WHAT DOES “OFFSHORE” MEAN?

“0ffshore” is a term that defines the organizational and legal status of a business entity. As a rule this status relates to the requirement that any business activity should be conducted outside the country of registration. In this case the entity is exempted from all or most of taxes in the country of registration.

WHAT IS THE LEGAL FRAMEWORK OF AN OFFSHORE COMPANY?

The ongoing primary attraction of incorporation is to limit the liability of investors. Limited liability legislation was first introduced in the nineteenth century to distinguish the liability of a corporation as a legal entity from the liability of its owners, thus limiting the losses of shareholders to the amount of the share capital which the owners had paid or undertaken to pay. Because a company is a legal entity distinct from its shareholders and directors, profits received by the company will generally be taxed at the rate to which the company is subject in its country of residence. Thus a resident of a high tax country may set up a company which is subject to a low or zero rate of tax.

WHY GO OFFSHORE?

Over the last twenty years, increasing client demand for offshore facilities has mostly resulted in political and economical instability, market globalization, high tax regimes and more effective tax recovery.

The following are all important motivations for using offshore jurisdictions:

  • Minimization of tax;
  • Protection and enhancement of assets;
  • Risk management;
  • Cost reduction;
  • Confidentiality;
  • Avoidance of bureaucracy and excessive regulation.

Both individuals and corporations are seeking a safe place to protect their assets and investments and/or legal ways to avoid taxes – trying to take advantage of profit-making opportunities that are unavailable onshore.

WHICH OFFSHORE CENTRE IS THE BEST?

Clients often ask which offshore area is the best for company incorporation. The answer really depends on the intended use of the offshore entity and the client’s own personal or business reasons.

There are more than 50 jurisdictions worldwide providing offshore company legislation, and selecting the most suitable jurisdiction requires very careful consideration. There are a number of factors to consider, the first being the political and economic stability of the jurisdiction in question. Furthermore, its corporate legislation should be able to guarantee confidentiality and complete privacy. Other factors include auditing and other statutory compliance requirements, exchange controls and banking facilities, double taxation avoidance treaties, etc. Another obvious factor is the cost of incorporation, domiciliation and professional services in the desired offshore center.

HOW TO INCORPORATE AN OFFSHORE СOMPANY?

Once a jurisdiction has been chosen, incorporation procedure starts with the nominating of a suitable company name.

The name should not be similar or identical to an existing name. The Registrar will refuse a name if it is already held by an existing company. Certain words such as “bank”, “insurance” and “trust” may only be used if the company is specifically licensed to engage in the activity concerned. In some jurisdictions there are other restrictions, for example the use of the word “international” in the Isle of Man is permitted only for companies with a paid-in capital not less than GBP 100.000. Normally it is the responsibility of the incorporator to choose a name that does not cause confusion.

Authorized share capital can be as high as the client chooses, however, in most jurisdictions annual flat rate taxes are levied in respect of the company’s total share capital. In this case we recommend that a company be incorporated with the highest authorized share capital to qualify for the minimum registration and annual maintenance fees.

There are two main types of share: namely registered and bearer. In the case of registered shares the shareholder’s name appears on the certificate. With bearer shares the owner holds a certificate, which states that “the bearer” owns the shares in question. Owners of bearer shares enjoy greater confidentiality but less security, because if the bearer share certificate is lost it is extremely difficult to prove ownership of the company. In many jurisdictions the details of registered shareholders are not publicly disclosed. Therefore for greater security and confidentiality we recommend that registered shares be issued and that nominee shareholders be appointed.

Registered office and agent, company secretary and other domiciliary requirements vary in different jurisdictions. A registered office need not be a place where actual business is conducted, but it is a place at which all official notices may be received. Most offshore jurisdictions’ legislation requires that the office must be run from premises in the country of incorporation. There is an additional requirement in a number of jurisdictions to employ a registered agent to act as the company’s official representative in the country of incorporation. In some offshore jurisdictions it is a legal requirement to appoint a company secretary who is responsible for making sure that the company is in good standing and all the necessary returns are made to the Registrar and Government.

The Board of Directors of the company in some jurisdictions may be formed with a minimum of one, two or even three directors. To prevent a situation whereby the company is deemed to be resident in a high tax country where the directors reside, we strongly recommend using professional nominee directors who reside in a fiscally neutral overseas jurisdiction. As a client is effectively giving over control of his business to a third party, it is very important that he deals only with a reputable offshore services provider.

WHO USES OFFSHORE?

