Why do business owners set up offshore companies?
The point of an offshore company is simply this: in high tax countries such as South Africa, establishing a company in an offshore jurisdiction, like Mauritius, for example, is beneficial because these locations offer low or no tax. Furthermore, as long as the company does not do any business in the country in which it is located, most forms of local tax can also be avoided.
Formation of an offshore company is popular for entrepreneurs who want to set up an import-export company, an international trading company, or an asset holding company. They also use this vehicle to hold property investments or intellectual property.
Foreign governments, in turn, allow offshore companies to be registered inside their borders because company registration and other forms of offshore investment provide a substantial income for these countries. The capital that is invested by these companies in local banks and investment houses creates significant inflow of foreign investment into these economies.
What is an offshore company?
An offshore company seldom conducts business in its country of incorporation. It is usually incorporated in a country where taxation is lower and reporting restrictions are more flexible than the country in which its owners reside. An offshore company can usually be set up within two working days by offshore specialists like OCRA Worldwide, an international and offshore corporate and trust services provider. Advisors like OCRA maintain a list of shelf companies, which are ready-made, never-used corporations established to meet a client’s immediate needs and available to trade instantly.
What are the benefits of going offshore?
Establishing an offshore company has several advantages:
1. Reduced tax
Tax reduction is the number one reason for establishing a company offshore. An offshore company can be used and structured to reduce taxation, especially if you do not derive a profit from the country in which the company is incorporated. You may even be able to avoid paying tax altogether.
The amount of tax an offshore business will pay depends on the way the offshore company is structured and how well you can legally benefit from your tax situation. It’s advisable to consult an offshore incorporation service provider who will look at your circumstances and advise you on how and where to structure an offshore company for maximum gain.
2. Simplified, cost-effective operations
If your business is not subject to international regulations (such as financial institutions are) there are certain jurisdictions that make it easy and attractive for all types of companies to operate. Although it depends on the jurisdiction you choose for incorporation, the burdens of accounting, auditing and record keeping are likely to be significantly reduced. This in turn results in reduced overheads and it also decreases the amount of time and energy that has to be invested in these often onerous tasks.
3. Reduced reporting requirements
In addition to simplifying your overall operations structure through the use of an offshore company, there are also generally far fewer requirements to file information in most offshore jurisdictions.
4. Low incorporation fees
Some jurisdictions charge low fees to incorporate, and they also charge far lower maintenance fees. However, this varies from jurisdiction to jurisdiction and you are advised to investigate the options.
5. Fast incorporation
Incorporating offshore can mean faster incorporation time. Some countries are not perceived as being business ‘friendly’, while others are. This means that legislation either facilitates or complicates business set-up procedures. In some countries it can take months to set up a company, whereas in Singapore this could be done in days. For entrepreneurs in a competitive market, this can be a very important and decisive factor. If you have a product you want to take to market as soon as possible, and before the competition gets there, incorporating overseas can enable you to introduce your product quickly, efficiently and effectively.
6. Asset protection
It’s possible to manage assets and business transactions in such a way that assets are shielded from any form of liability. You can use an offshore company with an offshore trust, for example, to protect your assets while retaining control over the way your affairs are managed. By placing certain assets within an offshore company structure and then placing the shares of the company within a trust, you can be actively involved in the offshore company and direct the management of its assets whilst remaining independent from it and ensuring that your assets enjoy maximum protection.
7. Greater confidentiality & anonymity
Because offshore companies can use nominee directors, they can carry out all transactions in the name of the private company and keep the names and details of the underlying principal of the company out of public documentation.
A word on tax
“It is important to consult reputable advisers because the tax rules that apply are complex and subject to change,” says Betsie Strydom, director and tax specialist at Bowman Gilfillan. “Proper tax planning requires you to consult advisers in every jurisdiction, and ensure that the structures and management arrangements are real and that they have commercial substance. Do not rely on ‘window dressing’ particularly when it comes to the management of the offshore entities.”
Entrepreneurs who want to set up a business offshore need to take a variety of tax rules into account. “Those that apply to setting up business offshore are complex,” says Strydom. “Not only do you need to take South African tax rules regarding controlled foreign companies and effective management into account, but you also need to consider the tax rules of the country in which you intend to operate, as well as the provisions of any double taxation agreement (DTA) between South Africa and the country in which you want to do business.”
The purpose of DTAs is to prevent double taxation. The DTA between two countries generally means that you will be taxed in both countries, but one country will usually give you a tax credit for the tax paid in the other country. “The type of income, the locations of the offshore businesses and the terms of the DTA or treaty that are applicable will determine whether the offshore structure offers any benefits and in which country you will be taxed,” Strydom explains.
Exchange control considerations are extremely important when setting up a business offshore, according to Strydom. “Sole proprietors and close corporations (CCs) are not permitted to make foreign direct investments outside the common monetary area (CMA), which links South Africa, Lesotho and Swaziland into a monetary union.
They can only invest outside the CMA by using their offshore investment allowance, which is R4 million,” she says. South African corporates may make new outward foreign direct investments into companies, branches and offices outside the CMA provided the total cost of this investment does not exceed R500 million per company per calendar year without prior South African Reserve Bank (SARB) approval. The SARB has issued Exchange Control Rulings which, among other things, summarise current exchange control policy on foreign direct investments by South African companies.
