What is offshore company – formation, registration, bank account set-up

For businesses that are looking to set-up abroad, or to access an international market, the rewards can be enormous. However, going global can be a tricky transition to negotiate. This is where setting up an offshore company comes into the picture. An offshore company is one that is formed for the purpose of operating outside the country of its formation. In most cases, an offshore company is headquartered in the country of its origin with decisions and operations conducted remotely.

Setting up an offshore company is done by registering, establishing or incorporating the business in an offshore location. This business is established under the laws of the land, and comes under the legal jurisdiction for all business and commercial activities. It is therefore mandatory for an offshore company to pay taxes to the government where the business is incorporated. These offshore locations are also termed as ‘tax havens’, owing to the tax friendly policies and lower regulations that the government in question has established.

What constitutes an offshore company

Offshore companies differ from country to country and depend largely on the existing jurisdiction and the relevant laws for government company formation. Nevertheless there are certain commonalities that most offshore companies share. The biggest common factor is the non-existent taxation structure put in place in their home jurisdiction. Other reasons include lower government regulations on corporate activities and business flexibility promoted by corporate regimes.

However, there are multiple reasons for individuals to form offshore companies. These reasons are more substantial in nature and are primarily for:

• Asset protection
• Flexible business laws
• Confidentiality
• Substantiated privacy laws
• Protection against lawsuits
• Ease of operation

Offshore company formation

Over the last decade or so, the UK has emerged as a popular offshore destination. This is primarily because they have the advantage of a low tax rate while still being European and being able to have a VAT number. UK companies can also be used in tandem with an offshore company to reduce the tax rate. This type of structure is commonly known as an "Agency Company". We will discuss more about this form of structure in more detail.

In order to form an offshore company the process must be initiated by one or more shareholders or directors, who may be either natural or juristic. First the Articles of Association and the Articles of Memorandum must be drafted. The applicants then must submit a signed application form to the relevant government department, together with the relevant supporting documents. These documents are:

• Certified copy of valid passport (or national identity card)
• Original or certified proof of address (issued within the last 3 months) in English or translated into English
• Original or certified bank reference letter (issued within the last 3 months) in English or translated into English
• Curriculum vitae with a signed business plan

Note: Documents must be provided for all individuals who desire ownership in the company.

Offshore company registration

Once you have all the necessary documentation at hand, you must proceed with the registration of the company. You will need to register with the Companies House from either ones of these methods:

• Register online: This process is fairly straightforward and can be done within 24-48 hrs. Mode of payment can be credit or debit cards.
• Register by post: Postal applications generally take a bit longer; around 10-12 days. However, there is a provision to register on the same day by paying an additional £100 and getting the application to Companies House by 3PM. The mode of payment for this payment can
• Use an agent: Agents provide multiple services besides just the registration. There are specific agents who are authorised to incorporate registrations electronically. Note: It is very important to prepare and provide all the required documentation before submitting incorporation paperwork for registration. Not doing so can result in considerable delays or even penalties.

Offshore company registration packages

For individuals living abroad, a convenient and hassle free option for registering your offshore company is to take the services of an authorised agent. Because of the competitive nature of the business, there are numerous companies offering up their services at extremely competitive prices. One of the services that you will find is the company registration package that provides all-encompassing services your business requires to stay functional in the UK. These packages vary depending on your specific requirement and with costs. Most company registration packages are yearly packages and are simple and straightforward to understand.

Sample Package 1

Some packages offer a UK limited company formation along with a prestigious London registered address, and a secretarial compliance for a total of 12 months.

What may be included in the package:

These reasons are more substantial in nature and are primarily for:

• The provision of registered office address for 12 months.
• The government mail forwarding overseas and mail scanning.
• The company’s secretarial compliance service.
• Provisions to have all the following items sent to you by mail.
• A digital PDF certificate of incorporation.
• A digital PDF customised version of memorandum and articles of association.
• A digital version of the share certificate.

You may also have an option to add services according to your preference.

Sample Package 2

Some packages offer an exclusive limited company formation package that includes a nominee director, a domiciled address in London along with a bank account.

