Onshore and offshore refer to the jurisdiction in which investors choose to base their company. This choice has a significant influence on aspects concerning company taxation, control and even the types of business activities that the corporation can engage in.
Opening an offshore vs an onshore company will depend on the business targets and whether or not investors wish to reduce the corporate taxes to a minimum. Of course, when deciding to locate a company, the tax reductions which are specific to offshore jurisdictions are not all that needs to be taken into consideration. The choice between onshore and offshore is, in most cases, dictated by more than just tax issues. We take a look at what each type of jurisdiction has to offer to investors.
Onshore companies are those businesses based in countries that do not offer specific preferential tax regimes or preferential confidentiality or non-disclosure treatments. The company will usually conduct a large part of the business in the country where it is a registered legal entity and will need to comply with the ongoing policies for disclosing public information as well as submitting tax and accounting/auditing reports as needed.
Apart from a geographical consideration (the fact that the business activities are performed in the country of residence or in nearby countries), onshore jurisdictions have other characteristics as well. While their taxation regimes differ from those in offshore locations, this is not to say that all onshore jurisdictions have very high corporate taxes. They are not zero, however, corporate taxes for investors who open a company in Estonia will be 20% of the gross amount of the profit distribution. Other countries in Europe have even lower corporate tax rated and it is useful to explore all of the options when choosing to base a company in the EU.
Another characteristic for onshore jurisdictions is that they have a very well-developed financial and business sector. This, in turn, means that the company will benefit from economic and business security and from various business-friendly policies that can also yield tax advantages. For example, Germany is one of the most important EU economies and a country that has signed a large number of double tax treaties. Foreign investors who start a business in Germany will have significant advantages that are worth exploring despite the corporate income tax rate which is generally accepted as a high one, ranging between 30 and 33%, with the included solidarity surcharge trade tax.
Offshore companies are those based in a country that offers preferential tax treatments and investor-privacy and confidentiality policies. These jurisdictions offer plenty of advantages, from zero corporate taxes to a fast and simple company incorporating regime and a high level of investor protection, plus the lack of any requirements for the disclosure of the true company beneficiaries. While it is true that offshore companies may be successfully used for asset protection purposes, these types of business entities may be used for legal tax minimization purposes. Tax havens are legal and basing a company in one of these jurisdictions does not necessarily mean that the business is involved in illegal activities, as the general reference seems to point out.
Tax havens like Belize offer a zero-tax policy and companies based here are incorporated not for the purpose of trading internally, but for conducting international business activities, most often of a financial nature. The fact that these jurisdictions, often located in small insular states with exotic views, offer a highly advantageous tax regime has created another name for them: tax havens. Countries like the Cayman Islands, Belize, the British Virgin Islands, Seychelles and other are popular tax havens. They offer much more than just zero taxes in as they also provide a fast-track company formation procedure and they do not make it mandatory for company directors to disclose their identities. A nominee director and shareholder can be successfully used. What’s more, in most of these jurisdictions, the financial accounting and reporting requirements are minimal or non-existent.
Choosing the right offshore destination will require some research on the part of the investor. It is important to consider not only the tax benefits but also the types of business structures that can be incorporated and the limitations or restrictions that may apply for conducting business in the tax haven where the business is registered.
While the distinction between onshore and offshore jurisdictions is clear in most cases, there are a few locations that allow investors to benefit from the best out of both worlds. These are the mid-offshore or the onshore-offshore hybrid jurisdictions. Here, tax benefits are available to foreign investors when they choose to incorporate a local resident company that will also trade in that jurisdiction (and that can have a bank account in another country). The key characteristic is that these jurisdictions offer an exemplary taxation and business regime, at the same time, complying with all of the international transparency standards. Examples include Hong Kong, Singapore or Labuan and Liechtenstein in Europe. These hybrid jurisdictions can be the most suitable option for investors looking to open an international business.
Onshore, offshore and mid-offshore jurisdictions all have their particularities and it is important to understand them in the context of specific business purposes. The company image can be linked to the jurisdiction in which it is based – an even more important reason to seek proper guidance and counseling before incorporation. We recommend that you consult with a local onshore/offshore company formation agent in the jurisdiction of choice before commencing the business incorporation process. Adopting the best strategy, whether it is onshore or offshore, is a step that matters to your business.
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