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QUESTIONS CONSIDERED IMPORTANT BY THE AUTHORS
QUESTIONS WHICH ARISE DURING THE COURSE OF CONSULTATION

What is an offshore company?

The English term “offshore” denotes something that is away or far from the shore. So, an offshore company is a venture which is registered in a country (or in a sovereign territory of a country with independent legislation), but does not pursue economic activities in the given territory. In other words, a company in this status does not derive revenues from the country of registration, but from outside the borders of that country. Theoretically, an offshore company may exist in any country in the world but it is by no means certain that any kind of tax benefits will be attached to this status



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What is a tax haven?

In everyday language a tax haven is a state or territory which provides a remarkably wide range of tax benefits for the offshore companies registered therein (the original English term - tax haven - means tax refuge). That is, an offshore company can operate under favourable tax conditions only if it is registered in a tax haven territory (in accordance with the principle outlined above, the company must, of course, operate outside the territory of registration).

On traditional tax haven territories the operation of companies is supported by a thoroughly-regulated legislative mechanism. This means that in the given country the legal code provides favourable taxation status for the offshore companies. It is necessary to stress this because it is not that the company pays no tax illegally, but, on the contrary, it is exempted from the payment of tax or a part thereof as provided by law.



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What is the purpose of the establishment of an offshore company?

This is one of the most important issues concerning the establishment of companies. There may be a number of goals and objectives, in the same way that the business relations evolving in a market economy may involve an infinite number of combinations. Therefore, to a certain extent, the client himself should find the answer to the above question because nobody knows his business activities better than the client himself. We can only briefly outline the purposes for which offshore companies are most frequently used.

Offshore trading companies: Trading companies may be used to reduce the profit of parent companies located in high taxation areas and to pass those profits on to an offshore company. Having registered an offshore company the parent company presents it with an invoice for the sale of goods at a uniform, minimum price, for example. Then the offshore company concludes contracts for the sale of the goods at a higher price. In this case the parent company derives a much smaller profit based on the minimum price of the goods sold and as a result its taxes on profits are reduced considerably. The offshore company, as a result of the transactions, earns a healthy profit after selling the goods at the higher price.

Offshore investment companies: The use of offshore investment companies makes it possible to have more options for choosing objects for investments, which enables the investor to concentrate on the most advantageous projects or to select areas that offer potentially high incomes. Moreover, it makes it easier for transactions concluded between the company and its clients to be kept in confidence. Making investments on terms advantageous for an offshore company merely provides an opportunity to transfer spare currency resources abroad without violating currency and tax legislation.

Offshore finance companies: The ownership of an offshore finance company gives an opportunity to pursue the most advantageous credit policy considering minimisation of taxes on granted credit and borrowed funds, and improves the ability to offer different financial and credit services to clients. Besides, granting credit to a firm located in a higher taxation area through an offshore company at a high rate of interest provides an opportunity to transfer currency resources to a third country without violating the currency and tax legislation, and to greatly reduce or even acquire exemption from tax on profits made in a country where taxation is higher. Offshore companies may be very conveniently used for the minimisation of taxes related to joint-venture activities. In this case the same citizens own and manage both the domestic and foreign (offshore) companies which set up the joint venture. It makes it possible to transfer to a third country the share of the profit which belongs to he foreign company in the form of non - taxable dividends. At a later date the money (in the form of privileged investments or credits) may be returned to the country in which the joint venture is registered.

Offshore holding companies may be used for financing the activities of their subsidiary enterprises under different jurisdictions by offering them the opportunity to reduce taxes due to interest payments on loans granted to them by parent companies. In this case a holding company is formed in an offshore area, in which neither tax on profit, nor other types of corporate taxes are collected from it; all the profit made by the above-mentioned method may be used for financing further activities of a holding group or for reinvestment for other purposes.

Offshore insurance companies formed by a company registered in a high taxation country or by a group of such companies may be used for insuring risks of a parent company or a group of parent companies on more advantageous terms than those traditionally offered by insurance companies. The form of an offshore reinsurance company may be used by insurance companies for insuring their own risks.

Offshore banking companies that have licences of a limited or unlimited type may be formed by banks for the purpose of accumulating profit in countries with reduced or so-called “zero” taxation as well as by groups of companies for a pooling of financial resources and a facilitation of money flow within a group. An offshore bank may also be used to finance the international operations of its founders in order to avoid problems of currency limitation.

Offshore companies formed for owning a property give an opportunity to reduce - or even eliminate - inheritance taxes and capital gains tax. Besides, if the owner of any property is a company, it is possible to simplify considerably a process of this property's sale: in this case only the shares of the company are sold and transferred to another owner, but the company remains the owner of the property. In this way it is not necessary to pay the state duties imposed when a property is sold or given as a gift.

Offshore companies engaged in rendering services (in advertisement, management, marketing, consulting etc.): People and companies gaining large incomes conducting activities in the field of service provision may reduce taxes greatly by assigning the rights to obtain remuneration for their activities to an offshore company. In the future the remuneration, or a part of it, will be paid to an adviser by an offshore company, but payments will be structured in such a manner that taxes will be minimalised.

Offshore companies dealing with personnel recruitment are used by employers actively for the purpose of reducing taxes on their employees' salaries. In this case the money to be used for the employees' salaries is transferred to accounts of the offshore company, in which the employees actually work and its sum may be considerably greater than that paid to the personnel in the country of residence. The difference is accumulated in the employees' offshore accounts and therefore no tax is imposed on their real income.

Offshore companies formed to hold intellectual property (patents, trademarks, copyrights, techniques etc.): Such companies may acquire any property from its original owner. An offshore company may patent a property or conclude contracts for transferring it into use, thus getting a non-taxable profit by using it.

Offshore ship-owner companies may be formed to reduce taxes on ship-owner and shipping activities by means of the purchase or rent of ships, and the profit earned from their activities may be accumulated in areas of reduced taxation.

Offshore private funds for the ownership and confidential management of private property may be formed in Liechtenstein and Panama. The use of funds provides for either partial or total reduction in taxes on incomes, capital and inheritance. Furthermore, it guarantees that the distribution of income earned by the property or by its inheritance be carried out according to the will of the property owner.

Offshore investment funds are fully recognised by the international investment community. Usually they pay neither taxes on profit nor extremely high organisational and legal duties. Besides, dividends and interest are either taxed at a decreased level or are exempt from taxes in general. The pooling of small investors of capital in a fund makes it possible to participate in more expensive projects, and means savings on research of the market, commission and managerial expenses. A founder (manager) enjoys the greatest advantage; he has the flexibility to carry on activities abroad, since it makes it possible to attract investors from a huge number of jurisdictions by means of an unrestricted sale of shares; he can also make investments in many jurisdictions without taxation and can conduct foreign trade activities.



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What are the advantages of using an offshore company?

We list the advantages related to offshore companies registered in tax havens in two distinct groups:

  • Direct taxation advantages/benefits
  • Additional benefits independent of the favourable tax status


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Direct taxation advantages/benefits

These advantages do not require specific explanation. The amount of revenue generated is taxed in the country of the offshore company. Taking advantage of the fact that these countries provide a wide range of tax benefits for enterprises of this kind, we may secure considerable tax savings.



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Additional benefits

This other group of advantages is composed of benefits independent of taxation which are not to be ignored by certain types of businesses in certain situations. Some of these benefits are listed below, though the list is by no means exhaustive:

  • Full anonymity: Full anonymity is provided by law in certain tax havens because neither the directors, nor the owners of the companies are recorded among public corporate details. As a result, the personal details of the owners and directors are hidden from the public and this can be used favourably.
  • Lack of bookkeeping obligation: In a number of tax havens offshore companies are not required to keep books. This, too, results in a considerable saving since, if we look at the data of a domestic (non-offshore) company of a similar size, the annual bookkeeping fee alone usually amounts to several hundred - or even thousand dollars.
  • Enforcement of prestige-related considerations: It may happen that in certain business situations a foreign company may offer more advantageous terms and conditions. The participation of a “foreign investor” in a domestic enterprise sometimes creates considerably more trust and confidence in a potential business partner, or it may even provide exemption from customs duties in certain cases, etc.


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Where should you set up an offshore company?

At the moment, there are more than 40 locations in the world which offer considerable benefits for offshore companies as tax havens. Traditional tax havens are usually located on archipelagos (e.g. the British Virgin Islands), in island republics (e.g. the Republic of Nauru), or in small countries (e.g. Panama). The independent legislation of these countries and territories encourages foreign investors to establish companies on the given territory. In most serious offshore zones the operation of the companies, the security of foreign investment and the protection of secrets are guaranteed by a code of laws. (For instance, the legislature of the British Virgin Islands passed such a code of laws under the name of the International Business Companies Ordinance in 1984.) When encountering this topic for the first time it appears extremely difficult to differentiate between the advantages and disadvantages offered by the many small and possibly unknown countries. There are, however, a few factors which may help you find orientation.



