How Offshore Companies Work

By BankBazaar | April 12, 2016

How Offshore Companies Work

Design Credits: Rakesh Mohan

The Panama Papers Leak has brought discussions about offshore companies to the forefront. But, what is an Offshore Company? And, is it always a bad thing to start one?

What Are Offshore Companies?

As the name suggests, an offshore company is one that is incorporated outside the country where it is registered. This is not to be misunderstood with companies that are engaged in offshoring their manufacturing or service functions.

Usually offshore companies are established in countries which offer tax, legal and financial benefits. Tax-havens like the Cayman Islands, Ireland, Mauritius, Panama and Bermuda are some popular locations for setting up an Offshore Company.

Why Set Up An Offshore Company?

An offshore company is generally not governed by the laws and tax structure of the home country of the company. Also, it is subject to a favourable tax structure as well as laws which encourage the setting up of companies like these.

The regime in the countries in which offshore companies are set up tend to promote business flexibility. This means that corporate activities in these countries are much more lenient compared to the laws that govern corporates in developed nations.

Benefits Of Establishing An Offshore Company

Offshore companies are often exempted from paying taxes on income earned in areas under the jurisdiction of the foreign country. Another advantage is low cost. Costs and fees involved in establishing and operating the offshore entity is usually low in the countries in which they exist.

Compliance reporting requirements are also minimal. For instance, in regions such as the Cayman Islands, there is almost no information available to the public on such offshore companies.

Business flexibility is the biggest advantage. Benefits under this include minimal capitalization rules, low maintenance of capital and encouraging financial assistance norms. Most regions also allow offshore companies to get away with their own rules for payment of dividends.

Another reason why offshore companies are set up, is due to the strong asset protection laws of offshore locales. Most of the time, details of beneficiaries are kept anonymous. The best part is perhaps the fact that offshore banking usually helps further the cause of safeguarding assets.

Drawbacks Of An Offshore Company

The usual suspect of course, is that offshore companies can be used to evade taxes. These companies can also be used to undertake illegal transactions. The most popular one is that offshore companies can be employed to stow away unaccounted money.

Apart from the above points, another drawback is that the very nature of the business makes it difficult for investors to evaluate the business. This is because the laws and rules under which they exist might be unknown or tough to comprehend. Offshore companies also run the risk of losing benefits available in their home country, such as trade benefits.

The latest in the Panama case is that prosecutors are looking at allegations that a computer hacker was behind the leak of the papers. It is suspected that the hack originated outside Panama. Europe is considered as a possibility. Any adverse developments or revelations that might come up would prompt tax havens to rethink their strategies in attracting money into their country using ‘shell’ companies.

For those who don’t already know, there are several legitimate ways to minimize taxes in India. Here are a few that should interest you – Top 5 tax saving investment plans.

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