Overcoming problems with offshore companies

One of our longstanding members has submitted a question which we think would be of interest to many other members considering using offshore companies. In this post we look at potential problems with using an offshore company. The original question we received was: OFFSHORE COMPANY SETUP PROBLEMS In many previous articles on this subject it has been made clear that an offshore company can be advantageous but that there are problems setting up such a workable tax efficient vehicle. Is there really any way that a UK resident (with no relations or other trustworthy friends living offshore) can arrange an offshore company with all the requisite parts in place (local directors controlling company activities bank account etc) remain absolutely certain their interest and eventual fruits of the company are safeguarded against the offshore incorporator/controller/arranger running off with everything. if an offshore firm provides "Nominee Shareholders" it must in accordance with, for example the IOM licensing requirements, issue a Declaration of Trust stating that you are the ultimate beneficial owner and we are simply acting on your behalf. Would a "Declaration of Trust" provide a sound and safe way of proceeding? If so, are there any negative issues with regard to the UK residents tax position in a situation like this and would having some kind of "Declaration of Trust" compromise the effectiveness of the Offshore Co? It's a good question. The UK anti avoidance rules are formulated to prevent individuals in particular reaping the benefits of an offshore company. Therefore whilst in theory the benefits of an offshore company are very attractive (ie exemption from UK tax on foreign profits and on all capital gains), in practice obtaining these benefits can be difficult. As was pointed out above the first step is to ensure that the management and control is overseas. We've looked in various other articles at was is required for this, and its pretty clear that simply having overseas nominees wouldn't be sufficient if they didn't exercise any actual control. It's worthwhile noting that whilst having overseas shareholders is certainly beneficial, its the Directors that are usually the key concern. The Directors are given the power to run the company by the company's constitution and provided their position is not usurped by any other party (eg interfering Shareholders) it would be the location of the Directors when they exercise control that would be the key issue. If you had UK shareholders but foreign Directors that actually ran the company, the company could be non resident. If you had foreign shareholders but UK directors running the company it would be UK resident. The declaration of trust in favour of a UK resident would mean that the shares were effectively owned by the UK resident, but as stated above this is not necessarily conclusive. You do however need to have a foreign board of directors actually making decisions. It can be attractive to have an offshore trust owning the company in certain cases with the offshore trustees exercising control over the foreign board to further establish the foreign control. The UK resident could be a trust protector to provide some degree of security. The other issue is the anti avoidance rules which can attribute income and gains to UK residents. You'd be looking at taking advantage of the various exemptions to avoid these rules where possible.