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What is it that provides favourable taxation status for the company?

It is reasonable to ask the first question: In what respect is the taxation of the offshore company favourable? And in connection with this: Why is it worthwhile for these countries to offer benefits of such magnitude to foreign investors? (We shall answer this question in the next section.) On all serious tax haven territories, tax benefits have a legal basis and foundation. For instance, this benefit is provided for the companies registered in the above-mentioned British Virgin Islands by the code of laws adopted in 1984.

Accordingly, offshore companies pay no taxes of any kind to the British Virgin Islands, other than the annual state duty of the usual amount of 300 US dollars, independent of turnover. In the case of the Bahamas and Belize, this annual duty is 100 US dollars, while in Panama it is 150 US dollars. It is obvious that these tax benefits are considerable, compared with the 30 to 50% tax on profit typically imposed in European countries.



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Why is it advantageous for the country of registration to provide tax benefits?

These locations are usually situated in geographically small countries. The population is usually small. Tourism and various services play the most important role in their economies. Offshore businesses generate considerable revenue for them. On the one hand, concrete employment opportunities are created: various law offices, a state registration apparatus, representatives, banks registered on these territories, etc. are required. On the other hand, through the state duties (registration and re-registration fees) and taxes the population of the country obtains considerable revenue. Let us consider some statistics. The British Virgin Islands have a population of 17 000 and currently some 320 000 offshore companies are registered there. If all the companies registered on this territory pay the annual duty of 300 US dollars, then the duties paid by the offshore companies alone represent 5200 US dollars per local resident.



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What principles of taxation are enforced in the place of registration?

As already mentioned above, one of the most important purposes of the registration of offshore companies in tax havens is to reduce high tax burdens and to take advantage of direct or indirect tax benefits. At the same time, we should stress that completely tax-free and cost-free companies do not legally exist in any part of the world, in spite of the fact that in a number of countries offshore companies are often referred to as tax-free companies. Fundamentally, the following principles of taxation may be enforced in the locations of registration of offshore companies:

  • In countries where the company may only derive revenues from abroad, these revenues will be completely free from the payment of any tax. In this case, the company is required to pay a fixed annual fee which is independent of the turnover and profit of the company. Such locations are the British Virgin Islands, the Bahamas, Belize, etc.
  • The tax is not based upon the turnover but upon the company's registered capital . For instance, the Liechtenstein foundations are required to pay 0.1% of their issued capital (or at least 1,000 Swiss Franks) to the state annually.
  • Tax exemption is granted only in respect of revenues derived from abroad . In such countries as, for example, Panama and Hong Kong, companies may pursue economic activities within the country, too, and the domestic revenues are taxed on the basis of a linear rate, while revenues derived from abroad are tax-free. In this case (Hong Kong), the company is required to indicate domestic revenues separately in its annual report.
  • Taxation on the basis of a linear tax rate . One of the best-known locations is Cyprus where offshore companies pay a 10 % tax on their net profits. (In these locations, without exception, the keeping of books and preparation of annual reports is compulsory.)



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Are offshore companies required to keep books?

Bookkeeping by the companies is an issue closely related to the issues dealt with above. Those who are already owners or managers of a domestic company are perfectly aware of the amount of trouble that the various state bookkeeping regulations may cause. In most countries bookkeeping fulfils two purposes: on the one hand, it should inform the owners, creditors and business partners of the company of the financial and pecuniary position of the enterprise, while, on the other hand, it should satisfy certain, often rather stringent, requirements laid down by the authorities (Tax Office, Customs Authority, etc.). In this respect, offshore companies can be divided into two distinct categories:

  • It is provided by law that the company need not keep books for official purposes. This opportunity exists in those countries where the annual tax or duty is fixed (the Bahamas, Belize, British Virgin Islands, etc.). For the country of registration is not interested in the company's annual turnover and profit because the company's tax (state duty) is a fixed amount independent of turnover and profit. This concept offers extremely interesting and also cost reducing possibilities to a lot of entrepreneurs. This does not mean that if the owners of the company so decide they cannot keep internal books for the purpose of keeping themselves informed. This, however, is an internal matter for the company and no external authority has the right to intervene in the keeping of the books.
  • It is compulsory to keep books . Countries falling into this category are Ireland, Cyprus, Uruguay, etc. Of course, in this case, what we have in question is not just bookkeeping of any kind, but accounts of a nature that satisfy and comply with the legal rules of the given country and contain a clause by the local auditor guaranteeing the validity of the accounts. The bookkeeping of most offshore companies is not at all complicated, provided that the company has no tangible assets or real properties and pursues no cash transactions, because then the transactions effected on the company's bank account constitute the majority of the company's business. Although, compared with the situation described in the previous paragraph, the operation of the company appears to be considerably more complicated if books are required to be kept, this does not necessarily entail a permanent bookkeeping obligation. Most offshore companies obliged to keep books carry out their own bookkeeping requirements and have the report audited during the period preceding the submission of the report.


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What requirements does the country of registration prescribe in respect of the directors and shareholders of an offshore company?

There are some offshore zones where there are no restrictions of any kind concerning either the directors or the shareholders. These include, for example, the Bahamas, the British Virgin Islands and Belize. Companies may be set up here with the participation of a single director and a single shareholder of any nationality who may even be one and the same person. Other offshore locations do prescribe certain restrictions in respect of the directors and shareholders of ventures. These restrictions may be divided into two main groups:

  • Quantity restrictions . This means that the minimum number of directors or shareholders is defined. For instance, in the case of Panama, a company must have at least three directors.
  • Nationality restrictions . This is a provision expressly applying to the directors, the main purpose of which is to create jobs for the citizens of a given country. For instance, in the case of companies registered in Liechtenstein, at least one of the directors must be a resident of Liechtenstein.


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What further restrictions might exist regarding the company activities?

  • Foreign exchange restrictions. This may apply particularly in places where the official currency of the given territory is not convertible. However, in the most popular and well established jurisdictions offshore companies are exempt from any foreign exchange restrictions and may effect their transactions in any currency.
  • Restrictions relating to the holding of the annual meeting of directors. Some locations prescribe, on a compulsory basis, that the directors of the company meet at least once a year and that the meeting be held in the given location. Locations of this kind are, for instance, the Cayman Islands and Bermuda. In these locations, the requirement that the compulsory annual meeting of directors be held in the territory concerned is for the purpose of encouraging tourism in the area. However, in most locations there are no restrictions of any kind and the directors may hold their meetings in any country.
  • Restrictions on the opening of bank accounts. In the case of certain countries, it is a legal requirement that part or all of the company's bank accounts be opened in the banks of the given country. However, the legislation of the vast majority of offshore zones enables companies to open bank accounts in any country in the world.


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What kind of details are entered in the companies register?

This is an extremely important question since, in the course of a number of business transactions, the owners and directors of a company do not wish to reveal their identity. In countries with a continental legal system there is little scope for this because, for instance, in Hungary, Austria and Germany the details of a company are completely public and anybody may gain access to them at the office of company registration, referring to any alleged or real interests. From this respect, we can divide offshore companies into three categories:

  • Full anonymity . The details of neither the directors, nor the owners are available in the public company register since these details need not even be reported to the authorities in these countries. Countries of this kind are the Bahamas, the British Virgin Islands, Belize, etc. The role of full anonymity in economic life is rather important as can be measured on the basis of the number of companies registered in these locations (for instance, in 1998, some 43 000 new companies were registered in the British Virgin Islands alone).
  • Partial publicity . For instance, in the case of Panama, the owners of a company are not entered in the companies register, whereas all the details of the directors are public.
  • Wide publicity . A number of details concerning the company are accessible in the companies register. For instance, in the case of Cyprus, the details of the owners and directors are available (name, nationality, passport number, date of birth, residence, etc.).


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What should the size of the company's registered capital be? How can or should it be paid up?

When analysing this requirement, the effects of the two types of legal systems (continental and British-American) on the different territories can be observed.

