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Information for the following article was provided by one of
our International Consultancy firms (International Company Services
Ltd.) and is derived from source material contained in our Home
Study Course HSC001 "Doing Business with Privacy - Offshore".
The International Business Company (IBC) is a corporation with
the benefits of limited liability like any other corporation. It
is a distinct legal entity that limits any claims against it to
the ‘paid in capital’ and assets and nothing more. This
of course protects the principal(s) from the possibility of utter
ruin if the entity is attacked due to liabilities.
The proper use of an IBC however, can extend the benefits far beyond
just the corporate limited liability.
With a company being legally distinct from its shareholders, tax
planning opportunities are immediately created. It is of course,
the case in many countries that tax rates vary between individuals
and limited companies.
It is also possible that the proprietor of a company may be resident
in a high tax jurisdiction with the company he owns being registered
in another lower tax jurisdiction. These differences allow possibilities
for legitimate tax minimization - tax deferral - and legal tax avoidance
altogether.
Individuals may warm to the words of the British judge Lord Clyde
when he declared, "No man in this country is under the smallest
obligation, moral or otherwise, to arrange his legal relations to
his business or to his property as to enable the Inland Revenue
to put the largest possible shovel into
his stores". U.S. courts have ruled similarly. In similar
vein, the directors of a company may consider it only their duty
to the shareholders to minimize legally the tax liability of their
company.
The offshore islands off the coast of Europe and North America
were the classic offshore areas. They were characterized by low
taxes or no taxes, compliance requirements which were rather less
than in the more populated countries and they might also have had
flourishing finance sectors - dealing indeed with the monies which
they received from neighboring high tax countries. If this describes
the original sense of the word offshore the word is now defined
by its extended characteristics so that land locked countries such
as Liechtenstein and Andorra are referred to as being offshore.
Offshore areas with their low taxes, tax exemptions, and in some
cases, no tax status, occupy a vital and growing role in the international
economy. Use of offshore companies and trusts is increasing too
with the liberalization and in many cases abolition of exchange
control systems by the developed nations.
Clients sometimes ask, "Which is the best offshore area to
incorporate in?" There can be no standard reply to the question
as the answer really depends upon what the client intends to use
the offshore vehicle for and upon his own personal or business circumstances.
There are however, a number of factors which must be considered.
The first is the tax regime of the country and just
as important is the political and economic stability of that country.
The country chosen should not be subject to violent political swings
or the likelihood of military coup or invasion.
Other factors include the quality of communications with the country,
its language and legal system, the degree of confidentiality afforded
by its system, its exchange controls and banking facilities. Regard
should be had too, to restrictions which the country might impose
upon certain types of business. For example, if a professional services
company is being set up to pay three consultants, this would be
better arranged in a country where the company would not be required
to comply with
local employment agency legislation.
An obvious factor is cost. What is the incorporation fee and what
are the audit and other statutory compliance requirements?
When considering the use of offshore facilities, clients are reminded
that the tax and other benefits which can be obtained will depend
on the country of residence and possibly the domicile of the beneficial
owner and any relevant anti-avoidance legislation. We always encourage
clients to take appropriate independent professional advice before
setting up an offshore company or other entity.
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