Moving Your Business to a Tax Haven
Tax havens provide an ideal corporate landscape for business owners wishing to set up a company offshore and take advantage of reduced taxes, better privacy measures, and asset protection.
Setting up an offshore company in a tax haven is usually a straightforward process. However, it is important to first understand all the various factors involved and whether or not embarking on such a process is right for your specific objectives and circumstances.
In this article, we outline what is meant by the term “tax haven”, the reasons why (or why not) one might want to set up an offshore company in a tax haven, and how to practically go about it.
Table of Contents:
- What Is A Tax Haven?
- Tax Havens For Business Advantages
- Tax Optimisation
- Asset Protection
- Tax Havens For Business Disadvantages
- Difficulties In Proving Ownership
- May Not Protect You From Local Taxation
- Risk Of Overstepping The Law
- Registering A Business In A Tax Haven
What is a Tax Haven?
While there is no one strict definition of a tax haven, it is generally defined as any country or jurisdiction that offers favourable tax rates to foreign individuals and businesses.
This may either be in the form of zero tax whatsoever (a traditional tax haven), low or territorial tax regimes, or access to various tax loopholes/bylaws which make it possible to drastically reduce one’s actual realised taxes.
Tax havens often offer other attractive benefits to foreign entities which include greater privacy and asset protection than traditional onshore jurisdictions.
Tax havens do not make it mandatory for businesses to physically operate out of the jurisdiction or for foreign individuals to reside there in order to gain access to the tax benefits.
This feature makes them ideal for those looking to incorporate an offshore company in a tax haven purely to take advantage of the tax benefits, without needing to physically move their business operations or personal residence.
Deciding whether to set up an offshore company in a tax haven involves a clear understanding of your personal circumstances and what you are trying to achieve.
While there can be many advantages, it is not necessarily the best or only way to optimise your tax situation while reducing your overall expenses and improving profitability and productivity.
Here we provide a brief overview of the key advantages as well as the potential disadvantages of setting up an offshore company in a tax haven. It is up to you to do further research and consult with an expert who can give you personalised advice on whether it is the right step to take, and if so, the best way to proceed with it.
Tax Havens for Business Advantages
Unsurprisingly, the number one advantage of setting up a company in a tax haven is that it can help to radically optimise and reduce your tax burden if structured correctly.
There are numerous offshore jurisdictions which make it relatively easy for foreigners to set up an offshore company and be granted with much more favourable tax treatment than in their home country.
The important thing to understand, though, is that in order to effectively reduce your overall tax liability, you need to have everything correctly and legally structured.
You also need to consider additional factors like the reputability of the jurisdiction you choose to incorporate in (which will in turn have consequences for your future business and financial dealings).
Here is where you might opt to incorporate in a jurisdiction with a very low corporate tax rate and good reputation as opposed to one with zero taxes but with a poor reputation.
You need to understand how the tax laws of your home country interact with those of the offshore tax haven, whether you will be subject to double taxation or continue paying high repatriation taxes etc.
All of this certainly takes a high degree of expertise and therefore requires the guidance of a professional tax attorney or advisor.
Conducting your business and financial matters through a separate legal entity such as an offshore company in a tax haven can provide much greater levels of financial privacy and confidentiality.
The offshore company provides an additional layer that is not publicly linked to your personal name. In addition, most popular tax havens offer superior privacy protection and anonymity compared to traditional onshore financial centres.
Offshore companies, especially those located in tax havens, can provide one of the simplest yet most effective asset protection vehicles. Keeping your assets housed in a separate entity like an offshore company can keep them well-protected from litigations, creditor claims, as well as wider threats like political unrest and economic collapse in your home country.
Certain offshore tax havens have specific corporate legislature in place which make it even more difficult for your assets to be claimed or seized and provide unparalleled levels of asset security.
Tax Havens for Business Disadvantages
While there are clearly some significant benefits to owning an offshore company in a tax haven, there are also some potential downsides. These include:
Difficulties in Proving Ownership
While the high degree of privacy and confidentiality of an offshore company in a tax haven may be one of its key benefits, it can also work against you if you are in a situation where you need to be able to prove ownership of the company.