  • In countries where legislation is based upon British roots, the system of requirements is much more flexible. This is particularly true of the offshore zones situated in the Caribbean Sea region. For instance, in the Bahamas, the standard registered capital of the company is USD 5,000. In respect of the laws of that territory, this is the so-called nominee registered capital which need not be made available for the company through payment to a special bank account. The same applies to the British Virgin Islands where the standard registered capital is USD 10,000 but the payment thereof is not compulsory either. This means that these companies can be formally set up with a few thousand dollars' worth of capital without actually possessing a single cent on foundation.
  • In the countries of the second group (as a consequence of the effect of continental law) both the rate and the method of payment of the registered capital are defined precisely. This is the case, for instance, in Switzerland, Liechtenstein and Hungary where the registered capital must not only be subscribed by the owners but is also required to be paid into a special bank account of the company, and any non-cash contribution is required to be made available for the company.


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Who do we call nominee owners and nominee directors?

Nominee directors and owners are applied if the actual owners and directors of the venture do not wish to be recorded in the company's deeds of foundation.In this case, one or several persons (natural persons or companies) agree, against remuneration, to be entered in the documents in the above capacity. If the actual owner so requires, the nominee directors are involved not only in the establishment of the company, but also in the signing of the company’s contracts and in arrangements regarding the amounts received on the company's bank account, etc. throughout the company’s existence.In applying nominee directors, it is common practice that the nominee directors are merely entered in the company documents. In the same documents, the nominee directors grant a power of attorney to a third party in which they delegate all rights to that party (e.g. opening of bank accounts, signing of contracts, etc.). The third party so named can, of course, be the beneficiary himself. 

If the beneficiaries do not wish to reveal their identity at all, the nominee directors will sign the contracts of the company, issue the invoices, initiate bank transfers, etc. They will, of course, effect each transaction against extra remuneration.

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When and why is it practical to use the services of the nominee owner and the nominee director?

The use of nominee owners is most useful in the case of locations where the details of the owners are openly available to the public; that is, on the basis of the company register, anybody may become familiar with the identity of the owners. Countries of this type are Ireland and Cyprus, where owners' details are entered in the company register. If, therefore, you wish to remain anonymous in these locations, it is necessary to have the details of another person, a so-called nominee owner, entered in the company register. In this case, it is very important that the nominee owner should not act against the wishes of the actual beneficiary, and should not abuse his or her rights. This problem is overcome by an agreement between the nominee owner and the actual beneficiary - the so-called Trust Deed.

In practice, the use of nominee directors and owners requires, in both cases, perfect and complete trust between the commissioning and the commissioned parties, since the nominee directors formally have considerable economic power in the company. Abuse of such power, though theoretically possible, in practice is virtually unheard of since the nominee directors are usually employees of the local law office which generally also represents the company locally. These offices take good care to work only with reliable partners. The “corporate industry” provides them with a living and any scandal involving them would result in the loss of trust in the given law office, and consequently, a dramatic fall in the number of orders.

Therefore, the most important rule is that the nominee directors direct and may direct the company only on the basis of the instructions of the beneficiaries.

And another important rule: the use of nominee directors is, in most cases, recommended but by no means compulsory.

The nominee directors and owners work for several hundred ventures simultaneously. Their considerable income is derived from the annual commission fees paid by the companies on a regular basis, as well as from the individually modest, but collectively substantial, fees paid on a case-to-case basis for any work actually performed (signing of contracts, etc.).



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What annual maintenance fees are involved in the operation of an offshore company, and why is it important to pay them?

It is very important here to dispel the widespread belief that offshore companies can be operated not only tax-free but also totally cost-free. Although exemption from the payment of taxes is usually granted, exemption from costs is not. The maintenance of the company as an organisation, even if it is only formal and nominee maintenance, does result in some costs, a fact which should be taken into consideration prior to incorporation. In this section we would like to look at the costs which are typically incurred in more detail.

  • Annual state duty / tax: this is either a fixed annual amount, a linear rate or a banded linear rate, depending on the method of taxation.
  • Fees payable for the registered office and the registered agent . In the offshore zones, almost without exception, it is a legal requirement that the company should have a seat registered in the given country and, in the majority of cases, also a so-called local representative (agent, secretary, etc.). In general, these two are not separated because the compulsory seat address is also the address of the local representative and is usually a law office. This law office provides the address (seat) for the companies registered by it and undertakes to represent them against the payment of a set annual fee. In fact, this representation is, in most locations, minimal. It is usually confined to the representative forwarding the amount of the annual tax, transferred to it by the registered company, to the state treasury once a year. (The country of registration is, through this single legal requirement, able to create several hundred or even thousand jobs, and provides a living for a proportion of the population for a number of years.) The maintenance fees are payable annually. If the offshore company does not pay this amount, the local representative renounces his right of representation and reports his resignation to the office of registration. As a result, the company violates the law concerning the compulsory employment of a local representative, and in a number of locations it is possible for the office of registration to delete the company from the companies register. As a result, a company not legally existing comes into being, all of whose transactions will be void following deletion.
  • Remuneration payable to the nominee directors and owners . Nominee directors and owners are used if the actual owners and directors of the venture do not wish to be named formally in the legal documents of the company. In return they receive a fixed annual fee, plus a small fee for each and every service performed on behalf of the company.
  • Mail forwarding costs . If the company requests its partners to send all mail to the address of registration, a fee is, of course, payable for the forwarding thereof to the actual place of operation. This amount may be a fee set annually or an actual fee per item.
  • Provision of office space, use of telephone and facsimile, costs of administration . The provision of a registered address does not mean that the offshore company is in fact entitled to use the office located at the address defined in the legal documents of the company. If the client does need office space, he should indicate his need in advance, and should separately order the provision of telephone and facsimile numbers, and the taking and forwarding of messages. A fee is also payable for the contracts signed by the nominee directors and the invoices compiled and sent to the location, etc.
  • Fees payable for the (re-)issue of various documents . For instance, if the company subsequently needs a new certificate of incorporation, or, e.g. if the documents of registration of the company are destroyed (burnt, lost etc.) and need to be re-issued.

Of the above costs, the first two items are compulsory in the case of every company, while the other items are optional (may be opted for as required). In this general information material we have only outlined the most frequently incurred cost elements, in addition to which, however, a number of other additional costs may arise, according to the needs and requirements of the owners and directors.




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Where is it practical to direct an offshore company from?

Most offshore companies must have some kind of managing body, which is usually the board of directors. The directors must be residents of the given country. For this reason in particular, the way the laws of a given country deal with this topic should be taken into special consideration. For instance, in accordance with German tax laws, if the director of a company based in the Bahamas is a resident in Germany, the company in the Bahamas can also be taxed in Germany. What logical element does German tax law rely on when it prescribes this rule? As a result of the fact that the German director lives in Germany, the tax law assumes that the company based in the Bahamas is directed from Germany; consequently, the company has premises in Germany and any revenues related to such premises are taxable. It is important to understand the cause and effect correlation of the tax laws.

For instance, according to the conventions concluded between different states for the avoidance of double taxation, the basis of which is the model created by the OECD, the definition of premises begins with this question immediately: "premises are, in particular, the place of management..."

Why is it practical to use the services of the management centre? If we want to over-simplify the matter, we could say that such a territory may serve this purpose; the citizens of the territory may not be afflicted by the obligation of taxation because a foreign company is directed from the given territory. For instance, if a US company is managed by a director living on the Island of Sark, the director in Sark need not pay tax on these grounds (according to the laws of Sark, local residents are not required to pay personal income tax, for instance).

Summing up the above, it can be established that in general it results in a substantially more favourable tax law situation if the company is officially managed by a resident of a tax-exempt territory or a territory enjoying tax benefits (Sark, Cyprus, etc.).


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What is meant by the term: shelf company ?

A shelf company is a legally established company which a law office in the jurisdiction involved has already set up at an earlier date, but which has neither carried out any activity, nor opened a bank account.

Such a company is set up with the non-concealed intention that at some point somebody will buy and operate it. The legislation of a number of tax haven locations allows for the foundation of companies of this nature.

The only drawback of a shelf company is that it is not possible to select a name in advance (it can only be modified subsequently) since companies of this kind were registered under the names made up by the founder.

The deeds (documents) of foundation do not usually differ from those of a newly set up company, and the fee of establishment is usually the same, too.




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What are vintage companies?

Companies which have been incorporated for several years (2, 3, 4, or more), but have carried out no business activities since the time of incorporation, are known as vintage companies. These companies are stored, like fine wines, so that once they have reached a certain maturity they will be able to begin operating.



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When is it worth buying a vintage company?

There are a number of reasons for buying vintage companies. These include, for example, reasons of prestige, where the people operating the company buy a company which was incorporated earlier so as not to begin their business activities with a freshly incorporated company. It may also be the case that the purchase of a company incorporated earlier is required for administrative reasons. Certain tenders and applications are only open to companies of a certain age (e.g. minimum three years old). In addition to these reasons, vintage companies have an indisputable advantage over freshly incorporated companies in that they could have operated, signed contracts, acquired rights and assumed responsibilities from the date of incorporation.