In this modern age with the high quality of services available, offshore is now a relatively simple and affordable procedure for almost anyone. Once having moved all or part of your business offshore, the savings made by the low-tax or tax-free status opens up a whole new world of investment and business opportunities. All those who are interested in minimization of costs are often express interest to use of the offshore entities:

  • High net wealth individuals: International Investors, Entrepreneurs, Property Owners
  • TNCs: Financial institutions and Financial institutions
  • The Offshore Sovereign States

WHAT IS A NOMINEE SERVICE FOR AN OFFSHORE IBC?

A nominee is a person who is not a real owner or director of the company, but who is appointed by the real owner to act in this capacity. Nominees are widely used by the owners of offshore companies to preserve their identity. By using the power of attorney, the nominee director transfers all the powers to manage the business to a person whom the real owner can trust.

WHAT IS THE DIFFERENCE BETWEEN A REGISTERED SHAREHOLDER AND A NOMINEE SHAREHOLDER?

A registered shareholder is when the beneficial (real) owner records his/her name on the share certificate and in the Register of Shares as the owner of the allotted shares.

A nominee shareholder is when the beneficial owner chooses not to have his/her name on the share certificate or in the share register. The nominee appears on the certificate and in the register, in return the nominee signs a Declaration of Trust to the beneficial owner giving up any right to exercise any powers over the shares including voting rights or the right to sell or transfer these shares.

The nominee shareholder is used where the Companies Registry may be open to public scrutiny or if the owner requires a deeper sense of privacy.

WHAT IS THE PURPOSE OF THE DECLARATION OF TRUST FROM NOMINEE SHAREHOLDER?

A Declaration of Trust from nominee shareholder to the beneficial owner is to ensure that nominee cannot use the shares in anyway without the express authority of the beneficial owner.

WHAT IS THE PURPOSE OF THE NOMINEE DIRECTOR?

The nominee director is intended to simply facilitate the beneficial owner in matters of privacy. He is not intended to assist in the management of the company or sign documents and contracts on their behalf. There are exceptions where a nominee may sign certain standard documents such as contracts, invoices etc. which will have to be approved first. In jurisdictions where there is an open registry, the nominee director will appear on the documents in place of the beneficial owner.

HOW CAN I CONTROL MY COMPANY WITH A NOMINEE DIRECTOR?

Control over the company is gained through the General Power of Attorney signed by the nominee director to the beneficial owner or other person (who the beneficial owner may appoint), plus the undated letter of resignation of the nominee director can also be executed at any time the owner wishes to appoint himself or other person as a director.

CAN TAX AUTHORITIES OR ANY OTHER “THIRD PARTY” GET INFORMATION ABOUT THE BENEFICIAL OWNERS OF THE OFFSHORE COMPANY?

To preserve the confidentiality of the beneficial owners we recommend using the nominee services of director and shareholder, which we provide. You can also consider using bearer shares where they are available. Only your registered agent will have your personal details. Government Authorities can request the information from the agent only with a courts’ order, but they would have to present very strong evidence of your illegal activities in court for such order to be granted.

WHAT IS THE DIFFERENCE BETWEEN A NOTARIZED DOCUMENT AND AN APOSTILLE DOCUMENT?

A notarized document is a copy of the document which is certified to be a true copy of the original and signed (notarized) by one who is a registered Notary Public. This notary public is usually an attorney a lawyer or a justice of the peace.

An apostille to a document is the authentication, by a specially appointed government official, of a copy of a public document which has been notarized as a true copy by a notary public. The apostille is internationally accepted under a convention of The Hague. Not all countries of the world are members of The Hague but the majority of English speaking and European countries are members.

WHAT’S THE DIFFERENCE BETWEEN AN IBC AND AN LLC?

First of all, a US Limited Liability Company (LLC) is not a regular tax-free company. An LLC is a US registered company which does not issue shares, therefore does not have shareholders. Its owners are known as members. While an IBC cannot conduct business in the country of incorporation, there is no such restriction on an LLC. The similarity is where an LLC is owned and operated outside of the United States by US non-resident aliens and have more than one member; there is no tax liability on its members. LLC’s must file annual accounts. Its members are individually liable to tax on their share of the profits if earned within the US or if a member is a US citizen or resident.

WHY OPEN AN OFFSHORE BANK ACCOUNT?

There are a number of reasons for opening a corporate or personal bank account in an offshore jurisdiction. An offshore account gives a higher level of freedom, security and profitability. Many offshore countries guarantee bank secrecy. In some, bank secrecy laws are so strict that it is a crime for a bank employee to disclose any information about a bank account or its owner. A currency control in offshore countries is considerably less rigid than in high-tax countries. Moreover, offshore bank accounts are able to avoid the high service costs that have become a part of domestic banking. Offshore banks normally offer very attractive interest rates. Offshore credit and debit cards afford a certain level of privacy since all purchases are debited to the offshore bank account.