In addition to services being offered in the previous package the following services may be included in the package:

• The signed powers of attorney.
• Online portal to manage your companies or orders.
• A company secretary with telephone numbers and email ID.
• A bank account with a bank of your choice.
• Hard bound copies of the company’s register.
• Stationery items with company logo design and printed on letterhead.

Types of offshore company formations

There are primarily five different types of offshore company formations. Namely:

• International Business Company
• Offshore LLC
• Offshore Corporation
• Private Foundation
• Captive (Re)Insurance Companies
• Trusts

In this article we cover two of the more popular offshore company types:

International business company

The International Business Company or otherwise popularly known as the IBC, is perhaps the most widely used offshore company formation. The IBC engages in various business activities like trade and investments and doesn’t have to pay local corporate taxes. This is true if the company engages in international business transactions and revenue doesn’t come from local sources. The IBS also is protected under various laws for confidentiality of ownership, asset protection, flexible management and others. Various offshore locations offer this business structure, as in the case with Panama, St. Vincent, Belize, Dominica and some others.

Offshore limited liability company (LLC)

The offshore LLC is probably the second most popular company type, because unlike a traditional business, a limited liability company gives limited liability to its owners and stakeholders. This form of business is very flexible as it allows nomination or responsibilities to be named among the partners; this ensures greater flexibility of ownership and remuneration. Due to its existence as a partnership, LLCs provide a tax-neutral vehicle that bypasses corporate taxation. This is also ideal for forming international joint ventures, as the company can enjoy all of the benefits of incorporation, without any tax liability.

Tax optimisation and agency companies

The concept of an "Agency Company" has become increasingly popular, as it helps businesses in the UK optimise their taxes. By this concept, a UK company is formed purely to operate in combination with an offshore company to enjoy a tax rate of less than 5%. The day-to-day business is conducted in the name of the UK Company, but on behalf of the offshore company as undisclosed Principal which is allowed as per the law of ‘Principal and Agent’. This set-up offers an onshore ‘face’ with all the offshore benefits as the customer need not be aware of the offshore business.

Let us look at an example for more clarity:

• A customer places an order with Company A based in London UK.
• The customer gets invoiced for the order and makes the payment towards the bank account of the UK Company.
• This money is then remitted to the offshore company’s bank account by the UK company.
• The UK Company then pays only 5% tax + the additional agreed commissions, as opposed to the 21% that he would have had to pay otherwise.

One drawback of the Agency Company is that for it to execute effectively, the company must not be operated or managed from the UK (at least on the face of it). The Agency Company may not want to be seen as a stakeholder of the offshore company. If suspensions of the tax authorities do arise, this could lead to heavy penalties which may exceed the original tax bill.

Offshore banking

Banks in offshore locations operate and function much like onshore banks do. To begin with, they require basic personal information to open an account, like your name, date of birth, address and citizenship. To substantiate this information they will usually require some documentation like your passport, drivers’ licence or other forms of personal identification. However, in some cases there may be additional documentation requirements, in a bid to require money laundering and other illegal activities.

The advantage of offshore banks:

• Most offshore banks are located in countries where taxes are extremely low or non-existent in some cases.
• Government regulations imposed on offshore banks are almost nonexistent. These banks run either as independent banking institutions or as part of a larger banking unit based onshore in another country.
• Offshore banks enjoy a certain degree of privacy which insulates assets from scrutiny or seizure by tax authorities in the individual depositor’s source country.
• Individuals, who live in countries that are undergoing political instability, are offered offshore banks as a safe and secure location where they can place their assets.

Most offshore banks are located in countries that favour less government interference and bureaucratic regulations. Some of these countries include Cayman Islands, Bermuda, Luxembourg, the Channel Islands, Macau and Panama. However, the actual list of countries is probably much larger. Often these banks are sub branches or subsidiaries of much bigger banks, like HSBC, Standard Chartered, Merryl Lynch etc. The guidelines for each bank differ according to the country where they are located.

Also See: Requirement to Correct Legislation for Declaring Offshore Tax Liability.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.