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Why are vintage companies more expensive?

The price of a vintage company is made up of several components, and is generally higher than the price of a freshly incorporated company. Firstly, there is the fee for the original incorporation of the company; in addition, the annual maintenance fees (registered office and agent and annual tax) for each year of the company's existence must be paid - the person or company originally incorporating the company has already had to pay these each year, so obviously he must recover his expenses before he will sell on the company. Finally, there is usually a maturity fee, which is generally a fixed annual amount for each year of the company's existence.



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Where should the offshore company open a bank account?

A considerable part of the financial transactions of offshore companies is effected through bank accounts. Free access to the financial assets of the company, whether to transfer or withdraw cash, is essential from the respect of operation. So that this can be done comfortably, it is worth taking the following considerations, which we have identified on the basis of several years' practical experience, into account:

  • Perhaps the most important consideration is that the financial institution chosen should be a long-standing bank which enjoys a generally good reputation and is also considered reliable within the world of finance. It is not advisable to open a bank account in an unknown little bank in an unknown small country. It may happen, for instance, that the letter of credit you open with a bank like this is not accepted by the partner's bank.
  • The chosen bank should be in an economically and politically stable country where the state guarantees the investments of foreigners by law. It is, however, highly important that these laws should exist not only on paper but also should be enforced in practice. It is not advisable to open a bank account in a country where sudden, drastic political changes are frequent. It is also a warning sign if in the given country there has already been a precedent for the freezing or confiscation by the state of the amounts deposited in the accounts.
  • The bank should be located in a country where bank secrecy is strictly enforced, in practice, as well as in principle. There is no need to spend too much time explaining the importance of this factor.
  • The country in which the bank is located should have a liberal foreign exchange management policy. It is desirable that there should be no restrictions of any kind on the conversion and exportation of currency, the withdrawal of cash and payment, etc.
  • At the same time, it can be reassuring if the chosen bank is not in the same country where the owners or directors of the company qualify as taxpayers.
  • It may not be advisable to open the bank company's account in a country too far away. This is important in cases where the withdrawal of cash from, or payment of cash into the account is indispensable in the interest of the operation of the company.
  • Management of the bank account should be simple and convenient. You should find a solution whereby the bank account can be managed not only in person but also via facsimile or telephone, or perhaps directly via computer (modem).


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What elements make up the original agency fee?

  • Registration fee . This includes the fees related to the legal establishment of the company, that is, the fees charged by both the foreign legal office and by LAVECO Ltd. The amount referred to also covers the complete corporate document package and one dry seal, as well as the fees for the related notary public and state certification and courier fees to Hungary.
  • Annual governmental tax, duty . Where the annual tax or duty is fixed, it is to be paid by a date defined by law. Payment is effected through the local representative. Payment of the annual tax is very important since failure to meet this obligation results in the establishment of sanctions in every location. (For instance, failure to meet the obligation of payment is recorded in the companies register which is available to the public which may in turn, prove detrimental to the reputation of the company. After a certain period of time, the company court judge may delete the company from the companies register, following which all transactions effected on behalf of the company are void.)
  • Remuneration payable for the local registered address and to the local registered agent . We have already outlined above the role they play and why it is important to transfer their remuneration. As in the case of the annual governmental duty, this remuneration is also payable annually and is to be renewed.

The fees defined in the above three paragraphs represent the so-called compulsory costs of establishment, of which the first one is a one-off payment, while the second and the third ones are annual fees. (Of course, those listed above apply in the case where the annual tax is a fixed amount and no books are required to be kept; that is, here we used the most flexible and cost-effective alternative as an example.) In addition to the compulsory costs, a number of optional costs may also be incurred in the course of the establishment and subsequent operation of the company. We have also already made mention of these optional services, and therefore only provide a summary thereof in the following. These are the fees of the following services:

  • bookkeeping, audit fees,
  • remuneration payable to nominee directors, owners,
  • fee payable for office rental,
  • telephone, facsimile forwarding fees,
  • performance of company secretary services,
  • forwarding of mail.

The use of these services is not compulsory. At the same time, there are some business activities which require a more sophisticated appearance in the course of a business or financial transaction. The services listed above are offered for such cases.



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Is it necessary to travel to the place of incorporation when establishing a company?

Contrary to popular belief, it is not necessary to travel to the offshore jurisdiction when establishing a company; it is sufficient for our clients to visit one of the offices of LAVECO Ltd. Here we provide both old and new clients with incorporation and consultation services, as well as answers to questions which may arise regarding the everyday operation of offshore companies. In fact, at the moment it is not even necessary to travel to our offices, as the necessary papers can be completed and returned to us by fax or post (unfortunately, orders can not be accepted by email).



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What are the most important foundation documents?

In this section we are going to describe the documentation involved in companies incorporated in the most frequently used, traditional offshore jurisdictions (the Bahamas, the British Virgin Islands, Delaware, Panama etc.):

  • Certificate of incorporation : This deed is issued by the office of registration, and certifies that the company has been entered (under the given name) by the office of registration in the companies register on the given day. A so-called "Apostille" is usually attached to the certificate of registration (usually referred to as "the Certificate of Incorporation") which is a certificate issued by the central authority (usually the Registrar) whereby the certificate of registration has indeed been issued by the office of registration. This is an internationally recognised and accepted deed regulated by the Hague Convention of October 5, 1961.
  • Articles of Association / By-laws : This document contains the basic regulations relating to the operation of the company. It is for the most part a standard format document, usually drawn up on the basis of the text of the legislation of the given location. Of course, as in all by-laws, here too, the by-laws may be freely amended by the owners and directors of the company. The following items, among others, are defined in the by-laws: activities, registered capital, name of the company, order of the appointment of the directors, rights of the directors, rules relating to the issue of shares, etc.
  • Appointment of the first director(s) : After signing the deeds and documents of foundation, the founder will appoint the first director(s) and will delegate the rights related to the company to them.
  • Minutes of the first meeting : The minutes of the first meeting of the directors usually contain the first steps to be taken by the company, in particular, the fact of foundation, and approval of the seat and the dry seal of the company.
  • Minutes concerning the issue of shares : These contain the details of the owners subscribing and buying the shares, as well as details of the shares or share certificates issued.
  • Subscriber's resignation letter: In this document, the founder, who is usually the legal representative of the company, transfers all the rights related to the operation of the company to the company and its beneficiaries.
  • Corporate seal : The use of seals in the countries concerned is different from the way in which they are used here. It is usually a legal requirement that the company should have a so-called dry seal which is to be approved at the company's meeting of foundation. However, this stamp is not used for stamping contracts and invoices (a simple signature is enough there) but for sealing the share notes issued by the company, as well as the regulations and minutes of the company.


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What services are covered by the term 'Secretarial services'?

The essence of the secretarial services is that companies incorporated through LAVECO Ltd. can be provided not only with the simple address which appears on the foundation documents (usually the company's official seat), but also with telephone and fax numbers. Messages which arrive at the secretarial address are then forwarded to a fax or telephone number given by the client. In many cases it may also be necessary for a company to have a postal address not only in the place of incorporation, but also in a country far from there. For example, a company incorporated in the Bahamas may rent an office in London or Budapest, or maybe Vienna, and can also have telephone and fax numbers in the same cities.



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When might it be advantageous or necessary to use the secretarial services?

To increase the prestige of the company:

An offshore company is usually acquired in order to do business in different countries. Naturally, the company needs to have a respectable image in order to proceed with serious business activities. It goes without saying that a company with an office ( i.e. an address and telephone and fax numbers) in a large European or American city will command greater respect and be treated more seriously than a company which has only a postal address on a small remote island.

In the case of a company with an office in Europe or America it is very difficult to determine the exact place of incorporation - a fact which may be very useful in creating a more appropriate international image for the company.

To increase confidence in the company:

The use of the tel/fax/mail forwarding services may be very useful for citizens of countries in which the postal service works slowly and inefficiently; in such countries there is a very real danger of company correspondence (such as contracts, bank statements etc.) being lost or sent to the wrong address, which may have very serious consequences. By holding all correspondence in the office provided for the company within the framework of the tel/fax/mail forwarding services, and forwarding it by courier at regular, pre-arranged intervals, the risk of correspondence being lost or mislaid is practically eliminated

The use of the tel/fax/mail forwarding services is also indispensable for residents of those countries or states where the use of offshore companies is strictly controlled, restricted, or even prohibited. The postal address, and telephone and fax numbers provided within the framework of the tel/fax/mail forwarding services can be used in contracts and invoices, and thus help to distract the attention of the tax authorities from the company's true country of incorporation. In such cases, the impression created is of a company entirely managed from abroad ( i.e. from the office in Europe or America ).



