If you are in the process of researching whether it makes sense to establish an offshore corporation for your business, you have probably come across numerous “resources” online that are either: (i) lacking in real information, if not outright contradictory; (ii) just a little bit too shady; or, (iii) only focused on selling you something you can’t tell whether you actually need (spoiler alert: you don’t).
Moving your business offshore can provide important benefits under the right circumstances; and, as you might expect, there is more involved in setting up an offshore corporation than simply filling out a few forms online. In this article, we will provide an overview of the two primary benefits of forming an offshore corporation (again, in general terms – an offshore corporation may or may not be right for you) and take a look at some of the most popular jurisdictions for setting up foreign corporations overseas.
The Two Primary Benefits of Using an Offshore Corporation: Deferring Tax Liability and Asset Protection
The two primary benefits of using an offshore corporation have to do with limiting your income tax liability and protecting your company’s assets. When done properly, setting up an offshore corporation is a legitimate, completely legal way to protect your profits from the IRS (at least in the near term) and shield your assets from potential creditors.
1. Tax Benefits of Using an Offshore Corporation
Have you read that setting up an offshore corporation can help you avoid owing taxes to the IRS? If so, you have received some misleading advice. While setting up an offshore corporation can have certain tax benefits, these benefits do not have to do with tax liability avoidance, but rather tax liability deferral.
As a United States citizen (or a United States company), when you set up an offshore corporation, your new corporation still has to pay tax. In fact, it likely has to pay tax in the country where you establish the corporation (unless the country has no corporate income tax) and back home in the US. However, setting up an offshore corporation can still have valuable tax benefits. Why?
- Many foreign countries have significantly lower income tax rates than the United States; and,
- Offshore corporations can defer their US tax obligations with respect to any income that they reinvest in their overseas operations.
If you continually reinvest your earnings in your offshore corporation’s operations, then your tax obligations to the IRS will be continually deferred. When you bring income back into the United States, then you will have to pay the US taxes, subject to a credit for any taxes you paid overseas.
Companies of all sizes are using offshore corporations to reduce their current tax liability. Consider these examples, as reported by NPR:
- Google, Inc. set up operations in Ireland, where the corporate tax rate maxes out at 12.5 percent. It opened an Irish office, hired Irish employees, and opened Irish accounts. It also set up a series of subsidiary entities not only in Ireland, but also in the Netherlands and Bermuda. By crediting these entities with its non-US income, Google has saved an average of more than $1 billion per year in income tax.
- A pharmaceutical company called Forest Laboratories, Inc. set up a corporate structure to run its profits through “a mailbox in Bermuda.” The company is headquartered in New York City, and has almost exclusively US sales and US employees. By allocating its income to offshore entities, it was able to reduce its current tax liability by more than 33 percent.
2. Using Offshore Corporations for Asset Protection
The second primary reason to set up an offshore corporation is for asset protection. Using an offshore corporation combines the benefits of (i) the liability protection of the corporate structure, and (ii) the protections afforded by keeping your assets offshore, while also avoiding the limitations of other asset protection tools such as the foreign asset protection trust.
Just like using an offshore corporation for tax purposes, there are right ways and wrong ways to use an offshore corporation for asset protection. For example, asset protection is one area in particular where you need to act before it is too late. If you try to move assets overseas to thwart an existing business or judgment creditor’s attempts to satisfy your outstanding debt obligations, your attempts could not only be disregarded, but could even result in civil or criminal penalties.
This is why we recommend proactive asset protection for business owners and professionals in all walks of life. By implementing an offshore strategy now, you can be confident that your assets will be secure in the event that something unexpectedly goes wrong down the line.
Where Should You Organize Your Offshore Corporation?
When you can set up an offshore corporation literally anywhere in the world, how do you decide which country is best for you? Due to the tax and asset protection benefits they offer, the following are among the most popular jurisdictions for setting up offshore corporations:
- Tax Benefits: Exemption from local taxes for international businesses and no obligation to file tax returns. US income tax deferral.
- Asset Protection Benefits: Belize does not recognize US judgments. Corporate ownership remains private.
British Virgin Islands (BVI)
- Tax Benefits: Exemption from local taxes for BVI companies and no capital gains tax on company sale. No obligation to file tax returns. US income tax deferral.
- Asset Protection Benefits: No reciprocal enforcement agreement or legislation with respect to US judgments. Company ownership remains private.
- Tax Benefits: No corporate income tax on offshore activities for Hong Kong companies. US income tax deferral.
- Asset Protection Benefits: No reciprocal enforcement agreement or legislation with respect to US judgments.
- Tax Benefits: Nevis business corporations and limited liability companies are exempt from all local taxes for assets and activities originating offshore. US income tax deferral.
- Asset Protection Benefits: Nevis does not recognize US judgments. Parties seeking to file a lawsuit must post a non-refundable bond and hire local counsel. Corporate ownership remains private.
- Tax Benefits: Exemption for all income received outside of Panama. US income tax deferral.
- Asset Protection Benefits: Disclosure of any information to foreign jurisdictions requires local court approval.
- Tax Benefits: No tax treaty with the US. US income tax deferral.
- Asset Protection Benefits: No reciprocal enforcement agreement or legislation with respect to US judgments. Significant emphasis on bank secrecy.
Of course, every individual’s and company’s situation is unique, and just because something worked for someone else does not necessarily mean that it will work for you. Before taking any steps toward setting up an offshore company, you should speak with an experienced attorney.
Discuss Setting Up an Offshore Corporation with an Experienced Attorney
Jiah Kim & Associates is an international business and asset protection law firm representing US residents and foreign nationals in all matters pertaining to the establishment and maintenance of offshore corporations. If you are considering setting up an offshore corporation for tax or asset protection purposes, we encourage you to contact us to learn more about the options and benefits that are available. To speak with an attorney in confidence, call us at (646) 389-5065 or use our online scheduling tool to book an appointment today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.