There is often no public register which makes proving ownership of a registered offshore company difficult. This is a problem if the owner needs to be able to declare themselves as a beneficial shareholder of the company.
May Not Protect You from Local Taxation
As previously mentioned, using an offshore company in a tax haven to avoid taxes is not as easy as it sounds, as there are many factors to consider including the tax laws in your own country of residence.
While the offshore jurisdiction may have very favourable corporate tax legislations, you may still incur high taxes in your home country upon repatriation of the profits from your offshore company.
Usually, as soon as the profits are brought back to your home country, they are subject to local tax rules which may negate a large proportion of the advantages of the offshore tax haven.
There are ways to work around this, but it requires complex structures and careful planning, and in extreme cases may even require you to relocate to a more tax-friendly country of residence.
Risk of Overstepping the Law
The aim of setting up an offshore company in a tax haven should be to legally optimise your tax situation, and it is always strongly recommended to work completely within the legal frameworks of both your home country and the offshore jurisdiction.
However, tax and corporate laws are complex and constantly evolving, and there is always the risk of mistakenly overstepping the confines of the law and entering the territory of tax evasion as opposed to legal tax avoidance.
This is again why it is so important to work with the expert guidance of a tax attorney to ensure that you do not unknowingly engage in any illegal activities.
Registering a Business in a Tax Haven
Now that we have explored the relative pros and cons of setting up a company in a tax haven, we can outline the actual steps you will need to take.
In most cases, the actual formation process is straightforward and simple, and generally involves the following steps:
- Clearly outline your objectives and the reasons why you think you should set up an offshore company: Here is where you need to do your own research to understand what exactly the problems are that you are trying to solve by setting up an offshore company and whether it is in fact the best solution available to you.
- Draft your plan with the guidance of international tax experts and attorneys: It is highly recommended to enlist the services of an international tax expert right from the outset to help ensure a smooth and effective process. You should be prepared with your objectives and rough plan that you have outlined yourself, and then allow the expert to help you make a final decision on the best approach to take and how to actually execute it.
- Choose the jurisdiction where you want to set up your company: The advisor you have chosen will also be able to help you to decide upon the best offshore jurisdiction to achieve your objectives in the simplest and most cost-effective way.
- Choose the type of company structure: Before incorporating your offshore company, you need to decide upon the type of legal entity you will form (e.g., Corporation, LLC, Partnership, etc.). This may be highly dependent on both the jurisdiction you have chosen (as certain types of company structures may be available in different jurisdictions) as well as your own circumstances and objectives. Again, an expert advisor can help you determine the best type of entity to form as well as guide you through the entire incorporation process.
- Register the company: The final step is to actually go through the process of registering your chosen entity in the offshore jurisdiction. This is usually the simplest part of the entire process, as most offshore tax havens make the incorporation process quick and easy. Most often, the entire process can be completed within a few days. Once again, your international tax advisor will help you through the registration process.
It is helpful to understand the three main categories of offshore companies that you may be able to form according to how the tax savings may function. These are:
- An offshore company in a traditional tax haven which simply levies zero or negligible corporate taxes. This includes the likes of British Virgin Islands, Seychelles, and Cayman Islands.
- A legally tax-exempt trading company in a reputable offshore jurisdiction such as Singapore, the UK, and Hong Kong. These are not deemed to be official tax havens but offer attractive tax regimes for offshore companies, as well as helping the company to maintain a better reputation.
- An offshore company in a reputable “low tax” jurisdiction such as Ireland, Hungary, and Estonia. Once again, these are not seen as genuine tax havens but offer significant tax benefits to companies incorporated on their shores.
It is clear that setting up an offshore company in a tax haven can result in significant tax savings and provide numerous other benefits. This means a much a greater portion of your company’s profits are available to reinvest and further the success of your business, as well as enable a larger profit distribution and thus more disposable income.
That being said, deciding to set up a company in a tax haven is a big decision that involves time and costs.
Before you decide to go ahead, it is vital to consult with a qualified international tax expert who can advise you on whether it makes sense to set up an offshore company and where to do so, as well as help guide you through the incorporation process.
The cost of hiring such a professional could very well save you a great deal of wasted time and money further down the road, and is undoubtedly worth the investment.