Bahamas: Professional Corporate & Financial Services - 2. Types Of Offshore Companies

Last Updated: 18 May 1998
The efficiently planned use of an individual, or more complex structure of offshore entities, can give many commercial and fiscal advantages to the discerning user. We detail herewith the various general uses of offshore entities however we would remind clients that their jurisdiction of tax residence, local anti-avoidance legislation, coupled to the geographical location where, or the type of business for which they intend to use the offshore entity may dictate what jurisdiction or type of structure is more suitable to meet their requirements.

We would also point out that the comments made herein are purely for information purposes and are not meant to constitute legal or other professional advice. Where appropriate we always recommend clients to consult with either legal or accountancy professionals in their country or residence or of the proposed business activity. We regularly co-operate with and advise such professionals in determining a suitable corporate structure to satisfy the specific requirement of their clients.

TRADING COMPANIES

A company involved in import-export business may establish its "Trading Company" in an offshore area. The location of such would depend on the nature and geographical terms of the business itself. For example a company purchasing from China, and selling goods in Australia could establish its offshore "Trading Company" in Hong Kong, the most commonly used jurisdiction within the Asia Pacific Region. In this instance as long as the Hong Kong company conducted no business in Hong Kong, the profits created would be free of taxation, whilst the location of the "Trading Company" would be acceptable to the Chinese suppliers. Another suitable location for the operation would be to use a Singapore registered company.

Another example would be for trade between India and the United Kingdom, where one could establish an Ordinary non-resident company in Mauritius for the purpose. In this instance both India and the United Kingdom have Double Taxation Treaties with Mauritius, whereby profits generated by the Trading Company would be taxable at a lower rate of between 0% and 35% in Mauritius.

Another example of effective tax planning structures, now becoming more common in use, is the creation of a Trading Company in Cyprus for commercial activities between Eastern Europe Countries (particularly Russian and Poland) with certain European Community Member States (notwithstanding the United Kingdom, Republic of Ireland, and Germany), the United States and Canada, all of which have valid Double Taxation Treaties with Cyprus. It may be possible to register the Cyprus company as a branch of an existing offshore company, however the same principles exist whereby profits would be taxed in Cyprus at a lower rate of 4.25% under the terms of the Double Taxation Treaties. Similarly India now enjoys a Double Taxation Treaty with Cyprus, the planned use of which can be extremely beneficial for inward investment into India by non resident parties.

We have available a brochure which explains fully the specific taxation advantages and planning criteria whilst using any of the current Double Taxation Treaties held with Cyprus. We will be pleased to send you a copy on request.

Other jurisdictions commonly used for the establishment of trading companies include Jersey, Channel Islands (Exempt companies), the Isle of Man (Non-Resident), and the Republic of Ireland (Non-Resident), although when trade with Member States of the European Community is involved one must take into consideration the question of compulsory registration for Value Added Tax which is not possible in Jersey or for an Irish non-resident Company.

HOLDING COMPANIES

Probably the most common use for holding companies is where an individual does not wish it to be known that he is the "owner" of a particular company he will "adopt a corporate identity" which will become the actual owner. The most common (and lowest priced) jurisdictions nowadays for holding companies are the Bahamas, Belize, and the British Virgin Islands, all of which have the added advantage of no public filing of the details of either directors or shareholders, and the possibility to issue either registered or bearer shares.

Another common use for holding companies is the registration overseas of the company as a foreign business venture, either as a wholly owned subsidiary, joint venture, or representative office. Significant tax advantages can also be gained by utilising offshore companies for the acquisition of residential or commercial property. When owned by an offshore company personal inheritance tax or capital gains tax on a subsequent disposal can be avoided. The sale of property is effected by the transfer (and sale) of the shares of the company, with the reduction of property purchase costs to the purchaser.

INVESTMENT COMPANIES

Somewhat similar to Holding Companies in terms of the commonly used jurisdictions, Investment Companies rely on the confidentiality aspects of their controlling and beneficial interests. Commonly an "Investment Company" will open a bank account in an offshore area free of taxation on deposited funds. The investment capital may subsequently be invested in fixed assets or business in a third country with which the investor may be connected. A loan agreement can be arranged such that interest and capital repayments are made free of withholding or profits tax, thus minimising capital taxation in the jurisdiction in which the loan was made.