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How do the secretarial services work?

The holding and forwarding of correspondence:

All correspondence (letters, packages, parcels) received by a company (client) at the address provided by LAVECO LTD. within the framework of the tel/fax/mail forwarding services is either held at this address or forwarded by ordinary or registered post or by courier according to the instructions given by the client.

The transmission of information by fax:

All information received by fax by a company (client) on a fax number provided by LAVECO LTD. within the framework of the tel/fax/mail forwarding services is either held by LAVECO LTD. or transmitted by fax to a pre-arranged fax number, according to the instructions of the client.

The transfer of information received by telephone:

In the event of a client of LAVECO LTD. receiving telephone calls on the telephone number provided within the framework of the tel/fax/mail forwarding services, a qualified secretary takes the call. A message can be taken in the name of the client (company); when required, the secretary can pass on information, which he has been authorised to do by the client, to the caller; any information received from a subscriber can then be passed on to the client.



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What expenses are involved with the use of secretarial services?

We should emphasise at this point that the use of the tel/fax/mail forwarding services is entirely optional, i.e. additional, and not obligatory for the clients of LAVECO LTD. The service is available both to new clients of the Company and to those who acquired their company at an earlier date.

Expenses incurred when using the tel/fax/mail forwarding services can be divided into two groups:

  • Fixed expenses: these include the fees charged by LAVECO LTD. for the provision of a postal address/telephone/fax for the client. The amount of this fixed fee is laid down in the order form for the tel/fax/mail forwarding services, and is payable at regular intervals determined in the form (annually or half-yearly). The amount is fixed and independent of the actual use of the service by the client.
  • Working expenses: these include expenses incurred during the forwarding or transmitting of correspondence and information (postal expenses, telephone and fax charges).



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The USA as a tax haven?

During the last decade the United States, and in particular the state of Delaware, has become one of the most popular jurisdictions in terms of company incorporation. This is indicated by the fact that in Delaware alone an average of 300 000 new companies are incorporated every year. The immense popularity of Delaware can be attributed to four main causes:

1. The incorporation of companies is simple, fast and free of bureaucracy.

2. The level of confidentiality is extremely high, since not even the details of the first director are required on the company's incorporation documents, which are available to the public.

3. The fact that the costs of incorporation and annual fees for Delaware companies are lower than in other jurisdictions is also a significant factor,

4. But perhaps the most important factor of all is the fact that the companies are incorporated in the United States, which carries extremely high levels of prestige.

And today the Delaware Corporation, which can generally be incorporated without par value shares, is still one of the most popular types of company purchased and used as an offshore company. Delaware Corporations are incorporated according to the terms of the Delaware General Corporation Law. The aim of the legislation of Delaware has, for a long time, been to provide the most favourable conditions possible within the state for companies registered in Delaware. It is due to this philosophy that more companies are registered in Delaware than in any other US state. This can be demonstrated by the fact that almost two thirds of the companies listed on the New York Stock Exchange and, according to FORTUNE magazine, the 500 largest companies in the USA are registered in Delaware.



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What features of the Delaware General Corporation Law make it so favourable for newly incorporated Corporations?

Minimal information is required. According to the terms of the law, the Certificate of Incorporation (the initial document creating the company) must contain some basic details, but these are truly minimal: the company name, the name and address of the registered agent, the maximum number of shares that can be issued, and the objectives of the company. The name and address of the director are not required on the document, which is unusual in the field of company incorporation, even by the liberal standards of the USA. Every state other than Delaware requires the name of at least the first director to be included at the time of registration. Even if the company wishes to change its directors, there is no need to involve the Secretary of State, the official registrar of companies. As a consequence, as far as the official registrar is concerned, the director can remain completely anonymous.

  • There is no minimum authorised capital requirement. Delaware Corporations are generally incorporated without par value shares.
  • The company can have its office anywhere outside the state of Delaware, can pursue its business activities in any currency, and can have directors and shareholders of any nationality.
  • Neither the company, nor its directors are obliged by the state to file an annual report.
  • Where the maximum number of issuable shares does not exceed 3000, the annual state duty (the Franchise Tax) is only 30 USD, and the filing fee only 20 USD.


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Is the Delaware Corporation an offshore company?

  • It should be noted that the Delaware Corporation is not an offshore company, since offshore companies as corporate entities do not exist in the USA. Not one of the states of the USA has laws which can be interpreted as meaning specifically an offshore format. The fact that Delaware Corporations actually appear to be offshore companies is based on the widespread belief that if a Corporation incorporated in Delaware does not register with the federal tax authorities and it has no source of income within the USA, then there is no obligation to pay federal taxes. The experts, however, dispute the validity of this thesis, since every company registered as a Corporation is automatically subject to federal taxes. At the same time, it is also a fact that the Internal Revenue Service (IRS) does not pursue those Corporations which are registered in Delaware, but do not file any kind of tax report. The experts are divided, with one side believing that, according to the law of precedents, if the IRS does not make tax demands on these companies, then this means that the IRS recognises that these companies are not required to pay tax. Although the behaviour of the tax authorities over the past 20-25 years would appear to support this view, it is unlikely that it would be possible to defend it in a court of law when faced with the IRS.
  • The Limited Liability Company (LLC) is a new development within American corporate law. In 1977 the State of Wyoming became the first American state to pass a Limited Liability Company Act, based on the 1892 German GmbH model. The State of Delaware has been offering the incorporation of LLCs since 1990. Today it is possible to incorporate LLCs in every American state, though the conditions and requirements of incorporation vary from state to state. Delaware also offers the most flexible conditions in this area. In the State of Delaware, just as with the Corporation, there is no need to include the name and address of the Manager in the Certificate of Formation (the initial document creating the company) when incorporating an LLC, and when signing the initial document anybody could be the organizer of the company. In the state of Wyoming anybody could fulfill the function of an organizer as well, but the Articles of Organisation (the initial document creating the company) must include the name of the first manager. The Limited Liability Act of Utah states that the first manager must sign the initial document of the company, and the original copy must be filed with the Secretary of State. Further conditions are also imposed in different states; in the case of LLCs registered in Nevada, for example, the acquisition of a Nevada State Business License is compulsory, even if the company pursues no activity within the state and has no employees. Each state has adapted the regulation of LLCs within the state according to the legal traditions of the state.


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What are the advantages of the LLC company form when compared with other company forms?

The LLC form of company provided a significant advance in US Corporate legislation. As a result of the significant advantages arising from its use, numerous newly-formed companies have chosen the LLC format, and a considerable number of established companies have converted to the LLC format.

  • The members of the company enjoy limited liability and therefore, benefit from the same protection as the shareholders of the C Corporation.
  • At the same time, if a member also participates in the management of the LLC, he does not lose his right of limited liability. In contrast to this, in the case of a General Partnership, the General Partner may be involved in the management of the company, but as soon as the Limited Partner participates in the direction of the company, he loses his right of limited liability.
  • The members may also appoint an independent Manager. Thus, the company may be run by Centralised Management, just as in the case of Corporations.
  • There are no restrictions on the number of members. S Corporations are limited to a maximum of 75 shareholders, all of whom must be US residents. As a result, the LLC has unlimited possibilities to increase the number of members and thus, the capital of the company.
  • The company can choose the principle of flow-through taxation associated with Partnerships. The importance of this is that there is no taxation at corporate level. The members of the company are taxed according to their share of the profit. This is extremely favourable, even in the case of US residents, since one level of tax is eliminated and tax planning therefore becomes much more straightforward. In order to be able to benefit from the principle of flow-through taxation, the company must have at least one member.


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Taxation of LLCs

According to earlier tax laws, an LLC could only be taxed as a partnership if it met no more than two of the four so-called “Corporate Characteristics”. During the course of a 1935 court case, a lawyer named Morrisey created the four “Corporate Characteristics”, later universally adopted, as follows:

1. Limited Liability

2. Centralised Management

3. Free Transferability of Interests

4. Continuity of Life

The checking of the four characteristics proved rather complicated for the IRS, and many solutions were devised for the evasion of the regulations. The legislators thought it better to relax the regulations, rather than to force the several hundred thousand US LLCs which came into being during the 90s into illegality. From January 1st 1997, the legislators introduced measures making the system of taxation and reporting of the LLC company form more simple and straightforward. According to the “check-the-box” regulations, LLCs can choose whether they wish to be taxed according to the principles applicable to partnerships or those of corporations. When the decision is made, or thereafter, the managers of the company fill out Form 8832. If, at the time of formation, the company has at least one member and does not file Form 8832 with the IRS, then the tax authorities assume that the company will be taxed as a partnership, and for tax purposes the members will be subject to the principles of flow-through taxation.




