Here are a few practical examples:
1. Advertising and marketing service based businesses
Some of the more popular actions conducted from Offshore
include service based activities such as advertising and marketing, as well as
the sale and distribution of information-based products.
Take Facebook for example. Australia is one of Facebook’s
most successful markets with 11 million users, or about 68 per cent of the
internet population.
The media buying consortium Group M estimates this year
Facebook will earn $55 million in advertising revenue from Australian users.
But the vast majority of that will be billed via Facebook Ireland, where the
commercial tax rate is less than half that of the 30 per cent levied in
Australia.
Google also bills Australian users of its advertising system
via its Irish subsidiary. That has allowed it lawfully to pay $74,176 in tax on
revenue of $201 million – a figure industry sources say might be as little as a
tenth of its real revenue.
Once the revenue from selling merchandise and currency for
gaming apps such as FarmVille is taken into account, marketing industry sources
say the true figure of Facebook’s Australian business could be closer to $100
million. Because Facebook does not file its accounts in Australia no one but
the company knows how much, if any, tax it should pay to the Treasury.*
The key to the successful use of Offshore Companies for such
activities centres on the service being seen to be provided from Offshore (+
the service must be billed at a commercially realistic rate). This requires
particular attention to be paid to the wording of sales and other commercial
agreements.
Additionally, it is vitally important to ensure that the
Offshore Company is not seen to be operating from onshore. For example it would
not be advisable for the Offshore Company in this instance to have a permanent
physical office in any of the countries where its customers are based. Contact
us to learn more.
2. Mail order or website based businesses
This is another example of a Trading Operation that can work
tax efficiently from Offshore. Commonly Mail Order (and many website based)
businesses never actually physically take supply of that which they sell. Hence
there is no need to keep stock warehoused. (Most mail order businesses in fact
are middlemen whose speciality is marketing).
How it works is the business receives an order (either via a
website hosted, or in response to a print ad that they have placed from,
offshore). They pass on the particulars of the order to the manufacturer who
then fulfils the order and packages the product (using the Mail Order or
Website based business’s branding) for mail or courier direct to the end user
buyer.
Provided the order is seen to have been taken from Offshore,
the difference between the cost and sale price can potentially be receipted
Offshore, tax free.
Again for this to work the mail order or website based
business needs to be seen to be managed and controlled (and to be taking
orders) from Offshore (which requires considerable skill and experience on
behalf of the IBC supplier/manager). Contact us to learn more.
3. Offshore “Captive” Insurance Companies
If you would like your business to be able to claim the
maximum tax deduction possible for payment of insurance premiums or if you
would like to be able to access insurance premiums at wholesale rates you might
wish to consider setting up your own “Captive” Insurance Company Offshore.
If you own a Captive Insurance Company you would, in the
ordinary course of business, insure (via the Captive) your various risks at the
highest conceivable premium (ie within the bounds of commercial reality).
Thereafter the Captive would re-insure those risks elsewhere at a lower rate.
The profit made by the captive on the differential would be realized and
receipted offshore potentially tax free.
Another advantage of owing an Offshore Captive Insurance
Company is that you can use it as a vehicle to invest in a wider range of
financial products than you could otherwise access if you were to set up the
Captive onshore (wherein you would be limited to the confines and limitations
of the onshore investment environment).
Moreover with the Captive being incorporated in a nil tax
jurisdiction the returns on its investments would be receipted, (and could also
be reinvested) Offshore, potentially tax free. Contact us to learn more.
4. Debt Factoring Businesses
Debt factoring is a process whereby a capital flush company
buys a debt from a cash strapped business for less than face value (say 80% of
what’s owed) which debt it then collects in full pocketing the difference (in
this example 20% of the debt) as its operating profit. Its stock in trade is
capital which can be kept, managed and supplied from offshore.
