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Offshore companies are an effective means of tax optimisation for business, allowing maintenance costs to be reduced significantly. Many firms, including Ukrainian companies, successfully compete with companies operating in countries with an unfavourable tax system by using tax planning.
What is tax planning using offshore companies?
International tax planning (ITP) with the help of offshore company is a set of legitimate schemes and instruments used by a legal entity for effective tax optimisation. Most transactions in the field of ITP are carried out within the legal framework, although there are sometimes exceptions to this rule. Businesspeople carrying out unlawful transactions and schemes in ITP give this field a criminal character. Their unlawful actions are prosecuted both administratively and criminally. The international community is strengthening measures to combat unlawful practices in the offshore field. Nevertheless, international tax planning is a fairly common activity in many democratic countries of the world.
Both multinational corporations and smaller firms use tax optimisation. They find excellent opportunities in this area to improve business efficiency by using the characteristics of different countries. Each state differs in its tax system, labour, natural and financial resources. One country has good natural conditions, another has cheap labour, a third has a favourable tax climate. Different jurisdictions differ not only in rates but also in methods of tax collection. Taking this into account, many international companies reduce their cost burden by opening subsidiaries in countries with a convenient tax climate (offshores).
How is international tax payment planning carried out using offshore companies?
The term “offshore” (from the English word “offshore”, literally meaning “beyond the shore”) was first used in Great Britain. This term is also used for activity “abroad” carried out in the jurisdiction of special economic zones. There are no states that completely exempt legal entities from paying taxes. Tax-free situations are created through ITP.
An offshore company is a non-resident enterprise in relation to the country in which it is registered. The administrative centre of such a company is abroad, and all commercial transactions are carried out outside the jurisdiction of the offshore registration zone. A number of special economic zones exempt offshore enterprises registered there from taxes, requiring only payment of an annual registration fee. Offshore companies under the jurisdiction of these states do not have to pay capitalisation tax, etc.
An important advantage of such countries is the simplified procedure for registration and management of an offshore company. It is sufficient to have nominee directors and owners of the enterprise. The procedure for boards of directors and general meetings is usually formal, while the actual management of the offshore company is carried out through the services of a secretarial office. Ownership of an offshore company is often anonymous with increased confidentiality guarantees. This is achieved through generally accepted international legal norms and the legislation of the state that registered the offshore enterprise. A number of jurisdictions exclude foreign-exchange control over offshore enterprises registered there.
Offshore companies registered in these special economic zones are subject to minimal financial reporting requirements, including requirements for audits of these enterprises. In addition, some countries have concluded international treaties allowing double taxation to be avoided. Another advantage of an offshore company is the possibility of obtaining a residence permit in the country where it is registered. The jurisdictions of some states allow this possibility.
Strict requirements apply only to the offices of an offshore company. Under the legislation of the special economic zone jurisdiction, it is usually not an operating premises but only an address for communications between the authorities and other persons and the agent of the offshore enterprise. It is also recommended to open an operating office in that country, meaning premises for conducting business.
Summarising the above, it can be said with confidence that tax optimisation using an offshore company is an excellent opportunity for a business to preserve its assets by reducing the tax burden, etc.