18 OFFSHORE BUSINESS STRUCTURES THE INTERNATIONAL BUSINESS COMPANY
International business companies (IBCs) are common in most tax
havens, particularly in the Caribbean. They are easy to form, easy to
operate, and they are ideal for e-commerce business. A local attorney
or bank in the desired tax haven can perform the function of incorporating
the IBC for you and providing additional, valuable services to
the beneficiaries, meaning you, the owners. Many reliable onshore
professionals (in the United Kingdom, the United States, or Canada)
can also provide these incorporation services. Refer to the contacts in
the Appendix, or contact Barber Financial Advisors (BFA) in Vancouver,
BC, Canada, to establish an IBC quickly. Although BFA can provide
these services anywhere, they specialize in Nevis, Belize, and
Panama, three preferred no-tax havens.
The IBC is like a domestic corporation, providing many of the same
features for the same reasons you would incorporate in the United
States. They resemble Delaware, Wyoming, and Nevada corporations in
having more attractive features and benefits than corporations of other
states, but an IBC is even more f lexible. These benefits can vary by
country of incorporation, but generally are characterized as follows:
_ Personal liability is limited to the amount of money paid into
the corporation by its shareholders.
_ A corporation is more attractive to potential investors than
other business forms.
_ A corporation has many more tax options than do other forms
of business, such as proprietorships or partnerships.
_ Favorable pension plans, profit-sharing, and stock option
plans may be adopted for shareholders, directors, officers, and
employees.
_ In the event of the owner’s death, a corporation can continue
to operate without interruption.
_ Shares can be readily distributed to family members.
_ Ownership interest can be transferred without the corporation
having to be dissolved.
_ Management is centralized.
_ Additional shares of stock may be issued to raise more capital.
_ Shares of stock may be used for estate and family planning.
_ Earnings may be accumulated by the corporation to ease the
tax burden.
_ A corporation may own shares of stock in another corporation
and receive dividends.
_ Life insurance and health programs are available to shareholders,
directors, and officers at reduced group rates.
_ Corporate owners receive greater benefits than self-employed
individuals.
_ Shareholders may borrow money from the corporation and pay
it back at their convenience and at a preferred interest rate.
There are many other advantages and creative uses for the corporate
form of doing business.
Some of the typical advantages of an IBC are as follows, where
permissible. In addition, the benefits will also vary with the individual
tax haven. Check with your expert prior to choosing the jurisdiction
for your new corporation. There are often these advantages:
_ A minimum of one shareholder is allowed.
_ A minimum of one director is allowed and is not required to be
a shareholder. A corporation, trust, or partnership may act as
director.
_ Telephonic board and shareholder meetings are acceptable;
also attendance by proxy. Actions can be ratified after the fact.
_ Bearer shares are frequently acceptable.
_ Registered and bearer shares may be issued with or without par
value, unnumbered, and issued in any currency.
_ Names of shareholders and directors are not public record; or
if so, nominee shareholders and nominee directors can be
substituted.
_ No filing of annual statements or financial returns is required.
_ No taxes are levied on corporate income, and in most cases, no
other taxes, either, on any business derived outside the host
country.
_ Sometimes the tax haven will provide a written guarantee of no
taxes for a fixed period, such as 20 years or 50 years.
_ No ultra versa rule—the corporation may be established for
any purpose.
_ The corporation may transfer its domicile, or an existing company
from another country may transfer in as an IBC.
_ The corporation may transfer its assets to a trust.
_ It may be owned by a trust, such as an Asset Protection Trust
(APT).
_ Government regulations and fees are low.
_ The corporation is an ideal structure for offshore e-commerce
business.
_ Third-party obligations may be guaranteed.
_ Shares are not subject to seizure by a foreign government
under nationalization schemes or to satisfy claims based on tax
legislation.
_ The corporation is not subject to exchange controls, if there are
any in the country of incorporation.
_ The Memorandum of Association and Articles of Association
can be altered by the company without restriction. These documents
are the Articles and Bylaws of the company.
_ There are no limitations on nationality, citizenship, or residency
of shareholders and directors.
