules and regulations. For example:

1. How much privacy will you need?

2.) Will you be using “Double Taxation” treaties (agreements that allow profits

from high-tax countries to be extracted to tax havens as interest, royalty payments or management fees)?

3. In which countries do you intend to do business?

3. Is your company a business, a consulting firm or a financial and investment services provider?

3. How much are you prepared to spend on annual fees?

3. Will you be issuing shares?

3. Do you intend to use proxies?

3. What are your current profits?

3. What is your capitalization level, and what are the repayment terms?

Your answer to these questions will have a great deal to do with where you choose to set up your off-shore company.

British Virgin Islands

A BVI Corporation can be formed in 3 business days. The main advantage is that only one director or shareholder is required. This can be one and the same person, or it can be another corporation. There is no requirement to appoint local shareholders, directors or a secretary. A BVI Corporation can maintain a bank account in the BVI as well as hold shares of another BVI company. It may not carry on business activities with BVI residents, act as an insurer, or initiate any business connected with banks or trusts without special licensing.

Seychelles

This is an island group located in the Indian Ocean just off the east coast of Africa and north of Madagascar. An offshore corporation can be set up in Seychelles faster than almost anywhere else – often in as little as one day. Since passage of the International Business Companies Act of 1994 – regulating offshore trusts, offshore banking, offshore insurance, international shipping and aircraft registration – offshore financial services has become the major industry. A Seychelles Corporation requires one director and one shareholder – however, either or both of these may be a natural person or a corporate entity. Local residents may act as proxy directors or shareholders, and corporate meetings may be held anywhere in the world. Legal requirements regarding management structure is possibly the most flexible of anywhere in the world.

Hong Kong

Since the first Portuguese traders arrived in 1513, Hong Kong has been a center of trade and commerce. The former British Crown Colony reverted to the control of the communist government in Beijing in 1997, however the agreement between the U.K. and the People’s Republic of China insures that Hong Kong will remain virtually autonomous and continue to maintain its own systems of law, monetary policy and customs through the year 2047.

If you plan to do any business in Asia at all, you should investigate setting up a Hong Kong corporation. Aside from having the least restrictive economy in the world, Hong Kong is virtually the crossroads of Asia with easy access to the Philippines, Indonesia, Singapore, Vietnam, Thailand, Taiwan and the PRC. Taxes are low and the taxation system is much simpler than many other places. In addition, flow of information is virtually unrestricted over a state-of-the-art infrastructure.

Figure 6 – Financial District, Hong Kong

Belize

Formerly known as British Honduras, this country offers many of the same benefits of other off-shore locations as far as privacy, taxation and ease of operation. In fact, under Belize corporate law, bookkeeping and annual accounts are not even required! The Belize IBC Registry is fully computerized, and a corporate entity can be formed in as little as an hour.

There are some caveats, however, as the stability of this country may be in question. Although legally an independent member of the British Commonwealth, neighboring Guatemala has long claimed Belize as a province of its own country. As of this writing, the border dispute has yet to be resolved.

In January 2005, there were civil disturbances among the citizens over substantial tax increases in light of government incompetence and corruption. Union employees refused to report for work for two days, and citizen frustration boiled over into a violent demonstration in front of the National Assembly Building in Belmopan. It was the third such disturbance in twenty years.

Panama

In Panama, there are no minimum capital requirements – in fact, a corporation may operate without any issued shares whatsoever. You will be required to have three directors, however these do not need to Panamanian nationals – or even reside in the country, and their information is not public record. A Panamanian corporation must keep a share register as well as a book of minutes, but this too can be located anywhere. There are no income tax returns required, no taxes on capital, and no accounts or summaries that need to be filed with the Panamanian government except for the annual franchise tax, which must be filed by the registered agent. There is also no obligation to hold specific meetings, except as specified by your own company’s by-laws .

Cayman Islands

The Cayman Islands are home to the largest offshore banking center on the planet. While the Cayman Islands offer exceptional political and social stability as well as very flexible rules when it comes to incorporation and banking, it is also rather expensive to get set up there; licensing fees run from $500 to $1750, depending on the size of your company. That said, the Cayman Islands have never had taxes of any sort on income, profits, capital, assets or capital gains. In that respect, a Cayman Islands Corporation is treated exactly like a natural person. In addition, there are few restrictions on corporate freedom or a company’s ability to transact any kind of business with anyone, in any part of the globe.

Puerto Rico

As mentioned above, Puerto Rico – as a U.S. Territory – furnishes your business with the protections of U.S. laws while offering almost absurdly low tax rates. The top tax rate in Puerto Rico is 7%; certain “pioneer industries” are taxed at rates ranging from 4% all the way down to zero.⁴ Because it is a U.S. Territory, goods from Puerto Rico are not subject to tariffs, and profits on U.S. sales are tax-exempt. The government of Puerto Rico also offers many incentives, tax credits and deductions, cash grants and other assistance designed to ease the burdens of business and encourage economic growth. Visit the Puerto Rico Federal Affairs Administration website at http://www.prfaa.com/eng/QuestionsGovE.asp for additional information, particularly as it relates to high-tech industries.

Figure 7 – San Juan, Puerto Rico

Where To Get Started

Again, an online search will bring up over a million different paralegal service providers, willing and eager to help out. Some of the services that will help you incorporate in different states also offer assistance should you want to set up an offshore company. Due diligence is once again necessary, as many of these organizations are of dubious reliability. Even among the reputable ones, fees can vary widely – and are always added on top of any and all fees that are charged by the jurisdiction in which you intend to establish a business entity.

If you are determined to set up an offshore company, your best course of action is to consult with an attorney – preferably one specializing in international banking and business laws who is familiar with the jurisdictions in which you plan to incorporate. Such consultation does not come cheap, but is part of the cost of doing business – and is an investment that will save you a great deal of money and headaches up the road.

Click&Inc can incorporate a business in 24 hours in all 50 states and save over $543 in legal fees. Our services include customized articles, bylaws, minutes, completed EIN form and personalized stock certificates. save taxes by incorporating

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