At the same time, some offshore banks are financially stronger and better managed than even major domestic banks. This is the case because an offshore bank must maintain a higher ratio of liquid assets to accumulated debts.

For the above mentioned reasons it could indeed make sense to operate a bank account in an offshore jurisdiction where it is safe from domestic fiscal authorities, creditors, competitors, ex-spouses and other who might wish to appropriate your wealth.

WHAT ARE REQUIREMENTS FOR OPENING A BANK ACCOUNT?

Banks normally require you to provide them with certified copies of a company’s certificate of incorporation, bylaws or Memorandum and Articles of Association, plus the resolution of the directors to open a bank account. All banks also require evidence of beneficial ownership in the form of certified copies of passports and the relevant resolutions by the Board. Banks have to know their customers’ business and therefore we will require clients to provide us with detailed plans for the new company’s operations. As a condition for opening a new account most banks require that an initial deposit be placed, and some banks may insist that significant minimum balances be maintained.

In order to prevent from money laundering, banks require the following information on each beneficial owner, director, account signatory and all other persons able to exert control over the company before we process an application to open a corporate bank account:

  • A character reference addressed to the bank where you wish to open an account, from another bank. The reference should state that the person has been known to the referee for a particular period of time and is considered trustworthy and a suitable person to operate a bank account;
  • Notarised copy of the person’s passport;
  • Original telephone or utility bills evidencing residential address;
  • A description of the company’s intended investment and/or trading activities including geographical spread;
  • An indication of what the company’s first year’s turnover will be;
  • An initial deposit to fund the new bank account, commensurate with the bank’s policy.

ISN’T IT ILLEGAL TO MOVE ASSETS OFFSHORE OR HAVE ‘OFFSHORE BANK ACCOUNTS’?

It is legal to have accounts, funds, reserves, liabilities, assets etc. almost anywhere in the world. When you do not declare assets or profits, that should be declared according to your domestic tax code, (IRS, Revenue Canada, Inland Revenue etc), you are subject to certain penalties and fines or more. The key elements are if the assets and profits are ‘reportable items’ in that current year. Setting up offshore is not illegal; however, withholding information about your offshore investments is illegal in some countries. The question of legality often arises from propaganda supported by high-tax jurisdictions to keep their residents (and their tax money) at home. An offshore jurisdiction should be perceived as a foreign country – but with certain advantages. These can take the form of banking secrecy laws, advantages in forming companies for international trade or investment operations, no interest tax, no inheritance taxes, no capital gains tax, no individual tax, and many others.

WHAT IS “FINANCIAL YEAR”?

Every company has to form and present to the authorities financial reports in which will be presented all business activities of the company during the last year. The period presented in the reports is called “financial year” or reporting period. This period starts the next day of the previous financial period or in case of a new company the date of registration of the company as a legal entity.

WHAT IS ANNUAL FINANCIAL REPORT?

Annual financial statement- is a report which is formed in the end of company’s financial year and it is based on companies accounting entries and books.

  • This Financial Statement includes:
  • Directors report
  • Auditors report
  • Profit and Loss Account
  • Balance Sheet
  • Tax report
Director’s report

In this report the directors give description of the company’s activity during the financial period stated in the report and a brief analysis of the financial results of the company. They are obliged as well to include structure changes in the company, such as change of directors, secretary etc.

Auditor’s report

This report, issued by the company’s auditors to the company’s shareholders, estimating how true and fare are the formed financial reports of the company. They can’t confirm if the reports are right or strict as they can’t check every transaction of the company because of the volumes and the reason that they can’t always receive the full information. Auditors 100% base their report on the information given by the company directors and have no responsibility in case that this information is false. The auditors check the company using tests, which means checking of only several documents and give estimation about the next:

  1. Are the company’s financial report formed according to company’s book keeping or are there any differences?
  2. Do the reports reflect the real business status and profits of the company?
  3. Were the reports formed as per accounting international standards?
  4. Are the reports formed in accordance with the companies legislation?
Profit and Loss account

This account reflects the profit of the company for the financial year (or a period of 12 months). The first thing shown on the report is the sales volume in comparison with the goods sold during the period independently if the payment for this goods was effected or they are sold in credit. From this cost of sales the cost of sold goods is subtracted and we can see the gross profit of the company. Further all the expenses are subtracted and we receive the net profit.

Balance sheet

This report reflects all the assets and liabilities of the company the last day of the financial year. Otherwise, the Balance sheet – is a list of all accounts of the company, after the profit and loss account was formed. It is actually a photo of the financial status of the company that day.

The assets of the company must always be equivalent with the liabilities and the equity capital of the company.