Ecommerce broadly refers to the exchange of goods and services through online transactions. There are many different forms that Ecommerce businesses can take in the digital marketplace such as an online store, through places like Etsy or Shopify to self-hosted online stores that use dropshipping or relatives that have their own products and sell on Amazon. Ecommerce and online businesses can also include online services and virtually any other form of online exchange that exists between customers and businesses.
Ecommerce is witnessing a massive increase over the last few years due to a number of factors such as internet access, changing financial and business landscape, young generations' relevance on mobile phones all driving both businesses and consumers online in increasing numbers.
Ecommerce businesses in particular lend themselves well to offshore company structures. This is because eCommerce businesses have less dependence on physical infrastructure and location, have clients across multiple states and/or countries, and conduct most of their activities remotely. This allows a greater level of freedom in choosing where to be based and allows the owner to live in a place that might be separate from where the business activities largely take place.
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Online businesses are particularly well-suited to offshore company structures because they are not physically restricted to a specific geographic location. This typically involves forming an offshore company in a favourable jurisdiction and using the company as an ownership vehicle for your online business activities. In doing so, one can obtain the many benefits that an offshore structure can bring, including reduced taxes, increased privacy, and greater asset protection.
E-commerce can provide you with a good opportunity to set up an internationally based business. Such a business can be operated at arms length from your own home (high tax) jurisdiction or from anywhere in the world. Depending on what is being sold, an e-commerce business is the ultimate portable venture because it does not require a physical location and can therefore be incorporated anywhere in the world.
Here is the simplified strategy, in a nutshell, and will be going into this more thoroughly in the following sections.
By following the tactics outlined below, you can create an offshore corporate formation structure that is possible as most online businesses can function in different parts of the world and exist very differently than a traditional brick and mortar business. What you want to achieve is a genuinely international business this includes:
To take advantage of the opportunity that uniquely presents itself for online companies, ecom businesses through effective tax restructuring can reduce or eliminate their tax obligations altogether by setting up an offshore company.
An offshore company or IBC is a corporate entity that exists outside the domain of local taxation laws, existing as a non-resident entity. If the entity does not engage in local activities there is 0% taxation on all of its corporate income.
The offshore company forms the basis for this strategy as it provides you with the legal framework for doing business.
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There are two main types of offshore tax jurisdictions which can be used to set up an e-commerce business: they can be set up in one of the traditional tax havens with zero taxation (e.g. Cayman Islands or Panama). Alternatively, they can be set up in one of the “onshore” jurisdictions with a favourable tax regime and easy incorporation requirements (e.g. United Kingdom, Ireland, Singapore, Scotland, United States).
For more information on offshore jurisdictions see:
An offshore web-hosting location adds another layer of protection and enhances your position as a truly non-local company by putting your servers in a country overseas. Using a reliable offshore server-hosted platform so that you can operate the back-end serves to internationalize and diversify your business by using different locations around the world in which to structure your company.
Having a server that is located outside of the country where you live helps to sever the connection from the country where you reside so that there is no element of the business organizational structure that is linked to the high tax location where you reside.
There are two different ways this step can be completed.
The first way is using a merchant account, by which you are authorised to take people's Visa, MasterCard or other payments online. Getting a merchant account in your home country should not be difficult, but that may not be the best option. You need a merchant solution that is outside your jurisdiction. Why? Because the proceeds of all sales should bypass your own country‘s banking system. Remember, this is an 'international' business you're setting up, so you need an international payment solution.
To activate your international merchant account, you need the services of a bank or clearinghouse. The latter is a third-party service that will allow you to bill using their merchant status, although many e-commerce businesses will qualify for their own bank-direct merchant account where the billing will be in their name. As you would expect, this type of service costs more that one in your country of residence.
Most domestic merchant accounts will require a 2.5% - 3% discount rate, which is the percentage they take of your turnover. However, with an offshore merchant account the discount rate is higher. You can expect to pay anywhere from 4% - 12%, dependant on the average ticket size. The higher rates would be for the riskier businesses.
Additionally, the clearinghouse or payment gateway processor will require you to put up a security deposit, to protect itself and the bank from any fraudulent use. This is usually collected in the form of a 'rolling reserve', which means they retain usually 10% of your sales revenue for a period of six months. Thereafter, your funds are released on a pro-rata basis. Your sales proceeds (less discount and reserve) will be wired to your offshore corporate account or, if you are fortunate enough to hold a bank-direct account then, the deposits will be made directly into your regular bank account which you will also have with that bank.
The second way which is becoming more popular is the use of other alternative platforms such as Paypal and Stripe to take customer payments. This presents the easiest form of receiving funds as most often the problems associated with payment processing for many online businesses that are incorporated abroad is that many are considered high risk and so it can be difficult for banks and their corresponding branches to accept payments. The alternative of using Paypal or Stipe is that you can receive payments directly to your corporate Stripe account that is then attached to the corporate bank account held by the IBC.
The arrangement will likely require some further levels of organization for this to work smoothly and will vary from person to person depending upon the business, residency, and citizenship.
To make this arrangement even more secure, you should also ensure that whatever product or service is being provided is also based in, or distributed from, an offshore location. If you are selling information services, then it's even easier, as you can have the actual information located offshore as well. Even better, you can employ people offshore.
You can also contract with third-party fulfilment companies anywhere in the world to ship your product or service. Drop-shipping is also a very commonly used option since you will have no inventory costs to consider, although many merchant credit card processors may require you to ship from your own stock. What that means is that you have no trading base in your home country. You have no operations, no stock, and no transactions—nothing.
What this will roughly look like is:
Capital can remain in either structure tax-free until they are brought within the country of where you live (though this is depending upon your country of residence and its tax laws). This arrangement works with several variations that depending upon the nature of the business and the individual
One way is to use a non-associated offshore card to draw funds from an ATM, but this is neither a long-term solution nor one we would recommend, especially if you need to show some income to justify your lifestyle.
The easiest solution is to treat this e-commerce business as a secondary income stream and build up an offshore nest egg. However, if this were indeed your primary income, then you would need to repatriate funds at some stage. This 'drawn' income would be taxable in your home country (and you would need to have proper paperwork to justify this income) - leaving undistributed profits to accumulate offshore.
For instance, let’s say that you are selling a magazine. The company publishing this magazine would be the IBC and all the accompanying business arrangements already discussed would be in place. You may be contracted as the editor of this magazine and, therefore, receive remuneration accordingly. That income would be taxable in your home country, but would not represent the full profit picture of the company as a whole. The balance of your profit would be retained offshore in a non-taxable offshore structure. The only taxable income is the amount that you take each month as a contractor.
A note of warning here that you must be sure you know your tax obligations in the country where you live as each country have its own CFC laws and rules that determine residency your obligations will likely be different depending on a number of factors.
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There are a number of countries that can be used to set up your offshore e-commerce business. Not every offshore country may work for everyone. There is no one size fits all solution when it comes to offshore structures. However, some of the jurisdictions that we use to set up clients with are:
To go through the steps this is all that's included in order to start an online store:
Whatever your online business might be there is an offshore solution that may provide you with a level of tax, privacy and protection that is not found in any domestic arrangement. To learn more about the details of this structure get in touch to see what arrangement can be sorted for your situation.
Disclaimer: Offshore Protection strives to keep information on this website updated, however, laws and circumstances are subject to change. All information on this website is for reference purposes only and does not constitute legal or tax advice. Contact Offshore Protection for specific advice regarding your situation.