By Courtesy of GIG
In a globalized world, where ever-increasing volumes of trade and investment are being conducted with little regard to national borders and huge sums of money can be transmitted around the earth at the press of a button, the demand for international companies, often located in offshore jurisdictions, has been rising steadily over the last two decades or so.
International Companies and Their Uses
International or offshore companies can be used by a variety of people to achieve a number of aims. Expatriates who have become non-resident in their home jurisdictions, or who expect imminent departure for a job or retirement elsewhere, can legitimately use offshore companies to shelter income from high levels of taxation; and offshore trusts remain one of the best ways to minimize cross-generational inheritance taxation, as well as offering asset protection for professionals against liability suits.
While offshore locations continue to offer solutions for the management of private wealth, a major growth sector in recent years has been on the corporate side. There are numberless ways in which offshore locations can offer tax-efficiency to corporates: holding companies for dividend flows; onshore or offshore listing structures; special purpose vehicles; IP management and licensing; international treasury management; real estate ownership and rental.
Offshore Incorporations Recovering
Offshore company formations in many places have yet to fully recover to their pre-crisis levels, and offshore incorporation activity has tended to fluctuate since the global recovery took hold. The overall picture remains somewhat fragmented, and incorporations in certain jurisdictions are holding up much better than in others.
According to Appleby's most recent "On the Register" report, released in August 2014, the total number of new offshore companies registered in the second half of 2013 was down compared with the first half. However, certain jurisdictions saw healthy levels of activity. The Crown Dependency jurisdictions of the Isle of Man and Guernsey revealed the largest increases in new companies joining the registers at 10 percent and 9 percent respectively when compared to the previous six months.
The British Virgin Islands (BVI) continues to dominate offshore new company registration activity by volume, and maintained a two-fold lead ahead of its nearest competitor, the Seychelles.
Newly registered companies in Mauritius and the BVI each make up 12% of their local registry total, ahead of all the other offshore jurisdictions.
Mauritius is also the offshore jurisdiction witnessing the fastest growth in the number of companies on its local register, with a 13% increase on 2012 to 18,560. The next biggest growth (3 percent) came from Bermuda.
Appelby's incorporation statistics also show that the recovery has been quite two-paced, with comparator jurisdiction the United Kingdom having witnessed a small decrease in company registrations from the first half to the second half of 2013, while incorporation activity in China exploded by 35% over the same period.
The total number of active companies on the offshore registers remains stable with a marginal increase of 1% between 2012 and 2013, and a 5% increase between pre-recession 2008 and 2013.
"When looking at the total number of companies active on the registers at the end of 2013, we see that the offshore markets are generally lagging behind their onshore counterparts," observes Appelby's report. "Only Mauritius bucks this trend outperforming the UK, Hong Kong and China, when comparing year on year growth rates. The other offshore jurisdictions either remained flat or have reported small annual increases to the total number of active companies on their registers of between 0.2-3%."
Offshore Transparency and Respectability
It's a remarkable fact that the pressure on offshore over the last twenty years from the Organization for Economic Cooperation and Development (OECD), the Financial Action task Force (FATF), the European Union and the G20 has actually had the unexpected result of making offshore respectable. Almost all of the main jurisdictions have fallen in line by reorganizing their local tax regimes, not by increasing international tax rates but by reducing local ones, while they have rushed to sign Tax Information Exchange Agreements and classical tax treaties with larger, high-taxing countries. Indeed, British Prime Minister David Cameron went on the record in the House of Commons in September 2013 to say that it was unfair to call UK dependent territories tax havens, with all the negative connotations that tends to be attached to such a label. Recognizing the positive steps taken by the like of Jersey, Guernsey and the Isle of Man recently, Cameron told MPs that: "I do not think it is fair any longer to refer to any of the overseas territories or Crown Dependencies as tax havens. They have taken action to make sure that they have fair and open tax systems. It is very important that our focus should now shift to those territories and countries that really are tax havens. The Crown dependencies and overseas territories, which matter so much – quite rightly – to the British people and Members, have taken the necessary action and should get the backing for it."
It is true that there has been a loss of confidentiality for tax fraudsters, but in most situations, the main offshore jurisdictions are just as secure and private as they ever were. For many people, and certainly for companies, the existence of double tax avoidance treaties is a positive advantage when dealing with an offshore jurisdiction.
However, it is also true that until recently, offshore transparency initiatives were mainly aimed at stopping predominately wealthy residents of high-tax countries escaping their tax liabilities at home with the help of carefully-structured and confidential offshore tax avoidance strategies. It has only been in the last couple of years that the focus has turned to corporate tax avoidance in a big way, and since it would be rare to find a multinational company without a tax mitigation strategy that involves a company formed in an offshore or low-tax jurisdiction, new proposals to make companies divulge more information about who owns them, plus the OECD's Base Erosion and Profit Shifting initiative, could have a major impact on offshore incorporations if they are successfully introduced.
While no jurisdiction is currently "black-listed" by the OECD, individual governments sometimes act unilaterally to ostracize certain offshore jurisdictions, actions that are often as much politically motivated as they are to do with the transgression of some national law.
For example, in October 2014, the Isle of Man, long considered to be in the ‘cleanest-of-the-clean' category with regard to transparency, was recently removed from Colombia's offshore blacklist.
Placement on Colombia's blacklist can lead to the imposition of a 33 percent withholding on money transfers, rather than the standard 10 percent. Colombia still has 41 countries on its blacklist.
France controversially black-listed Jersey and Bermuda in 2013, a move that perplexed the Governments of both jurisdictions after extra efforts were made to comply with the French requirements. The two territories were removed from the blacklist in December 2013.
The Mechanics of Offshore Company Formation
While the events of the last quarter century have undoubtedly brought "offshore" and "onshore" closer together in economic terms, establishing a company in a foreign or offshore jurisdiction can still be a complicated business, not least in the company formation process itself. Although many offshore jurisdictions have lots of things in common as regards their company laws, especially the British Dependent and Offshore territories which have tended to follow the English common law, there are still many local quirks and variations, and many of the concepts in civil law regimes especially may be unfamiliar to those who are used to doing business under a common law system. For example, some jurisdictions may permit a company to be formed with just one director, while others will require more than one. There are also differences in the amount of initial share capital needed in order to form a company, or whether bearer shares are permitted.
However, company formation procedures are generally a lot simpler and faster than a few years ago thanks to electronic registration systems which have cut down on the amount of paperwork needed. The time taken for a new company to be approved may still vary depending on the jurisdiction, but 24 hours or less is not uncommon these days.
Most jurisdictions charge initial registration and ongoing annual registration fees. While offshore jurisdictions are generally in competition with each other for international business, these fees can still be quite high in some locations, and they have generally speaking been on the rise as governments seek to make up for shortfalls in other tax revenues.
Other more general factors must also be considered when choosing the most appropriate jurisdiction in which to form an international company. One of the most basic, yet also one of the most important things to ponder, is the political and economic stability of the territory in question. Another important consideration is the jurisdiction's professional and telecommunications infrastructure. Even the most remote offshore jurisdictions are now relatively well-connected to the global communications network via telephone or internet, but if communicating with advisers across the other side of the world (in the middle of the night) is going to be a problem, it may be wiser to rethink your options. Geographical location is therefore also important, and it is vital that the time zone in which the offshore structure is based is taken into account.
Conclusion
So, as has been illustrated here, forming an international company can be quite a minefield! In all almost all circumstances, the process of forming a company offshore would be handled by a corporate service provider, adviser or local law firm - but it also pays to do one's homework, in addition to seeking out the views of a trusted, knowledgeable and independent advisor in this area.