Say you have a business that gives its customers 30, 60 or
even 90 days to pay following supply of goods or services. That business could
set up a subsidiary ie a debt factoring company offshore (which ideally no one
but the partners would know the true owner of) in a nil tax environment. To
maximise cash flow the business could resolve to sell each debt, immediately it
makes a sale, to the Debt Factoring Company in return for an immediate payment
of say 80% of the debt.
The Debt Factoring Company would of course proceed to
collect 100% of the debt. The net outcome would be that 20% of each sale is
receipted Offshore potentially tax free Contact us to learn more.
5. Investment in Offshore or Hedge Funds
Many if not most “Onshore” Funds are limited in terms of
what they can invest in and what they can offer the retail investor. Plus high
regulation makes set up and maintenance costs of such Funds significant which
costs are ultimately passed on to the consumer.
Offshore Funds by contrast are quicker and cheaper to set up
(and maintain). Plus (because they are not registered in high regulation
“nanny” states) they are usually less controlling in terms of what they will
allow the Fund Manager to invest in. This is attractive to investors with a
higher than average risk appetite eg those in search of higher (say, double
digit) returns.
A lot of Offshore Funds however do not allow “Onshore”
investors to participate, sophisticated investors excepted (eg persons with a
net asset pool of $US2million or an annual taxable income of no less than
$US200,000).
By setting up an Offshore company you can gain access to the
up till now inaccessible world of alternative investments. However to avoid
falling foul of onshore regulations Offshore companies established for such
purposes need to be structured and/or managed in a very specific way. Please
contact us for further information on what’s involved and on how we can assist
you to broaden your investment horizons.
6. Offshore Wills & Estate Planning
An Offshore Estate plan can be conceived in such a way that
the individual’s estate is passed at death to an Offshore Beneficiary,
typically an International Trust. The Beneficiary is usually created for the
sole purpose of benefiting certain nominated persons, without ever giving
unfettered control of the deceased’s assets to those persons. Such a plan
provides comfort to the client who can continue his life’s work safe in the
knowledge that his hard won assets won’t be wasted once he’s no longer around!
Additionally unlike passing those assets to a Trust
pre-death the client also benefits from the fact that he can still enjoy (and
retain complete control over) his assets for as long as he wishes. Another benefit of nominating an Offshore
beneficiary to receive your estate post death is that you make it extremely
difficult for disgruntled family members, in-laws or creditors to fight over
your estate once you’re gone as they would most likely have to take action in a
foreign court – which is rarely an easy (and almost always an extremely
expensive) exercise. Contact us to learn more
7. Insolvency and Divorce Insurance
Persons wishing to protect their assets from a greedy
ex-spouse or from Insolvency claims can effectively do so by establishing an
Offshore Vehicle designed exclusively for the purpose of taking possession of key
assets.
If professionally structured (and at the right time – don’t
wait till your spouse sues for divorce or you can’t pay your bills to set up a
protective structure!) one may be able to take possession of certain assets
from division by the Divorce (or confiscation by the Insolvency) Courts by
setting up an Offshore Corporate structure to hold such assets.
You can also transfer ownership of key assets to an Offshore
Corporate entity whilst retaining some degree of control over or access to the
asset. (The rich learned generations ago that ownership isn’t everything; being
able to use the asset at a time convenient to you is what counts most).
Some particularly clever Corporate structures are also
available Offshore that, once you perceive that divorce or bankruptcy is
looming (or even before that time), enable the Offshore Vehicle to
automatically take complete control over the most vulnerable assets, thus
shielding those assets from division by the Divorce Court and/or from
creditor’s claims.
If structured carefully such Offshore Corporate Vehicles can
also provide investment growth potential as well as reductions in future tax
liabilities. Contact us to learn more.
8. Group Finance Companies
Thin capitalisation rules onshore often limit the amount of
tax deductions that can be claimed for the cost of funds borrowed by one member
of a group of companies from another.
