Offshore finance companies are set up for the purpose of inter-group treasury management. Interest payments from group companies may be subject to withholding tax, but these taxes differ from the usual corporation taxes. The interest paid can be a deductible charge for taxation purposes, thus consolidating interest payments in an offshore finance company provides a tax saving. Many large companies establish their own offshore companies for the purpose of mixing dividends of subsidiaries and deriving maximum advantage from tax credits.
In certain countries, foreign exchange losses are not deductible for tax purposes. For example, if an offshore finance subsidiary that has been set up suffers a foreign exchange loss and that subsidiary company is then liquidated, the investment should be a tax-deductible item for the parent company.
Another area where offshore finance companies are used is leasing, particularly where an offshore structure is rich in funds which, if they are not invested, may be repatriated or subject to high levels of corporate taxation.
Offshore companies are often utilised for the purpose of acquiring foreign entities, international restructuring of corporations, real estate and other investments, and other corporate finance-related projects.
Since some countries suffer from political and economic uncertainty, many large corporations reduce the risk by moving their base of operations and ownership of assets offshore. For example, Luxembourg and Bermuda are host to many companies that have re-domiciled their operations.
Offshore companies are regularly employed to raise money through loan or bond issues. Such an arrangement may serve to reduce withholding tax on interest payments. For example, countries such as the UK levy a withholding tax on interest paid to non-residents on non-quoted bonds, thus it is vital to avoid double taxation in such cases.