offshore corporation

If you own an offshore corporation, it is important not to lose sight of the reasons why you chose to set up a business overseas. Similarly, if you are considering setting up an offshore corporation, it is important to understand not only the true benefits of foreign incorporation (there is a lot of misleading information out there), but the initial and ongoing administrative requirements as well.

Of course, none of this is meant to dissuade you from maintaining or forming your offshore corporation. There can be tremendous benefits to owning an offshore corporation, and the administrative burdens can be quite modest in comparison to the effective returns. You just want to make sure that you go in, and stay in, with eyes wide open so that you can maximize the benefits without overlooking common mistakes that all-too-often lead to unnecessary risk and liability.

Answers to Important Questions About Owning an Offshore Corporation

1. What are the True Tax Benefits?

Offshore corporations offer tax benefits. We’re guessing you’ve heard this before. But, what are those benefits, exactly? And, how can you make sure that you maximize the tax benefits without overstepping the line?

US Tax Deferral, Not Tax Avoidance

First of all, it is important to understand that, as a US citizen, owning an offshore corporation offers you the benefit of tax deferral, not tax avoidance. This deferral can be indefinite (as long as you continue to re-invest your foreign income in your offshore corporation), but if you ever bring your offshore earnings back to the US, you are going to owe a tax obligation to the IRS.

In addition, US residents must report their worldwide income to the IRS (regardless of whether any income tax is owed). As a result, if you are a US “tax resident,” the way you set up your offshore corporation and structure your personal compensation will be important considerations as well.

Foreign Income Tax Liability

The second major tax-related benefit of owning an offshore corporation is that many foreign countries have low (or zero) tax rates for corporate income. Specific tax rates vary from one country to the next; and, while some countries provide exemptions for all corporate income, others only offer exemptions for income earned overseas. As a result, it is critical to understand the tax laws in the country where you establish your offshore corporation.

2. Which Country Makes the Most Sense for Your Offshore Corporation?

Along with differing tax regimes, there are a number of other reasons to carefully consider the jurisdiction in which you organize your offshore corporation as well. Even if you already have a foreign corporation, it is not too late to consider your options, and possibly re-establish your corporate presence in another country.

From a legal perspective, the other main benefit of offshore incorporation is asset protection. Here, we are primarily talking about insulating your assets from creditors. To get the most benefit out of owing a foreign corporation, you will want to be sure to choose a country that takes a favorable stance on both privacy protection and recognition of foreign judgments.

In addition to the legal considerations, there are a number of practical considerations here as well. For example:

  • Will you be hiring overseas employees? If so, what skills and language experience do you need?
  • Where do you intend to live?
  • Do you already have assets overseas? If so, where are they located?

3. How Will Your Offshore Corporation Impact Your Estate Plan?

When making decisions about tax planning and asset protection, we always recommend making these decisions with your estate plan in mind. The tools that provide the greatest asset protection are not always the best options when it comes to estate planning (the law is set up that way on purpose), so you need to find a balance between security and flexibility that works best for you.

If you do not have an estate plan, you really should. Learn more about our international estate planning services.

4. What Does it Really Mean to House Your Assets Offshore?

As an example of the previous consideration, consider storing your assets offshore. Depending on your type of business and the country where you are incorporated, you may have no choice but to house some of your assets in a foreign country. While this has benefits when it comes to asset protection, it can add a layer of complexity to your estate plan while potentially also making it more difficult (but not impossible) for your beneficiaries to take possession of your assets after your death.

Again, the benefits of incorporating offshore may outweigh these countervailing considerations (and they often do); but, it is important to make sure that you are not viewing these benefits through a restricted lens.

5. What Is Involved in Organizing and Maintaining an Offshore Corporation?

To realize the benefits of owning an offshore corporation, you need to organize and maintain your offshore corporation properly. This means (generally speaking):

  • Completing all required initial and ongoing government filings
  • Preparing a comprehensive shareholder agreement, bylaws, and/or other applicable corporate governance documents
  • Maintaining separate accounts for your offshore corporation
  • Maintaining a clear distinction between personal and business assets
  • Updating your corporate governance documents as necessary to reflect significant developments (such as the addition or removal of a shareholder)
  • Filing all necessary tax returns in all applicable jurisdictions

If your offshore corporation was not properly formed, it might not actually exist at all. Similarly, failure to respect the ongoing formality requirements could result in your corporate entity being disregarded.

6. When Is the Right Time to Organize an Offshore Corporation?

As with most things in business and in life, when it comes to organizing your offshore corporation, timing is important. For example, you generally do not want to begin conducting business in your own name while you wait for the incorporation process to run its course. Incorporating overseas can take time, and you need to plan accordingly.

Similarly, if your primary goal (or one of your primary goals) is asset protection, waiting too long to incorporate and/or transfer your assets could backfire completely.

7. Do You Need More than One (Domestic or Foreign) Entity?

Finally, whether you already own an offshore corporation or are in the process of considering forming a company overseas, it is important to consider whether a single entity is enough to meet your needs. There is a reason why major global corporations set up entities all over the world, even in countries where they do not have any sales or employees.

To maximize the tax, asset protection, and other benefits of foreign incorporation, you may need to form multiple entities – in the US and abroad. Depending on your personal and business circumstances, the benefits of establishing and maintaining multiple legal entities can be well worth the relatively modest investment involved.

Discuss Your Offshore Incorporation Needs with an Experienced Attorney

To learn more about maximizing the benefits of offshore incorporation and how to effectively implement and manage a corporate structure that meets your tax, asset protection, and estate planning goals, contact Jiah Kim & Associates for an initial consultation. We represent entrepreneurs and established business owners worldwide. To schedule an appointment, call (646) 389-5065 or send us a message online 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.

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Jiah Kim & Associates

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New York, NY 10028