Similarly high net worth individuals will incorporate "Investment companies" for holding their own investment portfolio in stocks, bonds, securities etc. in a third country. The investments would be held in the corporate name, thus protecting the ultimate beneficial owner's identity, and their exposure to taxation on trading profits and dividends.

INTERNATIONAL CONSULTANCY COMPANIES

With the movement of certain European Countries and the USA and Canada towards taxing their nationals on their worldwide income, there still exists scope for the self employed professional such as lawyers, architects, designers or business consultants, to employ an offshore company in a second jurisdiction to receive their professional fees since such an entity would be considered a different legal "person" to the consultant.

Customarily jurisdictions requiring the minimum of reporting such as the Bahamas, Belize or the British Virgin Islands would be used, whereby once the consultant has formed the company and arranged overseas banking facilities he would advise his clients that he is now "employed by the consultancy company". The company would render invoices for professional fees or services and subsequently the consultant would render his fee note to the company for the income he wishes to remit to his country of residence, and thus to declare for taxation purposes which will ultimately minimise his taxation liabilities. Surplus profits can be retained offshore within the consultancy company to be used, or re-invested as may be determined by the consultant.

INTELLECTUAL PROPERTY COMPANIES

Subject to prior planning, offshore companies can be effectively utilised to reduce taxes on income derived from intellectual property. In practice the title of a patent, copyright, or trademarks are transferred for a small consideration to an offshore company before they start to increase in value. Once acquired by the offshore company the rights to the intellectual property can be licensed to other parties by the company, with payments going to, and accruing in the name of the offshore entity.

The same treatment may be attributed to Royalties, for example on a book, or performance rights in the case of an entertainers, which would reduce the beneficial owner's exposure to taxation in his country of residence, in that the Royalties are held in the name of the Company.

SHIPPING COMPANIES

The use of shipping companies can eliminate both direct and indirect taxation on shipping revenue. By the offshore company owning or chartering vessels, it should be possible for the profits for such activities to be accumulated tax free in a suitable offshore jurisdiction. Over the recent years there has been a transfer of merchant tonnage from the more traditional jurisdictions of Great Britain, Norway and Greece to specialist offshore shipping jurisdictions such as Liberia, Panama, Bahamas, Cyprus and Belize. It should be remembered that if a vessel is registered in a British Colony or the Channel Islands it will be entitled to fly the prestigious "Red Ensign" as if it were a native British vessel.

CAPTIVE INSURANCE COMPANIES

Captive Insurance Companies have been created by many multi national companies to provide a legitimate method whereby the company may reduce its overall tax liability. For example, in the United States together with may other countries, payments made in order to provide insurance coverage are not taxed. The multi-national will establish its own "in house" or "captive" insurance company, so that not only can its insurance risks more effectively be managed, but also reduce its overall tax position and yet maintain control over its insurance expenditure. Principally the Bahamas, Bermuda, the Turks & Caicos Islands and latterly St. Vincent & the Grenadines are the foremost jurisdictions in this sector, however many other jurisdictions offer suitable legislation for this purpose.

BANKING CORPORATIONS (and OFFSHORE BANKS)

Many offshore banking institutions have been established in low tax jurisdictions over the last few years. Most of these institutions are wholly owned subsidiaries of major international banks paying interest to depositors free of withholding or income tax. They commonly are involved in international commercial financing from jurisdictions where there is no exchange control regulations. Such institutions will traditionally have a "Trust Division" or a "Trust Company" which is incorporated to offer a wide range of trustee and financial services to their international clientele. It is also becoming more common for offshore banks to be established by commercial organisations who wish to facilitate "in house" treasury operations. This does permit them to "write" their own documentary credits for international trade which can be confirmed by first class banks with which they hold correspondent accounts, or funds or securities on deposit.

Should you wish to receive further information on the registration of offshore banking units, we will be pleased to forward more detailed information on this subject upon request.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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