_ Nominee shareholders and directors are permissible.
_ Company books may be maintained in another jurisdiction.
Also, a trustee of an APT, for example, could be the sole director
of an IBC owned by the trust.
As with domestic corporations, there are many uses and advantages
to the IBC. The ability to redomicile quickly to another favorable
jurisdiction and with minimal formalities gives the IBC tremendous
mobility and f lexibility for the beneficiaries and can help you avert unexpected
problems due to changes in a jurisdiction or legal matters developing
elsewhere.
International business companies and other types of offshore
companies are commonly used for doing business worldwide: for trading
purposes, such as the import-export business, drop shipping of
merchandise, offshore sales distributor, offshore purchasing agent;
for holding companies, investment companies, mutual funds, avoidance
of probate, personal privacy reasons; for hotel operations, professional
service companies, shipping companies, as a flag of
convenience; for intellectual property companies for holding copyrights,
patents, and trademarks; for receipt of royalties; for licensing
arrangements, banking and trust companies, insurance, captive and
reinsurance companies, income saving through invoicing (aka reinvoicing),
international contracting and consulting, marketing, leasing,
administration, and management of other companies; for
personal investment purposes and e-commerce business; in short, for
almost any type of business that can be legally established anywhere.
In the case of finance-related enterprises, such as banking or insurance,
special licensing requirements within the venue will have to be
satisfied by the beneficial owners.
As with almost everything, there are usually a few pitfalls. Since
U.S. citizens and resident aliens are taxed on their worldwide income,
Congress has passed measures to control its more far-reaching subjects.
There are complex regulations for imputing income to U.S.
shareholders. These statutory provisions include the Foreign Controlled
Corporation (FCC), the Foreign Personal Holding Company
(FPHC), the Passive Foreign Investment Company (PFIC), the foreign
investment company, and other provisions addressed by thousands of
pages in the Internal Revenue Code (IRC). Avoidance of these measures
requires professional advice and assistance, and the cost and
trouble may not be worth it. However, if there is much to gain, it is
worth seeking professional advice. Unless you can legally circumvent
these tax rules, expect, as a shareholder, to pay tax on income generated
by the offshore corporation currently or eventually.
Your IBC will have a local registered office and registered agent who
are required in the event of service of legal process, to provide a legal
address within the incorporating jurisdiction, and to keep statutory
records. This function will usually be performed by a local attorney or
bank, and is typically included in the cost of incorporation. In most tax
havens, expect to pay between $2,000 and $3,000 in incorporation costs,
and more for any additional services your offshore company may require.
On an annual basis, there will be the registered office/registered
agent service in the range of a few hundred dollars, and the nominal annual
government fees to maintain the corporation, so you can typically
expect your total annual costs to be in the neighborhood of $1,000.
In addition to incorporating your company, the incorporator can
provide other services and functions on a prearranged basis. These
may include appointing nominee shareholders and directors for your
offshore company, usually under a confidential written agreement;
providing a base of communications for the company, including telephone,
mail receiving and forwarding, fax, telex, and cable services;
conducting the organization meeting, special meetings, and annual
meetings as required; consulting with you on tax and legal matters if
the incorporator is a legal or accounting professional; giving advice
on international tax planning if qualified; acting on the company’s
behalf as a director, professional, or attorney-in-fact under a power of
attorney granted by the shareholders or directors as so engaged; opening
bank and securities accounts as directed; and finally, arranging
for bookkeeping services, secretarial services, investment advice, and
other services relevant to operating your company. These services will
vary by the offshore service provider.
When you receive your initial corporate documents for your new
IBC, the local attorney or bank will likely retain copies, but you will also
receive documents depending on what you paid for and where you were
incorporating. In general, you can expect to receive the Memorandum
of Association, commonly called Articles of Incorporation in the United
States; the Articles of Association or the bylaws of the company; the original
share certificates (aka stock certificates), which will either be registered
or bearer, if available, and per your instructions, and representing
100 percent of the outstanding stock; the organization minutes, minutes
appointing the respective directors and/or nominees, and any other relevant
corporate records; a general power of attorney from the board for
the beneficial owner to transact business on behalf of the company (this
would usually have to be requested, would likely be an additional expense,
and its benefits and drawbacks would need to be weighed). A
Certificate of Good Standing may or may not be included, but can be
obtained, a full certified English translation of the Memorandum and
Association in the event of a Latin corporation or other non-Englishdominated
jurisdiction, such as a Panama corporation. A corporate
seal, and a minute book might also be thrown in.
