Previously in Understanding Unlimited Companies and Limited Companies: What Are They?, we shared characteristics of unlimited and limited companies respectively. In this article, we will reveal more about offshore companies.
What is an offshore company?
By definition, an offshore company is a company that is not registered in Hong Kong, so companies registered in the United Kingdom, United States, or other foreign countries are all offshore companies. However, generally speaking, most offshore companies around us are registered in places with higher privacy and looser tax regulations, such as the British Virgin Islands, Bermuda, Cayman Islands, etc.
Advantages of Offshore Companies
- High degree of privacy – Companies registered in Hong Kong have to submit information on directors and shareholders to the Companies Registry (CR). Submitted information can be obtained by the public through online databases, but offshore companies do not need to comply with the Companies Ordinance. Information on directors and shareholders of offshore companies only need to be delivered to their respective agents and the government of the country of registration, thus it is more difficult for others to check the identity of shareholders.
- Easy management – Offshore companies are not required to hold annual shareholders’ meetings or directors’ meetings, nor are they required to prepare annual financial statements and audit reports.
Disadvantages of Offshore Companies
- High establishment cost – Establishing an offshore company would require a local agent for submitting documents, thus higher fees will be accrued when setting up an offshore company.
- The need to rely on an agent – As offshore companies need agents to submit documents locally, if there is any update of documents, you will have to rely on an agent to deal with it.
Wait! Do offshore companies have to pay tax in Hong Kong?
Some people claim that offshore companies only have to comply with tax regulations in their country of establishment, so even if they do business in Hong Kong, they can avoid taxation. In fact, according to Hong Kong’s tax regulations, Hong Kong adopts a principle of territorial origin for taxation. That is, no matter whether a company is established in Hong Kong or overseas, as long as it has business in Hong Kong, it must be taxed. On the other hand, if a company is established in Hong Kong but its business is conducted overseas, it does not have to be taxed in Hong Kong. That’s why offshore companies with business in Hong Kong actually do have to pay taxes!
How You Should Choose Where to Register Your Own Offshore Company
When choosing a location for the registration of your offshore company, you must pay attention to the following points:
Legal system – Choose a place with a trustworthy and reliable legal system, because it gives confidence to business partners, and reduces worries in management. That is why we recommend countries which are based on common law.
- Disclosure of information – One of the largest reasons for choosing to establish an offshore company is to disclose as little personal information as possible. Logically, you would choose a location where it is harder for a search to happen or where minimal information is disclosed through a search.
- Simple tax system and low tax rates – Though most do not conduct business locally after establishing an offshore company, it should be noted that some countries levy global taxes (that is, if you happen to have assets or income from around the world, they will be considered taxable by the local tax system). Thus, you have to be aware of the local tax system when choosing a place of registration to avoid additional expenditure.
- Industry and purpose – The purpose behind establishing an offshore company and the industry in which it operates are both very important, because various industries and purposes will have different considerations for establishment location.
- Non-cooperative jurisdictions for tax purposes – In order to combat tax evasion, the Organization for Economic Cooperation and Development (OECD) has established a blacklist of non-cooperative jurisdictions for tax purposes to prevent companies from utilizing offshore companies to evade taxation. The following restrictions and penalties are imposed on companies established in countries on the blacklist:
- Income and expenses related to blacklisted companies (such as dividends, interest, royalties, service fees, etc.) will be calculated at a higher tax rate to increase the companies’ tax costs. Countries in the European Union do not even recognize the expenses of such companies as deductible expenses.
- The European Union will implement controlled foreign corporation (CFC) clauses (Note 1) on subsidiaries of blacklisted EU companies, so as to prevent EU companies from transferring their profits to tax-free or low-tax countries.
As these policies greatly dampen intentions to establish companies locally, popular registration locations will improve their business laws and tax systems to avoid being blacklisted. Therefore, although Hong Kong has not implemented relevant provisions and clauses, greater attention must be paid.
Comparisons Between Popular Establishment Locations
We’ve chosen some of the most popular establishment locations for offshore companies, with a comparison of their pros and cons below:
|British Virgin Islands (British Overseas Territory)||Seychelles||Cayman Islands (British Overseas Territory)||Samoa||Belize||Taiwan|
|Language||English||English, French, Creole||English||Samoan and English||English||Mandarin|
|Legal Framework||Common law||Based on British common law and Napoleonic civil law||Common law||Common law||Common law||Civil law|
|Degree of Privacy||Extremely high||Extremely high||Extremely high||Extremely high||Extremely high||Low|
|Tax System/Tax Rates||Low tax rates, taxation based on territorial origin; no global taxes||Low tax rates, taxation based on territorial origin; no global taxes||No corporate income tax; no inheritance tax or estate tax; no global tax||Low tax rates, taxation based on territorial origin; no global taxes||Low tax rates, taxation based on territorial origin; no global taxes||As high as 20%, taxation based on territorial origin; no global taxes|
|Non-Cooperative Jurisdictions for Tax Purposes (Note 2)||Was on the list, removed from list in 2020 (Note 3)||On the list||Was on the list, removed from list in 2020 (Note 3)||On the list||Was on the list, removed from list in 2020 (Note 3)||Was on watchlist, removed from watchlist in 2019|
|Suitable for||Tax planning, shareholding companies||Tax planning, companies requiring high degree of privacy (e.g. private detective companies)||Tax planning, shareholding companies||Tax planning, companies requiring high degree of privacy (e.g. private detective companies)||Tax planning, shareholding companies||Emigration|
Since the tax systems and business laws of each location are different, you must have ample preparation before choosing a location to establish your offshore company.
Although offshore companies can provide a higher degree of privacy for shareholders, greater consideration must be given to company management. Thus, unless a company is in need of overseas expansion due to scale or other necessary reasons, it would be best to keep operating a limited company first, before setting sights for the future.
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Controlled foreign corporation (CFC): Refers to a foreign company established in a tax haven that is directly or indirectly controlled by local residents.
Controlled foreign corporation (CFC) clause: Different countries have policies to prevent the transfer of income to tax-free or low-tax countries. Relevant EU policies were introduced as early as 2016. Taiwan passed CFC policies in 2019, but it will officially come into effect in 2021. Hong Kong has no relevant policies for the time being. Due to the relative depth and length of discussions around CFC clauses, we may dive deeper in future blog posts.
Non-cooperative jurisdictions for tax purposes: Since each country can customize their own list of non-cooperative jurisdictions for tax purposes, the notes above are based on the EU’s list of non-cooperative jurisdictions.
The Government of the British Virgin Islands, Government of the Cayman Islands, and the Government of Belize have respectively introduced economic substance laws in 2018. All local companies and limited partnerships must comply with the economic substance requirements, that is, they need to operate in the local area and have substantive management control. The requirements for shareholding companies will be relatively low in terms of economic substance.