How to Use an Offshore Company – The Classic Example
Generally speaking IBCs are used by businesspersons trying to avoid:
- having to pay tax twice (ie both at home and abroad); or
- high taxes at home on international business ventures
For example say you are a European resident shoe manufacturer and you hear that a developing Asian country (eg Melanesia), in a bid to try and attract much needed foreign investment, is offering tax breaks for any non-Melanesian who is prepared to set up a shoe factory in Melanesia.
Say the tax breaks include a special rate on business profits tax reduced from 35% of taxable income (ie assessable income less allowable deductions) earned by the factory to just 10%.
If the investor uses his European Company to own the Melanesian factory he will end up paying tax at home on net profits made by the Melanesian business at the usual high rate (say 45%) less what he paid in Melanesia (ie assuming his home country and Melanesia have a Double Taxation Avoidance Treaty; if they don’t he’ll end up paying tax in both countries ie 45% at home + 10% in Melanesia).
To avoid this a savvy businessman will set up an IBC eg in Seychelles (or BVI or Belize or maybe Panama) to own the Melanesian factory The net result? He pays no tax at home, 10% in Melanesia and an annual license fee in Seychelles (say $US1,000-$US2,000).
(Note if you live in a country that has Controlled Foreign Corporation Laws, unless the shares of your IBC are owned by a tax compliant holding entity, you may still be liable to declare and pay tax at home on your IBCs earnings)
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