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How can an LLC take advantage of the benefits of international tax planning?

The members of an LLC can be either American citizens or foreigners, without any restriction. The company may pursue its activities within the USA, and may derive income from both the United States and from abroad. However, if the company is managed from abroad, pursues no business activity on the territory of the USA, derives no income from US sources, and has only one member (who cannot be a US resident), then the company is not required to pay federal taxes. Naturally, the company is not exempt from taxes imposed by the state in which it is incorporated. In the case of Delaware and Wyoming the annual franchise tax amounts to a total of 100 USD. Further questions arise as to whether or not the company is required to submit forms to the IRS, if it is not required to pay federal taxes. On the basis of treasury regulation, if the company has only one member (who cannot be a US resident), is managed from outside the USA and neither pursues any business activity on the territory of the USA nor derives any income from US sources, then it is not required to file returns with the IRS. Consequently, it is not required to submit to the IRS form 1065 on incomes. If, however, a company has more than one member, then it is required to file returns annually with the IRS. Until the end of 1999, only companies with more than one member could enjoy this tax advantage, but now it is important for both new clients and existing users of LLCs to make sure that their companies are organised in such a way as to meet the necessary requirements.

From the above, it can be seen that concealed within the LLC company form is an ideal offshore company, which can be used for the arrangement of international business transactions, the provision of services and numerous other purposes provided that the company has only one member, that the member and manager(s) of the company are not US residents, and that the LLC is not used for any business purposes within the United States.

The above description is intended to provide general information, and can in no way be construed as the provision of concrete advice in a concrete case. We would be only too happy to provide our clients with any extra information they may require on the subject, based on the experience we have gained in helping to establish several hundred LLCs over the years. At the same time, we also strongly recommend personal consultation on the matter with a tax expert or adviser, paying particular attention to the specific details of individual countries.




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London - the citadel of the offshore world?

The modern offshore company, which began its all-conquering journey in the islands which once formed the British Empire, in the 1970s and 80s, can justifiably be described as an English invention. At that time, it was also possible to incorporate so-called "non-resident" companies in England, which, if managed from outside the United Kingdom, were not subject to taxation in England, although even then London could never have been described as a classic offshore zone.

This possibility ended in the early 90s, but, England, and in particular London remained an extremely popular place for the incorporation of companies, for both English and foreign businesses alike. Numerous businessmen chose to incorporate in London, Companies House now boasts a register with over three million companies, ranging from small businesses to multinational companies. So what makes people want to incorporate in London?

1. The legislation, regulation and infrastructure regarding company incorporation are very efficient and well-developed. The incorporation process is still based on traditional procedures dating back several hundred years - a joint stock company can still be established with capital of just 2 GBP - and the background legislation is so well-developed that contradictory changes do not occur from year to year. Many companies offer services in the field of company formation, though there are considerable differences in both the services they offer and their prices, and when examining such companies, it is also necessary to understand the background dependability which supports them. The authorities overseeing company incorporation - Companies House - work quickly and efficiently, offering great assistance to incorporators.

2. The regulations regarding taxation are stable, clear and comparatively liberal, and as with those referring to incorporation, are not liable to annual changes. This make long-term (3-5 year) tax planning possible, unlike in many other, more changeable European countries. In fact, recent changes have made the tax laws even more attractive to foreigners; Advance Corporate Tax has been abolished, and, as of April 1st 1999 the Corporate Tax for companies with an annual turnover under 350 000 GBP has been reduced from 21 to 20%, which is certainly attractive by international standards, especially considering that dividends paid abroad are not subject to dividend tax (withholding tax).

3. Book-keeping requirements are stable and easy to fulfil. Companies which do not operate in the UK, or rather in the EU, only need to prepare books, and file a tax return, once a year. As of July 26th 2000, companies with an annual turnover under one million GBP are no longer required to attach an audited balance to the tax return (the previous limit was 350 000 GBP). The company owners or directors can even prepare the simplified tax return forms themselves, though in practice we recommend a specialist accountant as this can considerably speed up the process.

4. UK companies are extremely prestigious. London is one of the bastions of international financial and business life. A company incorporated here will undoubtedly be held in high prestige anywhere in the world.

5. UK companies are not discriminated against. A number of countries now operate so-called "blacklists". If a local company deals with a company from a blacklisted country, then the local tax authorities may not recognise invoices from the blacklisted country as valid expenses in the local company's books.

6. England is currently party to the largest number of treaties for the avoidance of double taxation (DDTs) in the world. International tax planners can use these DDTs advantageously, particularly in the establishment of international holding structures.

The tax advantages related to English companies

The above shows quite clearly that English companies cannot be categorised as traditional tax-free companies, and in fact they are quite the opposite. How, therefore, can English companies be used advantageously in international business transactions? The following section shows just two of the possible uses.

Trading company for nominee purposes

Blacklists have meant problems for a large number of offshore companies, particularly those providing services. One very efficient way of overcoming this problem is by using an English company, which concludes a special contract with the offshore company, which may be incorporated in a traditional offshore zone such as The Bahamas, BVI or Belize. According to the terms of the contract, the English company concludes contracts with foreign partners on behalf of the offshore company, prepares invoices for the total amount of the services provided, and receives full payment into its bank account, although the offshore company actually provides the services. Periodically (as defined in the contract between the English and offshore companies), the English company is entitled to an agency fee of between 5 and 10% of the value of the contracts concluded. The English company must declare this income and pay tax accordingly, whereas, the remaining 90-95%, is transferred to the account of the offshore company, as set down in the contract. An offshore company is subject to tax in England on income with an English source. Although the offshore company operates through an English resident company, the actual source of the income is not England, but the foreign partner. At the same time, it is an important condition that the offshore company should be managed from outside England, and that the directors, shareholders and bank account signatories of the offshore and English companies should not be the same people.

Dual resident companies

An English company must be classified as resident in England if it was incorporated in England and/or the majority of the directors are resident in England and manage the company from England. However, according to the agreements made by England for the avoidance of double taxation (DDTs) it is possible for a company to be resident in two or more places, if, for example, it is managed from a different company. Such companies are known as "dual resident companies". As long as the company is managed from a country which is protected by a DDT, then the company can apply to the English tax authorities to be taxed in that country rather than in England. And if that country has more favourable rates of taxation, then it is worth operating the company as a dual resident company. Currently, the most attractive jurisdiction with which England has signed a DDT is Cyprus. According to Cypriot law, if a company, or a branch of that company, operates outside Cyprus, then that branch is subject to 4.25% profit tax on its worldwide income. The English company becomes resident in Cyprus by establishing an offshore branch there. The majority of the directors of the English company must be Cypriots and all decisions relating to the running of the company must be taken in Cyprus (supported by precisely recorded minutes). The bank account of the company must also be managed from outside England, preferably from Cyprus. Similarly, the company must not receive income from English sources. This is all the more problematic as activities carried out in England are subject to VAT. Dual resident companies must file annual returns in both Cyprus and England, but can also take advantage of the DDTs signed by Cyprus.

This information is not intended and should not be construed as concrete tax advice. Should you wish to make use of one or any of the structures mentioned, we recommend that you consult your personal tax adviser, as well as experts on the legal systems of all countries involved.



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What is a Certificate of Good Standing?

This is a well-established document in the case of companies registered in America and the UK and its former territories. It is usually issued by the company registrar in the given jurisdiction. This is the document which confirms that the company has not been struck off, and does not owe any tax or duties. The content varies from jurisdiction to jurisdiction, depending on the information which is available to the public in the jurisdiction of incorporation. The banks generally ask for proof of existence of the company when the formation documents are not fresh, which means that the company was formed 1, 3, 6 or 12 months earlier. Obviously a company which has not paid its annual fees, fees for its registered office and agent and its annual tax/duty cannot receive a Certificate of Good Standing.



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What is meant by the term flow-through taxation?

Flow-through taxation is a method of taxation used in the American and British tax systems, whereby a company is not taxed as a proportion of its income, but instead the part of the income accruing to each owner of the company "flows through" to them, and the owners then declare this in their annual tax returns. This type of taxation is generally used in the taxation of partnerships, in the USA in the form of LLCs and in England in the form of LLPs. The partnership, or rather the company's members, decide upon the rate of the company's income which will be apportioned to each member. From time to time the income is divided in the agreed proportions, and the members then include this income in their own tax or income returns. The members of partnerships, LLCs and LLPs can be either private individuals or companies. Further taxation of the income generated by partnerships depends primarily on where the members are resident for tax purposes, and where they have to file tax returns.