Provided the structure meets the present commercial and
operational objectives of the relevant company a particular Offshore Corporate
structure can be established such as can facilitate arms-length financing for a
company or group of companies beyond the application of local laws (the
application of which would otherwise limit the amount that can be claimed at
home by way of tax deductions for loan fees or interest payments).
How it can work is funds are passed to an Offshore entity
that, in turn, via an Offshore Finance Company, on-lends those funds to the
onshore resident company. In certain situations it is even possible to claim a
tax deduction for the initial payment of funds overseas as well as for interest
payments made to the Offshore Finance Company!
As ever for such a venture to work clear commercial objectives
need to be apparent from the get-go. Moreover this is a particularly
sophisticated system of offshore structuring and formation and deployment of
such a plan will require the engagement of specialized professional assistance.
Contact us to learn more.
9. Offshore Labour Hire and Recruitment Agencies
Establishing an Offshore Recruitment Agency in a nil or low
tax centre is a clever way for contract based workers to save on tax.
How it can work is the contractor agrees to work exclusively
for the agency in return for the agency guaranteeing him, by written agreement,
a minimum volume and/or rate of work (think about it from a commercial
perspective…why would you want to agree to work exclusively for one agent
otherwise?).
The next time the contractor finds a job that he’d like to
take on he simply tells the prospective employer that he works exclusively for
The (Offshore based) XYZ Employment Agency Ltd. Say the contract is for $100,000.
The employer signs a contract agreeing to pay The XYZ Employment Agency Ltd
$100,000. The XYZ Employment Agency Ltd then subcontracts the job to the
contractor for say $50,000 (whatever the lowest rate could conceivably be for
work of that type – the contract price cannot be seen to be commercially
unrealistic; that’s where these things can really come unstuck). The result?
Half the contract price of $100,000 is receipted offshore potentially tax free.
But that’s not all… The capability of the Offshore
Recruitment Agency to assume accountability for non-wage obligations means the
employer often no longer needs to worry about things like payroll taxes,
employee superannuation (retirement plan) payments, worker’s compensation
insurance, training costs or fringe benefits tax. This makes it even more
attractive for the would be employer to hire the contractor!
In addition the introduction of VAT/GST in most countries
has meant that many companies and businesses can benefit financially from
exporting (or importing) services that would otherwise be obtained from
onshore.
Outsourcing (Or “Offshoreing” as it is sometimes known) is
now big business. The rapid growth of the E-Commerce sector and the emergence
of websites such as freelancer.com (which enables contractors in developing
countries to bid for jobs put up for tender by businesses in wealthy countries)
mean that many services can now be obtained from any part of the globe. Hence
businesses can effectively outsource many jobs(that would normally be carried
out by costly local personnel)without having to worry about non-wage labour
costs that would otherwise apply were they to hire onshore resident staff.
Similarly, the ability to sell services offshore may allow
businesses to obtain the benefits of tax credits without having to incur a
VAT/GST liability. Contact us to learn more.
10. IT Consulting
This is another line of work that lends itself particularly
well to Offshore structuring as often the work is done by a person living in
country “A” for a client based in another country altogether (i.e. country
“B”).
Rather than having his onshore company take up the IT
consulting contract the savvy IT Consultant or Developer these days will have
an IT consulting company in a nil or low tax centre take up the contract in
question and then subcontract the work to him at a cheaper rate. The difference
again is receipted and banked offshore potentially tax free. Contact us to
learn more.
11. Intellectual Property Holdings
Offshore companies are widely used by
Intellectual-Property-rich companies as a means of protecting their unique
ideas or branding and to save on taxes. Industrial businesses also frequently
exploit their technological innovations by transferring such Intellectual
Property (“IP”) to an Offshore Licensing Company. The key is to sell or
transfer the IP to the Offshore Company at an early stage. Whatever the
Offshore Company pays for the IP it must be seen to be a commercially realistic
price. (Ideally the transfer of IP would happen shortly after the business
launches in order to minimize transfer costs).