As a result of pressure from outside, many tax havens, in their
effort to comply, have passed local anti-money-laundering legislation
and require greater transparency in financial matters. Some
have eliminated bearer shares, or they do not permit nominee shareholders
and directors. Many offshore service providers, including
offshore advisors, attorneys, or banks are now required to “know
your customer” under regulations commonly called “KYC” regulations.
They generally will want to know whom they are dealing with,
which may require the provision of identification, the source of any
funds being transferred to an account, and the type of business activity
you are involved in or your proposed business plans. This information
is maintained in strict confidence and is subject to the
secrecy or confidentiality laws of a given jurisdiction. In the offshore
world, aside from the letter of the law, confidentiality has
been the cornerstone and general practice.
For specific benefits of an individual tax haven, Part Three:
“Today’s Tax Havens” provides detailed profiles on over 40 offshore
havens. For the author’s favorite offshore havens, refer to the T-7 tax
havens discussed in Chapter 15.
OTHER TYPES OF COMPANIES
The Exempt Company
This is a company given an exemption on the basis that all business
will be conducted outside the tax haven of incorporation; in return,
the government provides a guarantee not to tax the company for a
given number of years—20, 30, 50, and so on, typically on income, inheritance,
estate, or capital gains.
The Nonresident Company
A company incorporated outside a tax haven where it has a presence is
a nonresident company. An example is Monaco, where an offshore
company can create a base for legal, accounting, banking, and communication
purposes without registering, but cannot conduct business
within Monaco, and whose shareholders are all nonresidents of
Monaco.
The Hybrid Company
This type of company can be found in the Isle of Man, Gibraltar, and
the British Virgin Islands and is commonly used as a charitable organization.
This company is limited by guarantee and is also referred to
as a quasi-trust or incorporated trust. It may consist of shareholding
and nonshareholding members. Control is stipulated in Articles and
either or both groups of members can retain control. The annual return
does not disclose the identity of any member. The hybrid company
provides greater flexibility and fewer restrictions for rich
investors than a regular trust. Owners can rest assured that their estate
will be properly dispersed according their wishes. A good contact
in the Isle of Man is Charles Cain (see the contact listing in the Isle of
Man profile in Part Three).
The Liechtenstein Anstalt (Establishment)
This entity is unique to English common law, and because it cannot
be accurately characterized as either a company or a trust, it could be
a problem for U.S. tax purposes. There are no withholding taxes on
distribution until such time as shares are issued, and until then, the
founder retains control of the Anstalt. A Liechtenstein attorney or a
trust company often acts as the founder. The shares may be transferred
at any time by the founder. All rights are transferred to a successor
through a deed of transfer, and if the successor is left
unnamed, the document is essentially in bearer form. The successor is
usually the offshore investor, the real beneficial owner. Further, the
deed of transfer can be held in a Swiss or Austrian safe-deposit box,
providing another level of security. This structure provides excellent
confidentiality.
Limited Liability Company (LLC)
This is a nice combination of advantages of the corporate form, having
limited liability and the f lexibility of a partnership where tax advantages
pass through to the owners in the same way as in a U.S.
incorporated S corporation or partnership. Management is conducted
by members/owners and a manager as opposed to directors and officers.
Members and owners can be individuals or other legal entities. A
definite advantage of the LLC over the IBC is that there is no U.S. reporting
requirement for U.S. residents under Subpart F of the Internal
Revenue Code, and it is a tax-neutral entity like the limited
partnership.
Offshore Partnerships
Offshore jurisdictions have a variety of partnerships, each with their
own advantages, but this book does not cover partnerships. Part Three
indicates by country profile if partnerships are encouraged. Refer to an
offshore professional for further information on offshore partnerships.
