We know that there are lots of different tax havens that can be used to set up an offshore company such as an IBC. But what exactly are the benefits and in what circumstances are offshore companies used?
Below I illustrate the wide variety of uses to which an offshore IBC can be put. If any of these apply to you, the first step should be to obtain advice from a suitably qualified tax specialist.
Trading Companies
With the breaking down of many trading barriers and the ease of international communications, including the growth of the internet, it truly is a global market out there. More businesses are therefore looking to spread their wings and expand overseas.
In these situations, some significant tax-planning benefits can be obtained.
A simple step is to incorporate an offshore company to form part of your trading group. This would principally be used to purchase or resell goods between the group companies.
So international trading companies could use this set up to establish a re-invoicing strategy and accumulate profits in a low-tax jurisdiction.
Common choices to base an offshore trading company would be Cyprus, Ireland and the Isle of Man in the EU and, further afield, Panama, the BVI and the Bahamas.
Professional Services Companies
Certain individuals providing professional services often use offshore companies. This is partly for asset protection reasons (they are worried about being sued) and partly for tax-planning purposes.
Such individuals include:
Lawyers
Doctors
Designers
Consultants
Entertainers
These individuals can often achieve some considerable tax savings by setting up an offshore company.
How does this work? Well in essence the offshore company can enter into a contract with the individual to provide services for clients outside his country of residence. This could then enable personal income to be accumulated free from tax in the offshore jurisdiction.
If the offshore company was to reinvest the money in a tax-free jurisdiction this could enable future income to be generated free of tax.
Example
Steve, a freelance computer programmer is UK resident and UK domiciled. As a UK resident he'll be taxed in the UK on his worldwide income.
But Steve, being a canny chap, uses a Bahamas IBC to bill some of his clients for work that he actually carries out overseas during his various international contracts.
There are some hoops he'll have to jump through in terms of ensuring that the company does not get classed as a UK-resident company (and therefore itself fall within the UK tax net) and avoiding the anti-avoidance rules. However, these can often be
overcome and the end result would be that Steve can divert income offshore that would otherwise have been paid to him personally and which then falls outside the scope of UK taxes.
Note that if Steve was to transfer funds to the UK from the offshore company to his personal account (or for his personal benefit) there would then be a UK tax charge.
Using an Offshore Property Company
Investing in property using offshore companies has become increasingly popular as more investors look at investing in overseas property.
The principal advantages of investing via an offshore company are to:
Avoid inheritance taxes
Avoid capital gains tax
Provide the opportunity for a future sale of shares, rather than the underlying property
The procedure is actually remarkably simple. You or the offshore company obtain the funds (usually via a mortgage) which are then used to purchase the property in the name of the IBC.
In terms of you providing funds to the IBC, a straightforward loan would be a good option, depending on the domestic tax legislation. The amount loaned to the IBC could then be extracted tax free in the future.
The rental income would probably not be taxed in the offshore IBC (provided a jurisdiction such as Panama, the Bahamas, or the British Virgin Islands is chosen), however the rental income will often still be taxed in the country where the property is located.
Any tax charge here can usually be minimized by the payment of interest by the IBC, which should be a tax-deductible expense.
Therefore rather than paying cash for a property, the company usually obtains finance for the purchase, from an offshore lender, and the interest payable would further reduce any tax charges.
In the UK using an offshore company to own assets is also popular from an inheritance tax perspective. This is because owning UK assets via an offshore company can enable the UK assets to be taken out of the estate of a non-UK domiciliary.
You can view the rest of this article at:
Using an Offshore Company In Practice
