The Benefits of Offshore Investments

The Benefits of Offshore Investments

Offshore jurisdictions offer tax benefits, but associations with secrecy persist. Governments attempt to discourage offshore strategies. Starting an offshore company and bank account can reduce taxes, but complications arise. Offshore investments demand careful consideration and professional guidance.

The Tesla car manufacturer has moved the company’s headquarters from California to Texas. Elon Musk has come up with the following excuse for the move: he said the real property prices were too high in Silicon Valley and his employees were unable to afford buying houses in proximity to their offices. However, everybody clearly understands the true reasons for the relocation: the taxes are considerably lower in Texas in comparison to California and the reporting requirements are not so harsh either. Two other corporate giants – Oracle and Hewlett-Packard – have left California for Texas recently.

What should you derive from this information? Probably, you should start to appreciate the fact that there are legal ways of reducing your tax burden and paying less in Taxes and one of such ways is relocating your business company to a different jurisdiction. To make you even more assured of the possibility of making such a move we would like to point out the following two factors. First, Elon Musk’s case is not unique: other corporations are leaving California because the taxes are too high in the state. Second, the ‘runaway’ corporations are huge and the task of relocating to a different jurisdiction is much more challenging for them than it is for a small company. Thus, if they can do it, then you can do it too.

Jurisdictions that charge lower-than-average taxes are often referred to as ‘offshore jurisdictions’. This phrase may have certain negative connotations for some people, we must admit. A few years ago, journalists’ investigations revealed that hundreds and hundreds of government officials and public administrators from different countries had offshore companies and offshore bank accounts. Due to the fact that offshore zones provide a high level of personal information confidentiality, the offshore companies and bank accounts that the officials had were named ‘secret’.

Now, why would a government official or a public administrator want to have a ‘secret’ company or a bank account? It arouses suspicions, doesn’t it? Probably the government officials were corrupt if they wanted to hide their money from other people’s eyes. Maybe they had received the money as bribes in exchange for allowing some companies to win public tenders, for example.

But these are only suspicions. The Panama Papers and other findings caused scandals but what they showed was the fact that some government officials and public administrators had offshore companies and offshore bank accounts. They didn’t show that the money had been obtained illegally! Has anyone gone to jail as the result of the Panama Papers scandal? We have heard about one person and that’s it. At the same time, a great number of honest and law-abiding offshore companies had to take a heavy blow to their reputation. They did not deserve it.

It’s easy to understand why large countries with powerful economies are trying to de-popularize offshore jurisdictions. Island states in the Caribbean, Seychelles, the Cook Islands, the Marshall Islands and other tiny countries often struggle for resources. So, in addition to developing their tourist industries, they are doing their best to attract foreign capital. One of the most efficient ways of doing so is offering foreign investors an opportunity to pay little in taxes.

You can seriously economize on taxes if you start an offshore company and open an offshore bank account. This is especially true if your company is currently registered in a high-tax country. But what would that mean for your home country’s fiscal authorities if you ‘go offshore’? Clearly, you will be bringing less revenue to them! You could not expect them to be happy about it, could you?

Let us suppose that you have a trade company registered in an offshore jurisdiction and you are engaged in international trading operations. Your company buys goods from the producer at a certain price, sells them to the consumer at a higher price and pays taxes on the profit that it makes. If the company is a tax resident of a low-tax jurisdiction, it will simply have to pay less in taxes than it would if it was domiciled (and tax resident) in a high-tax jurisdiction. This is exactly the situation where companies leaving California for Taxes find themselves. Taxes are payable in both states but the rates are lower in Taxes than they are in California! So, what makes you pay more in taxes when you can pay less? Well, maybe the climatic conditions are a bit more preferable in California but living in Austin is not bad at all either.

We are not going to pretend that you can open and maintain an offshore company at no cost at all. Neither are we going to pretend that you will face no problems with your offshore bank account. This would be untrue. Registering an offshore company comes at a price and besides, an annual company registration fee is due. After all, foreign investors have to make some contributions to the local economy even though they pay little in taxes. In addition to that, under pressure from the international regulators, offshore jurisdictions have started to introduce economic substance requirements. While previously your offshore company could exist only on paper and have no tangible assets whatsoever, this opportunity is not available any longer in most places. Now you have to have some ‘substance’ wherever you go: a company office, a telephone line, a company secretary, a local accountant, and so on. However, all these expenses are going to be compensated in all likelihood by the lower amount of tax that you would have to pay.

As far as offshore banking is concerned, we do not claim that it is going to be non-problematic for you either. Naturally, an offshore bank would welcome you if you decided to set up a bank account there. Why? If you bring money from America or Europe to the bank on a small Caribbean island, for example, the bank will now have more cash to use, which will certainly make it feel better! For this reason, offshore banks are doing their best to improve the quality of their services. At the same time, if you have a bank account somewhere in Belize, you may have problems making a transfer to Great Britain, for instance. Many banks in the country just won’t accept payments from Belize. As you can see, even though offshore investments can be lucrative, you have to take the matter of going offshore speciously and seek some professional support. 

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