Thereafter royalties, license fees and other sums
attributable to the use of the IP may be receipted by the Offshore Licensing
Company from related (as well as non-related) Companies, potentially tax-free,
Offshore thus reducing the overall tax burden of the group.
Not only can tax benefits flow but by wrapping IP in the
protective coating of an Offshore Corporate shell, you also make it much harder
for people to sue you
(a) Because they have to sue abroad in an unfamiliar and
often sinister legal environment and
(b) Because it’s often impossible to know pre-trial whether
the offshore company has any assets from which recovery can be milked. (One
wonders if Mark Zuckerberg had transferred ownership of the Facebook name/brand
to an offshore company early in the peace whether he would have faced the
multitude of law suits that have latterly befallen himiepost mega-success).
Whilst law changes in certain countries have made deployment
of such strategies more challenging, effective means of holding and exploiting
intellectual property through Offshore corporate structuring still exist,
provided that the appropriate structure can be put in place (hence, again, the
importance of making sure you choose an experienced, knowledgeable Offshore
Company Formation Service Provider). Contact us to learn more.
12. Offshore Employee Welfare Funds
With increased regulation traditional Employee Share/Option
Plans and Employee Bonus Plans are becomingly increasingly costly to both
establish and administer from “Onshore”. An Offshore Registered and Managed
Employee Fidelity Structure or Welfare Fund on the other hand can provide
benefits similar to an Employee Share/Option Plan or an Employee Bonus Plan but
at a much more economical price.
Traditional Employee Welfare Funds are very restricted in
terms of where monies held by the Fund can be invested (eg often they can only
be invested in shares of the employer company). Offshore
Superannation/Retirement Funds on the other hand are usually able to operate
outside of the restrictive regulations of most local superannuation schemes and
are thus able to invest in a wide range of investments (including in high
yield/risk investments such as Currency Trading, Bonds and Derivatives etc).
As an Offshore fund has a much greater choice of where how
and when to invest the fund can also be utilized as a high returning investment
vehicle for both employer and employee alike (ie in addition to benefiting the
employees by their receiving tax-preferred treatment on retirement or
termination). Additionally because the Fund is incorporated in and managed from
a nil tax environment and doesn’t have to account for tax every year it is able
to grow its capital base much faster via the power of compounding.
Tax deductions may also be available in certain countries
for payment of contributions by Employers to non-resident Employee Superannuation/Retirement/Welfare
Funds.
13. Offshore Indemnity Funds
In certain countries now the law expects employers to keep
funds aside to cover contingencies such as redundancies or employee related
legal liability (eg some former hotel owners are now being asked to pay
damages, decades later, to former employees who contracted lung cancer after
working for years in smoky bars).
There are clear advantages to setting up such a Fund
Offshore. For example as an Offshore entity has a much greater choice of
investments an Offshore Indemnity Fund can be utilized meantime as a high
returning (potentially tax free) investment vehicle for the employer (ie
provided the Fund abides by its constitution and keeps aside at all times a
prudent amount such as might be required to fund potential liabilities in the
future).
Additionally because the Fund is incorporated in and managed
from a nil tax environment and doesn’t have to account for tax every year it is
able to grow its capital base much faster via the power of compounding.
Tax deductions may also be available in certain countries
for payment of contributions by an Employer to a non-resident Indemnity Fund.
Upon winding up of the onshore business the proceeds of the
fund might be paid back to the employer (potentially tax free if the employer
is then tax resident in a country that doesn’t tax such receipts).
Kindly note the above are generic examples and are not
country specific. Local laws may have an important impact on your particular
situation. Consequently we recommend that you seek local legal and/or tax
advice before incorporating or using an Offshore Company for such purposes.
For more information on this topic (or if you would like to
know more about How We Can Help You) please Contact Us
This is a generic example of how an offshore corporate
entity can or might be used. Local laws may impact on your situation. Hence we
would recommend that you seek local legal and/or tax advice before establishing
such an entity
Winston Wambua
