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The ABCs of Offshore Companies

For all of us who have watched TV shows like Suits, even the mere mention of offshore holding companies invokes images of billionaires with wicked grins who evade taxes and defraud the common man. In this article, we attempt to examine how true those actually are and try to discern whether holding companies can be of use to a businessman (with a company income over a certain threshold) and how these companies actually work.

First, we define what an offshore holding company really is. An offshore company is created by a parent company in a location outside their primary one, in offshore locations (primarily islands) for a wide variety of purposes such as tax avoidance, asset protection etc. An important thing to note about this particular form of corporate structure is that the companies aren’t allowed to trade in these offshore locations. When the said offshore company also incorporates a holding structure, we get an offshore holding company. If this structure is properly created, the person who sets it up ends up with many benefits such as corporate tax optimization, enhanced liability protection etc. It is important to note that the offshore holding company is a subsidiary of the offshore company, not a separate entity of itself. A given entity can become an International Account Tax Compliance Act (FACTA) in two ways: The first one is acquiring a majority stake in the subsidiary (offshore) company. The second way is to make a subsidiary company from scratch and ensure that it owns the required shares in order to operate on its own. An offshore holding company is set up in one of the three forms:

  1. An IBC (International business company) – In this form the holding company take part in international trade and financial investments.

  2. A LLC (Limited Liability Company) – A LLC is independent of its owner and can thus help protect its personal assets.

  3. Offshore Trusts – These are extremely helpful structures and help a lot in succession planning and asset protection.

Now that we’ve established what they are, we need to try and understand why holding companies are particularly useful. The list of reasons for an individual or an organization to consider using an offshore holding company are many. A few of them include:

  1. Favourable tax laws, resulting in being called tax havens

  2. Loose regulations

  3. Lawsuit protection

  4. Asset protection

  5. Isolates liability from their parent companies

  6. Financial privacy

The listed reasons make High Networth Individuals (HNWI) common users of these companies. It should be noted that one of the more common uses is their ability to cut considerable amounts of tax liabilities on various sources of revenue for the company. However to reap these exemptions, one must find the countries with which the offshore country has DTAs (Double Tax Treaties). In these countries, the withholding tax will be automatically reduced and in countries like Belize, the holding company may not have to pay withholding tax at all. Additionally, a lot of offshore locations have extremely strict regulations in place, and to access the owner’s personal data, a request must be submitted from a government, thus adding a layer of security. Offshore holding companies also allow for smooth transfer of ownership property because according to the regulations in place at these offshore locations, no inheritance tax will be levied.

Lastly, we need to talk about possible issues that may arise with offshore holding companies. The companies shouldn’t solely be treated as corporate structures that exempt a company from taxes. There may be issues that first need to be taken into consideration. The network of treaties established between the country where the holding company is and the country where the subsidiary company should be carefully examined to understand what regulations are in place, and what the holding company can do in the offshore country. Another important thing is to examine a country’s tax laws. In the United States, International Account Tax Compliance Act (FACTA) requires a company to report all their foreign financial accounts and assets to the IRS. This act allows the governments in place to stop the tax evasion for which these companies are increasingly used.

Offshore holding companies are corporate structures with a wide variety of benefits, particularly for High Networth Individuals. If certain measures are taken, they ensure that an individual or company can effectively optimize the taxes they pay.




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