Is it legal to use offshore companies?

The reference to offshore companies can cover entities registered in various jurisdictions – for instance, British Virgin Islands, Seychelles, Belize, Cayman Islands, St. Lucia, Guernsey and Jersey of the Channel Islands, Marshall Islands, St. Vincent and Grenadines, Bahamas and others, and there is no single list of existing offshore zones.

Historically offshore companies have actively been used as instruments of tax optimization and assets protection. Zero corporate taxes for international businesses, for the overwhelming majority – absence of audit and accounting requirements, simple remote registration procedures and further ease of company administration, existence of closed registers of directors, shareholders and beneficial owners ensuring confidentiality of company’s officers are key factors making offshores appealing for various businesses.

Сonscious approach to the use of offshore companies

Global attitude towards offshore jurisdictions and companies registered there has changed significantly over the past 20 years. Focus on the need for transparency and prevention of tax avoidance, tax base erosion and profit shifting reshaped perception of offshores as widely accepted legal instruments. But does it mean that using BVI, Seychelles, Belize and other offshore companies is not legal anymore? The generic response to a question like that would be – of course not, but… will depend on the use. Let us consider examples below:

Example 1. Ann owns a BVI company and uses it for trading of cosmetic products. Ann is a French national and French tax resident. She regularly distributes dividends from her BVI company’s profits to a personal account held in a foreign bank. Ann has not informed French tax authorities that she owns a BVI company or that she has a bank account with a foreign bank. Ann does not pay corporate taxes in the BVI or anywhere else or taxes on dividends she receives from her business.

Using an offshore company in such way would definitely get Ann into trouble and raise questions as to the legality of her use of this BVI company.

Example 2. Oleksandr owns a Seychelles company which is used for the provision of software engineering services. He is a Ukrainian national and tax resident. Oleksandr regularly distributes dividends from his Seychelles company to a bank account held with the Ukrainian bank and pays personal income taxes in Ukraine. He informed Ukrainian tax authorities that he controls a foreign entity and fulfils relevant reporting obligations at the country of his tax residence.

Oleksandr is not using his Seychelles company in attempt to avoid payment of any taxes, complies with the local reporting requirements and gets a good night’s sleep. Well done, Oleksandr.

To be on a safe side and not follow Ann’s steps, we would encourage you to pay additional attention to the following:

1. Do check whether the country of your citizenship and tax residence allows you to own foreign companies, receive dividends on the shares of such companies, act as their CEOs – if that is not the case, then it would not matter how you plan to use your offshore company, it may be illegal for you from the start. If there is a requirement to obtain preliminary approval from the local authority before registering a foreign company, make sure to obtain such before engaging in registration process.

2. Alternatively there may be local requirements to officially report ownership in foreign entity, exercise of control over such entity and there may even be a requirement to pay taxes on company’s profits in the country of your tax residence – we highly recommend to check the existence of local legislation imposing such obligations in advance (in particular, CFC (Controlled Foreign Companies) requirements).

3. Another point to remember is that offshore companies must comply with the laws of the country where it effectively conducts business. For licensed types of business activities (for example, provision of financial services, investment consulting, payment solutions) licensing requirements should be carefully checked for each country of company’s operation.

4. Doing business abroad via an offshore company may also require establishment of subsidiary / branch / representative office in the country of operation depending on requirements of local legislation. Another possibility is that the foreign company may be regarded as doing business in another state leading to the creation of ‘permanent establishment’ with tax imposed on the relevant part of the offshore company’s profit generated there.

Introducing changes to the offshore world

Offshore legislation has also undergone certain major changes aimed at ensuring compliance with norms of international law and practice (and safe passage our of ‘black’ and ‘grey’ lists of International Monetary Fund (IMF)[T.Г.1] , Organisation for Economic Co-operation and Development (OECD)[T.Г.2] , Financial Action Task Force on Money Laundering (FATF)[T.Г.3] ):

1. introduction of centralized registers of directors, beneficial owners

Even though the access to such registers is limited to the relevant local government authorities and the registers are not open to the public, all the information is now stored not just in the archives of local registered agents but also in centralized state registers. For instance, information about BVI companies’ beneficial owners is stored in the BOSS system[T.Г.4] .

2. introduction of economic substance legislation

Companies conducting business activities that fall into the specified categories of ‘relevant activities’ may be required to establish real economic presence in the country of their incorporation – rent office space, hire local employees, manage the business from the territory of that offshore jurisdiction – with possible tax implications for the company. Regardless of the category all companies registered in the relevant offshore jurisdictions are required to submit annual reports to the designated local authority with identification of companies’ business activity and its category under the economic substance legislation on an annual basis. Offshore economic substance legislation does not differ significantly between different offshore zones. Some examples of such acts – the Commercial Entities (Substance Requirements) Act 2018 (CESRA) in Bahamas[T.Г.5] , the Economic Substance (Companies and Limited Partnerships) Act, 2018 [T.Г.6] (ESA) in the BVI, the Economic Substance Regulations, 2018 (ESR) in Marshall Islands[T.Г.7] .

3. changes in bookkeeping and reporting requirements

Introduction of new legislative requirements to store accounting records at a specified address, prepare financial statements or financial summary for the specified reporting period with possible further requirements for audit and submission of such financial statements. Most recent examples of such amendments can be found in Seychelles [T.Г.8] and the BVI.[T.Г.9]

Such line of changes makes offshore jurisdictions more accountable and shows a big step towards transparency which is the opposite of what offshore jurisdictions use to be traditionally associated with.

Compliance with international legislative framework and local laws can ensure that the use of offshore companies in corporate and business structuring is safe and legal. If you have doubts as to the legality of offshore companies’ usage, contact us for professional advice and regain your sense of security.

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