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Can offshore companies be incorporated in the USA?

American law does not deal specifically with offshore companies, and the term offshore does not even appear as a synonym for tax advantageous companies. American companies can generally operate anywhere in the world, with the exception of, for example, countries facing embargoes. As long as certain conditions are met, then a company registered in the USA legally does not have to pay tax. Today this is true primarily for LLCs which have no American owners or managers, do not maintain premises in the USA and have no income from American sources.



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Which is the best offshore jurisdiction?

The jurisdiction of incorporation is a key question from the point of view of the future operation of the company. Generally speaking there is no one simple best solution. There are always several alternatives to choose from when selecting a suitable company for a given type of financial activity. As many jurisdictions offer almost identical solutions for particular activities, in many cases several jurisdictions may be suitable. In this case, the deciding factors tend to be the cost, the prestige of the jurisdiction, and the ease with which the company can be administered.




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Why should I pay for the registered office and agent if I don't even use them?

A registered office and agent are legal requirements for the maintenance of a company. It may be that the company will never actually use the office address, but it still needs it, as the corporate law in almost all jurisdictions requires that a company must have, throughout its active life and without interruption, a registered local office; in most jurisdictions a registered local agent or secretary is also a requirement. If the agent who provides the registered office address resigns, then the company is breaking one of the laws on the maintenance of companies, and the company registrar will suspend the legal activity of the company or strike it off the company register. In most jurisdictions, the annual tax or duty can only be paid through the local agent. Therefore, it is very important for the company to pay its annual fees each year and on time.



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Why are agreements for the avoidance of double taxation beneficial?

Bilateral agreements for the avoidance of double taxation (and for the obstruction of tax evasion) can be beneficial because for certain types of income they apply tax rules which are more attractive than those which would be applied if the income was taxed in just one, or both, of the countries involved. The types of income applicable are typically incomes from interest, dividends and royalties. Generally speaking, the laws of most countries allow for the taxation of such income types being paid abroad to take place before they are transferred out of the country. If, however, there is an agreement for the avoidance of double taxation, and the agreement prescribes a lower rate of taxation for the type of income in question, then this lower rate will prevail as the international agreement is a higher form of legal regulation than the tax laws of one given country. Many factors have to be taken into account when applying the terms of agreements for the avoidance of double taxation, which is why it is always advisable to consult experts from the country of source to establish the exact conditions which apply in the tax practice of that country.



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What is a Certificate of Tax Residence?

A Certificate of Tax Residence, as the name suggests, is a document which proves the tax residency of a company. Although the name and content of the document may vary from country to country, the essence is always the same: the tax authorities, or similar body, of a given country certify that a given company or branch incorporated in that country appears in the records of the tax authorities, has a tax number and, where appropriate, pays tax. This document is necessary when a company wants to take advantage of the benefits offered by an agreement for the avoidance of double taxation, and has to file with the tax authorities of the country of source certification from the country of destination not only that the company is registered in that country, but also that the tax rules of that country apply and that the company pays tax in the country of destination.



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Can offshore companies only be used for money laundering?

It goes without saying that the answer is obviously no. However, given the generally pejorative public opinion with regard to offshore companies, a broader explanation is called for. The explanation has to start a little further away, with some philosophical thoughts. Does a person who has the intention of doing business have the right to establish a company? Obviously the answer is yes. Nowadays this has to be a basic right, in the same light as the freedom of conscience and religion. If I have the intention, and the necessary capital, expertise and business contacts, then I can start a business in a given country in accordance with the prevalent legal conditions of the country in question. If I am in business, then do I have the right to establish an offshore company and take advantage of the benefits offered, be they tax, currency or other benefits? Again the answer is yes. One of the basic principles of economics is making the best possible use of the resources available and maximising profits. Of the available resources, perhaps money plays the most important part. The circulation of capital is more effective and the profit greater if the business can be operated under more advantageous fiscal conditions. One of the ways of achieving this may be an offshore company. It is not by chance that today more than 50% of the financial turnover from daily transactions is carried out through the 4 million or so registered offshore companies. These companies have been established completely legally, taking advantage of the beneficial tax, customs, exchange and other regulations. In many jurisdictions, the state does not exert as much control over these companies as in the case of so-called onshore companies. The more relaxed regulation may lead people to believe that here it is possible to remain anonymous and to break the rules, and that the laws need not be adhered to. This is definitely not the case. Offshore companies are established to pursue financial activities in the same way as non-offshore companies. If, in the pursuit of illegal intentions, an offshore company is not used for strictly legal financial activities, then it can be said that it is not the company which is at fault or guilty, but the actions and intentions of the people who do not use the company for the purposes for which it was intended. And this is where the third question arises: is it necessary for someone to have an offshore company in order to break the law? The answer to this question is obviously no. Numerous crimes covered by the penal code can be committed by non-offshore companies too. In fact, if we consider the majority of crimes of a financial nature, then normal onshore companies are involved in more than 90% of the criminal cases. Typical cases include false invoices, unlawful VAT claims, and unlawful applications for state support, to name but a few. Furthermore, there is the act of returning such funds to circulation. We could go on discussing this question at great length, but it is already clear that if a person wants to launder money, they do not need an offshore company, and the primary purpose of offshore companies is not money-laundering.




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What is the essence of trusts?

The institution of the trust has a tradition dating back over 800 years in Anglo-Saxon law. The essence is that the person establishing the trust (the settlor or grantor) transfers the assets in his possession to a trustee, who nowadays tends to be a company specialising in this area, in such a way that the assets now become the property of the trustee. They set down in the Trust Deed (the official agreement they enter) how the trustee should handle the assets, the fees he will receive for doing so, and who the beneficiaries of the assets should be. The settlor himself can also be the beneficiary - for as long as he lives - or he can name other people (usually a spouse, children, brother etc.). After the death of the settlor, the assets are distributed according to the stipulations of the Trust Deed, and the trust is wound up, unless the settlor stipulated otherwise in the Trust Deed or the beneficiaries decide to enter a new agreement with the trustee. The trust institution was originally devised for cases where, for one reason or another, the settlor was unable to manage his wealth (for example, when accompanying the king to the Holy Land in the times of the Crusades). The most common form of trust agreements nowadays is where, for reasons of security, inheritance or asset protection, the trustee is a person or company who is resident in an a jurisdiction offering tax benefits, as a result of which tax burdens arising from the proceeds or growth of the assets are not incurred.



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Is it possible to organise private offshore foundations?

Private offshore foundations can be established, usually for reasons of asset protection. Today the two most popular jurisdictions for the registration of private foundations are Liechtenstein and Panama. The main point of the foundation is that the foundation itself is the owner of the assets under its charge, but the foundation does not have owners, just beneficiaries. Thus, the assets placed in the foundation in no way form part of the personal wealth of the people forming the foundation. The foundation, as with the trust, has beneficiaries, who may be, either in part or in full, the same people who form the foundation. The major advantage of the private offshore foundation over the trust is that the foundation is considered to be a legal entity, whereas the trust is not.



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Is it possible to change the directors of an offshore company?

Offshore companies are companies just like non-offshore companies anywhere in the world. Therefore, the owners of the company can freely remove or replace the officers of the company, and, in cases where the director(s) resign, the members or shareholders can appoint new ones in their place. Similarly, if a director passes away, the members appoint a replacement. The documents issued regarding a change in directors vary from jurisdiction to jurisdiction, and the actual procedure may also vary, depending on whether or not the details of the directors are available to the public.



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Can an offshore company buy property?

Generally speaking, according to the laws of the jurisdiction of incorporation, an offshore company can buy property on territories outside the jurisdiction of incorporation. In the case of most jurisdictions the only property a company may have in the jurisdiction in which it is incorporated is the registered office. The question is more complicated from the point of view of the laws of the country in which the property is situated. These laws may place restrictions on the purchase of property by foreigners, or may impose special conditions (for example, they may not be able to buy listed buildings or agricultural land). It is worth investigating the question thoroughly and consulting experts and lawyers in the country in which the property is situated before making a decision.



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Can an offshore company buy cars?