Other company forms are offered in the different tax havens and
other countries. The hybrid company and the Anstalt have distinctive
personalities, and others like the exempt company, the nonresident
company, or limited liability company are frequently found in tax
havens. Other types of companies used for international purposes are
mentioned Part Three. Specific interest in a certain type of company
should be addressed to a local professional for a full description and
review of the benefits and uses.
THE OFFSHORE BANK
Many people have liked the idea of owning their own offshore bank,
and have done so. And, many of these people subsequently found
themselves in trouble with the law, basically for two reasons. Either
these folks were using the bank fraudulently, or were suspected of
doing so, or they were just not qualified to run a bank. Easy qualification
requirements in the past made it simple to get a banking license.
That has since changed drastically as there has been much pressure
from law enforcement worldwide to stop this practice. Today, few jurisdictions
want to attract this type of business, but it is still possible
to secure a banking license. The imposed requirements are typically
much tighter on capitalization, qualification of management and
owners, the bank’s operations, and annual disclosures.
A Class A banking license permits the bank to conduct both local
(onshore) business and international business. A Class B banking license
limits the bank’s operations to outside the host country where
the bank was chartered, commonly known as an “offshore bank.” Another
license, sometimes called a restricted license, will limit the bank
from operating with anyone not named on the bank’s license.
There are certain potential U.S. tax benefits to owning an offshore
licensed bank. Income derived from owning your own foreign
bank is not considered subpart F income. Normally in an offshore corporation,
this income would pass through to the shareholders in the
same way as with an S corporation or a partnership. The bank would
have to be really operating as a bank to qualify on this point, but if it
does, you can defer paying income tax, can accumulate profits, have
money to invest or operate the bank with, and receive tax-free compounded
interest.
Tax havens granting bank licenses today are included in Part
Three under the individual country profiles. Local tax haven professionals
can advise you on their country’s licensing practices and attitude.
A U.S. tax advisor can give you full particulars on the tax
benefits for U.S. citizens considering such a move.
SHIP AND YACHT REGISTRATION: FLAGS
OF CONVENIENCE
Numerous tax havens have legislation addressing the registration of
ships and yachts. Usually an offshore corporation is established to
own the vessel and then it is registered in the name of the company.
The company would be managed and owned the same as any offshore
company and would have the same attractive company benefits. The
ship or yacht will then f ly the f lag of the country of which it is a subject.
That is why these countries are referred to as a f lags of convenience.
They are registered in these countries because of their
advantageous maritime laws and f lexibility for the owners. Of course,
the tax benefits are an important reason, too. When it comes time to
sell the boat, the owner merely transfers the outstanding stock in the
company to the buyer, and the vessel remains registered to the company.
Naturally, any other assets or liabilities would go with it unless
agreed otherwise, but generally speaking, there shouldn’t be any, or
they would have been kept minimal. The company would buy an insurance
policy to cover the vessel in the event of loss.
Panama is an attractive f lag of convenience and has an exchangeof-
note agreement with the United States. This arrangement permits
Panamanian-registered vessels to enter U.S. ports. The Panama corporation
that owns the vessel can also establish a representative office in
New York or Los Angeles without being subject to U.S. taxes. And,
Panama is a T-7 tax haven.
OTHER OFFSHORE VEHICLES—INVESTMENT FUNDS,
INSURANCE COMPANIES, OFFSHORE INTERNET
CASINOS, AND MORE
There are many specialty companies, some of which require special licensing.
Each tax haven tends to favor certain types of activities,
which is why you will find ships registered in Panama, asset protection
trusts in the Cook Islands, and insurance companies in Bermuda. A
few of the many types of companies and their areas of specialized activity
are investment funds, mutual funds, insurance companies, and
Internet casinos. By reviewing the individual country profiles in Part
Three, you will quickly deduce which tax havens attract the various
activities and issue licenses for specific activities where required.
Also, countries promoting e-commerce are identified, like Belize and
Nevis, two of the T-7 countries. A local tax haven professional can provide
more details on the advantages of their country for specific company
activities.