In terms of this section of the rulings, “Authorised dealers are allowed to formally approve foreign direct investments, but they will require detailed information before the approval can be given,” Strydom says. Conditions will be attached to these investments. For example, SARB does not allow foreign direct investments to be made where the foreign entities domiciled outside the CMA make any investment/loans into the CMA for any purpose whatsoever, via a loop structure. Also, SARB requires that the ‘place of effective management’ of the FDI Company remains in South Africa and typically also imposes a condition that the FDI Company cannot re-domicile without the specific prior approval of the Exchange Control Department of SARB. Where the intended investment exceeds R500 million, specific approval will be required too.
Choosing a jurisdiction
“It is possible to incorporate offshore companies in many jurisdictions,” says Hylton Cameron, senior tax manager at Grant Thornton Johannesburg. “Some of the most popular locations include Botswana, the British Virgin Islands, the Cayman Islands, Cyprus, Dubai, Gibraltar, Guernsey, the Isle of Man, Jersey, Mauritius, the Netherlands, Antilles and the Seychelles.”
To determine which location is best for you, you need to take a number of factors into account, including the type of business and the reasons why you want to register an offshore company. Language may also play a role, as does time zone. Jurisdictions such as Dubai, Singapore, and Hong Kong appeal to many entrepreneurs setting up an offshore company because of their competitive tax systems, infrastructure and reputation as business hubs. It’s worth noting that in sub-Saharan Africa, 29 out of 46 economies reformed, implementing 67 reforms, according to the World Bank Doing Business Report 2010. Nearly half the reforms focused on making it easier to start a business or trade across borders.
For South African entrepreneurs looking to set up a business in sub-Saharan Africa, an advisor like Grant Thornton has offices in a number of countries and offers accounting and business advisory services, as well as the skills and expertise that you will require to ensure that your fingers don’t get burnt. “Our local offices ensure that business people have access to hands-on assistance, and to best practice methodologies and knowledge resources. It’s vital to consult providers who have first-hand knowledge of the countries in which you want to set up operations and how the various systems work. That will help you cut through the red tape.”
Cameron advises entrepreneurs to ensure that the jurisdiction they are interested in is politically stable and has flexible tax and company laws. When people invest offshore, he adds, it may be for a variety of business reasons, including expansion into that country, use of that country’s resources, tax benefits and exchange control benefits. He notes that small to medium sized businesses may be attracted to countries like Botswana and Angola because of cheaper labour.
“For a manufacturing business, the labour costs may be more attractive and could be a major driving factor in the decision to set up there. If someone invests in Kenya or Zambia they usually do so because their operations would be commercially viable there. When we help a client to decide on whether a location like Kenya, for example, is suitable, we advise the client to look at tax issues in Kenya, as well as the tax implications for a South African citizen investing in Kenya.
We strongly advise against identifying an opportunity and only then asking questions about tax. Worse still is the situation in which a client goes ahead and invests offshore and only asks tax questions later.” Referring to tax rates in sub-Saharan Africa, Cameron notes that the rates reflected are open to interpretation based on the circumstances of each business. “Issues such as the fact that some countries offer lower tax rates for individuals than others are of little real concern. Sometimes companies apply what is called tax equalisation. Simply put, if you receive the equivalent of R100, less tax of 30% in country A and you then move to country B where the individual tax rate is 40%, the company will pay the individual more, so that the net result is still 70% as per the original country.”
The Mauritian appeal
Among the many jurisdictions that may be attractive to business owners who want to go offshore, Mauritius ranks tops. Cameron notes that Mauritius has undergone major economic reforms and is today one of the world’s most competitive fiscal regimes. It was ranked 12th best out of 183 countries in the ‘Paying Taxes’ category of the World Bank Doing Business Report 2010. South Africa ranked 23rd. In the ‘Ease of Doing Business’ category, Mauritius ranked 17th, while South Africa was in 34th place.
In addition, the Mauritian economy has had an average growth rate of 5,6% during the last five years. Mauritius is regarded as Africa’s first tiger economy, supported by a robust education and social infrastructure. It is a highly active Freeport and so functions as a substantial duty-free distribution hub for the south-east African region. In addition, it is strategically located, politically stable, offers excellent infrastructure, a well developed information and communications technology network and excellent sea and air transport.
Mauritius is a member of the Indian Ocean Commission (IOC), which promotes regional economic co-operation, of the Southern African Development Community (SADC) and of the Common Market for Eastern and Southern Africa (Comesa). Regardless of which region you are considering, it’s imperative to understand that not everyone will benefit from going offshore. You must seek professional advice before incorporation to ensure your actions are legal and the jurisdiction you have chosen is regulated and respected.
The Internet has many useful resources and sources of information for anyone who is interested in investigating offshore options. Here are some of the most valuable ones:
- Alliance Trust, Alliance Trust Co. (Mauritius) offers expertise in the formation and administration of offshore companies in Mauritius.
- Doing Business, The Doing Business project provides objective measures of business regulations and their enforcement across 183 economies and selected cities at the sub-national and regional level.
- Formations House, Offers readymade offshore companies with bank and merchant accounts.
- OCRA Worldwide, A service provider that has established and administered more than 185 000 companies and trusts worldwide from 20 global offices.
- PKF International, A worldwide network of legally independent member firms providing local expertise in accounting and business advisory services.