According to the laws of the jurisdiction of incorporation, an offshore company can buy cars. However, if we examine the laws of the country in which the car is to be maintained, the question becomes much more diverse. Generally, the car bought on behalf of the offshore company will not be used in the country in which the company is registered, but a totally independent territory. This means that it is necessary to examine the laws of the country in question, to see under what conditions a foreign entity can legally maintain a car in that country, and what tax, customs or other financial requirements are involved in the running of a car. It is necessary to check whether a foreigner has the right to maintain a car in the given country without being registered locally. As with the case of property, it is important to discuss the matter with local customs and tax consultants before deciding to buy a car.



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Can offshore companies give loans?

Offshore companies can give loans both to companies and private individuals. The company is also free to agree the concrete terms of the loan with the borrower. Thus typically the terms of repayment, collateral on the loan and the interest rates all form part of the agreement between the parties. It can generally be said that the laws of the jurisdiction in which the offshore company is incorporated do not place restrictions on this type of agreement. The situation for the borrower, however, may be different if the laws of the country in which the borrower is resident prescribe special rules relating to, for example, the payment of interest abroad. It is also necessary to examine the case of "thin capitalisation", where the amount of the outstanding loan can not exceed a certain percentage of the borrower's personal capital.



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Can an offshore company establish other companies?

An offshore company can be the member or shareholder in other companies, and therefore can establish both offshore and onshore companies in most parts of the world (obviously taking into consideration and in accordance with local laws).



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Who can sign on behalf of the offshore company?

It is usually the directors or managers of the company who sign as generally they are the ones with signatory right in the company's operational affairs. Those people who have been given power of attorney by the director (either for a certain types of work or for specific transactions) may also sign. The directors can even issue very wide-ranging powers of attorney (often with full power), which give the attorney(s) signatory rights and the right to act in the name of the company in accordance with the instructions set down in the document. Naturally the attorneys sign in the name of the company, and their own names must appear on documents they sign. It is also possible for the director to issue power of attorney for certain specific transactions (for example the purchase of a property) or for the carrying out of certain functions (for example the opening and running of a bank account).In this case the attorneys are only authorised to perform the specific tasks set down in the document, and may not carry out other actions in the name of the company. In the majority of cases powers of attorney issued by the director are valid for a specific period of time, for example for one year from the date of issue. It is also generally the case that the person to whom the director has issued a power of attorney is not authorised to issue further powers of attorney - this would lead to an endless chain, and make it virtually impossible to keep track of who has what rights and powers within the company.



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Do the owners of the company have signatory right?

Following on from above, it is possible for the owner of the offshore company also to be the company director, and in this case, the owner would obviously have signatory right. The owner would also have signatory right even if he/she was not the director, but had been granted power of attorney by the director. Furthermore, in the case of partnership type companies (LLCs, LLPs etc.), the owners can have signatory right if they are authorised to represent the company in the Operating or Partnership Agreement. In the case of normal offshore share companies, however, the shareholders do not have signatory right over the company's operational affairs, unless they are also the directors, or the directors' attorneys in the company. At first glance this may seem strange, but in fact it is completely logical. The operational affairs of the company are not taken care of by the shareholders, but by the directors appointed by them (or by the attorneys appointed by the directors). The shareholders have the right to appoint the management of the company and to vote at meetings of the shareholders. If a shareholder holds sufficient voting or ownership rights, then he/she can appoint the management, who are then obliged to run the company in accordance with the wishes of the owner.



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Why are certain words not permitted in the company name?

Many countries and jurisdictions have introduced restrictions with regard to the use of certain words and phrases. The rules of the different countries vary as to which words and phrases are not permitted and which require special permission. Generally speaking, the restrictions apply to words which may be misleading or deceptive, such as bank, banking, insurance, reinsurance, fund, investment fund, municipality, chamber of commerce, university, hospital etc. In many countries, the word "financial" is not allowed. The reason that the above words and phrases are restricted is that companies formed without the necessary financial, personnel and practical background might be capable of misleading clients and practising fraudulent and deceptive activity through the use of such a name. Furthermore, in the UK the company name may not include words related to the royal family (e.g. Windsor, royal, royal family). From the point of view of the choice of company name, the various states of the USA - and in particular Delaware - are the most liberal; here, with very few exceptions, anything as allowed, as long as at least one character in the name is different from an existing company. Perhaps the most complicated system is that in place in Cyprus, where the decision on whether or not a company name is acceptable seems to depend on the mood of the registrar at the time. For example, the seemingly innocent ML Marketing Ltd. name is not acceptable. If a name is considered undesirable, then it is not accepted. When selecting a company name it is important to bear in mind the regulations of the country in question, and also that these regulations may change from one day to another.



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Where is it possible to establish totally anonymous companies?

Obviously it is not possible to establish totally anonymous companies, as somebody has to act in the name of the company, to sign contracts and manage the bank account. This has to be done by real people, who must also physically appear in person. The question, however, can be looked at from a totally different angle, that is from the point of view of ownership. If we look at the question from this angle, then it becomes much more understandable, taking into consideration the fact that there still exist numerous jurisdictions where it is possible to issue bearer shares. In this case, the owner of the company is the person who has the shares in their possession. The shares are not issued in anybody's name, so the name of the shareholder does not appear on the shares certificate; in this case, if the shares are sold, the shares certificates are merely handed over to the new owner, and once the agreed price has been paid, the transaction is complete. Generally speaking, when bearer shares are sold, there is no need to fill out any further documents (minutes, endorsement etc.). Therefore, looking at the question from this angle, then it is possible to envisage the formation of a company in which it would be extremely difficult to discover and keep a record of the identity of the owners.




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Do the owners of an offshore company have to sign the documents of foundation?

Sometimes yes, sometimes no. In jurisdictions where the details of the owners are registered in the Companies Register, it is typical for the owners to have to sign the foundation documents as well as the Articles of Association. Cyprus, where the details of the owners are publicly available, is an example of this type of jurisdiction. Even in this case though, it is possible for the owners to issue the local incorporation agent or lawyer power of attorney to sign these documents on their behalf. In the majority of offshore jurisdictions, however, it is a local office which incorporates companies, and it is the employees of these offices who sign the foundation documents as the founders. Typically, they also appoint the first board of directors, who then issue the company's shares and interest certificates. In this case, therefore, the owners do not have to sign the foundation documents, as this was done at the time of incorporation by the employees of the local office.



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Can offshore companies invest on the stock exchange?

An offshore company can buy securities (shares, bonds, futures), and can also freely sell them. If we look at the turnover of the major stock exchanges of the world (New York, London etc.), we can see that the majority of the shares in circulation are in the hands of offshore companies, and change hands between these companies. Offshore companies are the major ownership players in developed capital markets. Offshore companies are also present in the commodities markets, where they are active in foreign currency transactions, as well as deals in the related futures markets. They also deal in the various raw materials and fuels markets.



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Can offshore companies own patents and licences?

Generally, offshore companies can be the owner or holder of any object, material or immaterial. Immaterial goods include various patents and similar rights, which can be assigned to an author or composer. In general these can be referred to as intellectual property, which may or may not be due as a result of legal protection (such as application for patent, copyright or industrial design patent), but they may also be other types. It can be seen, therefore, that offshore companies can own and make profit from intellectual properties.



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How long will it be possible to incorporate offshore companies around the world?

Today this is a very frequently asked question, just as it was five, and even ten years ago. The very fact of asking the question suggests some kind of negative attitude, as if we were talking about some kind of harmful, criminal topic, which should be done away with. But why should the offshore companies operating around the world be abolished, and indeed, is it possible to abolish them? Those who judge offshore companies do not usually give answers backed up by concrete reasons when answering the first part of this question. Instead, they usually just repeat that offshore companies make it possible to launder money and provide a screen to hide behind. At the same time, it should be borne in mind that here it is not the tool (that is, the offshore company) which is the problem, but the human intentions which lie hidden behind certain actions. And from this point of view, there is no difference between offshore and non-offshore companies. It is just as possible, if not more so, to launder money through and hide behind non-offshore companies. Statistics show that significantly more non-offshore companies are involved in crimes of a financial nature, with only a tiny fraction being carried out by offshore companies. If we return to the original question, or to that part of the question concerning the possibility of abolishing offshore companies, the answer is extremely complex. In theory, it would be possible to take such administrative steps as would block the establishment of offshore companies in the future. But what would happen to the multitude of offshore companies (some experts put the figure at three million, while others say it is closer to four) which are already in existence and operating around the world? It is impossible to imagine the functioning of the world economy with out these companies. Today the majority of day-to-day financial transactions are performed by these offshore companies. The placing of restrictions on already existing and functional offshore companies could bring chaos to the operation of the world economy, and could lead to instability. It is virtually inconceivable, therefore, that these several million offshore companies will have to face profound changes as a result of serious restrictions.



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