Offshore jurisdiction is a special region in the country, where tax rates are reduced or are even zero, the company registration procedure is simplified, as well as financial reporting, and there is an opportunity to move capital freely, that is, all conditions are created to attract a foreign investor. There are quite a few different offshore jurisdictions in different parts of the world that provide different conditions for doing business.
It should be noted that there is no clear commonly accepted classification of offshore jurisdictions in the world. Their borders are rather blurred, but nevertheless, there are a number of parameters that experts use to classify offshores.
So, here are these parameters:
- According to the taxation system, which is applied to an offshore territory:
- Offshore jurisdictions with reduced tax rates. Here, the tax rates are much lower than in the vast majority of countries in the world.
- Classic tax-free offshore jurisdictions. In this case, the company registered in a special zone does not pay taxes at all.
- By geographical location, offshore jurisdictions are divided into:
- Offshores in the territory of the states of Central America (Panama, Costa Rica, Antigua and Barbuda, etc.).
- Offshores in Europe (Andorra, Liechtenstein, Malta, Cyprus, etc.).
- Offshores in other regions of the world (UAE, Seychelles, Singapore, Vanuatu, etc.).
Also, offshore jurisdictions are usually divided into categories, depending on requirements on reporting and audit. And there is one more important criterion for classifying offshore companies: whether a zone is included into the so-called black, gray and white list that are formed by international organizations counteracting the spread of offshore zones (FATF and OECD). If some jurisdiction appears in the black list, this means that various restrictions may apply to companies registered in such a zone.
Advantages and disadvantages of offshore zones.
As a rule, tax rates are reduced or even equal to zero in the traditional offshores, however, a company registered in such a zone cannot enter the local market, and therefore cannot receive income from the territory where it is located. Thus, the budget of a state with offshore jurisdiction receives income from such companies only upon their registration, and when collecting an annual fee when prolonging the license of an offshore company. Here is a list of the main advantages and disadvantages:
Table 1 – Advantages and disadvantages of offshore zones
- Reduced (sometimes zero) tax rates;
- Low cost and simplified registration procedure;
- Simplified reporting and auditing requirements;
- Confidentiality
- Low confidence and negative impact on reputation;
- Possible restrictions on the international market when the jurisdiction falls into the black list;
- Impossibility to work in the local market.
Thus, we see that it is not always an advantageous decision to register a company in an offshore zone. However, there are still some cases when the best way out for business is to open a company in offshore. Here they are:
- Optimization of business in large international corporations.
- Organization of export/import in a certain jurisdiction, for example, a logistics hub;
- Purchasing real estate, or the secure protection of assets.
Choosing the jurisdiction for the company registration.
So, in the search for optimal jurisdiction for company registration, businesses seek, on the one hand, to obtain maximum tax benefits and simplified procedures for registration and reporting, and on the other hand – to find an area that is not included in black lists, and the company will not be affected with various international sanctions and restrictions. The example of such jurisdiction is the UAE. There are no taxes on profits, import/export duties, taxes on dividends in the country. And on the other hand, the country is not included in the black lists of international organizations, and local banks are well-known for their respectability and reliability, so you will not worry about protecting your assets.
Here are the main advantages of the UAE as an offshore jurisdiction (there are several dozen free economic zones in the country that offer various preferences for foreign capital):
- Possibility of obtaining a Residency visa for the founder of the company and his/her family (husband/wife and children);
- No corporate taxes;
- No duties on export/import;
- Possibility of capital repatriation, no currency control.
It should be noted that in the UAE you can register not only a classic offshore company, but also an onshore company, which will also have many preferences, but also provide you with wider opportunities in comparison with offshore companies and at the same time be exempt from taxes.
