Word Street Journal

Offshore accounts have unjustly become synonymous with fraud for many. However, they are often necessary not just for shadowy businesses, but also for entirely legitimate expansion activities.

Let’s discuss how offshore companies work, why they are needed for businesses, how to choose the right jurisdiction, when offshore activities are legal, and in what cases criminal charges may arise.

What are offshore companies?

There’s no universally accepted definition of the term “offshore” in the legal framework. It is often mistakenly associated with shadow businesses.

An offshore territory is one that offers favorable conditions for business, such as low taxes, simplified reporting without the need for explanations, the right to keep business owners’ identities confidential, and more. A bank account registered in an offshore country is referred to as an offshore account.

Several characteristics define classic offshore jurisdictions:

• There are no direct taxes, but companies pay an annual fee to the government.
• Special corporate laws and regulations apply.
• Companies may not need a physical office or staff but must use the services of a registered agent and have a registered office address.
• The company is managed by local trust or legal firm employees.
• Businesses can enhance their confidentiality, for example, through closed registries.

Offshore territories gained popularity in the 1960s and 1970s due to rising tax burdens and restrictions on capital flows. Small islands—former colonies and dependent territories of the UK—became favorable locations for reducing tax liabilities, as about 80% of financial flows at that time were associated with this kingdom.

Globalization and the technological revolution have enabled the movement of funds worldwide and the execution of various transactions.

Today, offshore companies are an integral part of both global and national economies, even in developed countries, as they concentrate significant sums of money. The vast majority of multinational giants have branches and bank accounts in offshore jurisdictions.

Why are offshore zones created and who benefits from them?

Territories with low taxes and opaque reporting are advantageous for both their creators and users.

Benefits for entrepreneurs:

• Confidentiality of personal financial information. Hiding your income from the tax authorities of your country of residence is nearly impossible and illegal. However, opening an offshore company and bank account can securely protect your financial status from competitors, ex-spouses, and cunning relatives eager to dip into your pockets. Those who shouldn’t know about your finances won’t find out.
• Asset protection. Offshore jurisdictions allow businesses to safeguard their assets from illegal claims and hostile takeovers.
• Improved financial conditions. Low or nonexistent taxes in offshore zones stand in stark contrast to conditions in some European countries, where profit tax can reach 20% or even 45%.
• A business owner may become a citizen of the offshore country by depositing funds into their bank account or paying a government fee. This opportunity is not available everywhere.

Benefits for creators of offshore zones:

Administrations of offshore territories can attract foreign capital thanks to their status. They receive little to no revenue from taxes, don’t audit reports, and don’t require transparency in operations.

Offshore and free economic zones create conditions for increased productivity in regions and countries, attracting investors for local businesses, creating jobs, and fostering entrepreneurship as a whole.

Benefits in offshore zones indirectly contribute to state revenue, including through taxes and fees for opening accounts and registering companies.

Offshore states do not interfere in the affairs of entrepreneurs within the law, do not conduct audits of their activities, and do not involve regulatory bodies to check companies. In return, the administrations expect capital inflow, investments, and economic strengthening. Even deposits in offshore banks help these financial institutions solidify their positions and positively impact micro and macroeconomics.

How do offshore companies operate?

To start, a business registers an offshore company. An offshore company is any company registered outside the country of the business owner. OP Group experts will gladly help you set up an offshore company.

An offshore company purchases goods in one country and resells them in another. The profit accumulates in the offshore company. It buys the exported goods at a reduced price and then sells them to the final buyer at the world market price. This way, companies retain the untaxed and unregulated difference, plus they can adjust prices based on conditions in different countries.

Offshore companies can lend funds accumulated in foreign accounts to domestic companies. The offshore company can return the money at any time, while the domestic company can reduce its taxable profit by the amount of interest paid on the loan.

Offshore companies can also be used for intellectual property activities. A trademark or intellectual property is registered abroad—under the offshore company that holds the rights. The domestic company can license the trademark, allowing it to reduce its taxable income by the amount paid to the offshore company for trademark use.

Advantages of using offshore companies

Some offshore companies are registered not only to minimize taxation but also for confidentiality, including protection against hostile takeovers.

Key advantages of offshore companies include:

• Absence or minimal taxation.
• Ability to transfer funds abroad.
• Protection of data regarding company management.
• Protection of business assets.
• Speed and flexibility of the registration process: no need to pay charter capital, minimal requirements for directors and shareholders, and an easy incorporation procedure.
• Simplicity of managing an offshore company. Shareholder meetings can be held anywhere in the world, including online.
• No reporting: no audits, no tax or financial reports required.
• Closed registries of beneficiaries. Company data is not publicly accessible.
• Accounts can be opened in any bank worldwide, with no currency control or need for transaction passports.
• Anonymous ownership of real estate. It can be purchased through offshore companies to conceal the true owners.
• Selling a business can be done by transferring shares of the offshore company to the new owner.

Types of offshore zones

Offshore territories are divided into three groups:

1. Classic or island (Caribbean) offshore zones. Companies pay an annual fee to tax authorities but do not submit any financial reports or pay taxes. These zones are characterized by high confidentiality. However, one downside is the low level of trust that companies and banks have in such businesses. Classic offshore territories include Belize, Seychelles, the Isle of Man, Guernsey, Jersey, and the Dominican Republic.
2. European offshore zones with low taxation. Here, profit tax is paid at a significantly lower rate than in neighboring countries. For example, in Cyprus, the corporate tax rate is 12.5% after joining the EU.
3. Territories with special tax regimes. Companies registered in these jurisdictions may not pay local taxes if they have no operations or income on their territories.

Is using offshore companies legal?

Registering an offshore company is legal. However, capital outflow is a negative consequence for any state. This phenomenon signifies a lack of tax revenue for the budget. Moreover, regulatory bodies cannot verify offshore companies, which increases risks related to money laundering.

For this reason, we observe a process of “de-offshorization,” which has been ongoing for several years. Offshore jurisdictions have had to concede certain positions, but they haven’t lost all their advantages; registering an offshore company still offers significant benefits.