In the early days of this blog, I wrote a couple of articles that continue to be some of the most read ones. Going back to them now, I notice that I have improved my blogging in the almost two years since then and that those articles are in fact quite poorly written, sometimes inaccurate, and in dire need of improvements.

So in the coming months, I will be revisiting and re-writing some old posts. We begin with How to Start an Offshore Company.

1. Company Form and Jurisdiction
2. Picking a Registered Agent or Trustee
3. Incorporating your Offshore Company
4. Record Keeping and Financial Statements

Company Form and Jurisdiction

These two go hand in hand, but I usually find it most valuable to determine company form first.

I am assuming that if you are reading this, you understand the concept of limited liability. If not, please make sure you do before continuing to read.

Company Form

The by far most common company form is one whose liability is limited by shares. The shares are not public (not traded on a stockmarket) and instead held privately, hence the term private limited company. These have different names and work slightly differently across the globe but are generally similar enough that they can all be grouped together, at least for this initial high-level approach.

Below are equivalent or close equivalent legal forms in various tax havens:

• Aktiegesellschaft (AG) – Switzerland, Liechtenstein, Luxembourg
• Delniška Družba (d.d.) – Slovenia
• Gesellschaft mit beschränkter Haftung (GmbH) – Switzerland, Liechtenstein, Luxembourg
• Naamloze Vennootschap (NV) – Curaçao
• Osaühing (OÜ) – Estonia
• Sabiedrība ar Ierobežotu Atbildību (SIA) – Latvia
• Sociedad Anónima (S.A.) or variations thereof in similar languages, i.e. Société Anonyme in French – Panama, Costa Rica, Monaco, Luxembourg, Lebanon
• Sendirian Berhad (Sdn. Bhd.) – Malaysia
• With Limited Liability (WLL) – Bahrain

The list above is imperfect because of multi-lingual countries but the point I’m trying to make here is that this very popular entity type has spread across the world. Often, these type of companies are called corporations but it’s beyond the scope of this blog to dive into the difference between company and corporation.

The (in)famous IBC – or International Business Company – which originate from a piece of legislation in the British Virgin Islands is for all intents and purposes a private limited company. Ownership of IBCs is determined by shares, which have share holders, who in turn appoint directors.

I could write dozens of paragraphs with buts and ifs and exceptions to the aforementioned, but they generally do not affect you or if they do, it’s something you should know already or will realize when doing your own in-depth research.

In 1977, some very clever people in Wyoming enacted a legislation which lead to the creation of the Limited Liability Company. The only bad thing about LLC is that the name makes it easy to confuse it with the previously discussed private limited companies.

What’s so clever about LLCs is that essentially are a hybrid between corporations and partnerships, in that they have limited liability but are not considered taxable entities. Instead, the members of the LLC are taxable and income is taxed as personal income. Some jurisdictions do consider LLCs taxable entities, though, such as the states of District of Columbia, but these are few and far between. A handful other jurisdictions charge a nominal franchise tax on LLCs.

LLCs do not have share holders and directors, and is therefore often not considered a corporation. Instead, they have members and – if they so chose – officers.

I won’t go into the details of LLC and comparing LLCs to corporations here. I’m saving that topic for another post.

LLCs have spread to other jurisdictions under various names.

• Limited Liability Company (LLC) – USA, Anguilla, Saint Kitts and Nevis, Belize, Cook Islands, Isle of Man, UAE
• Societate cu Răspundere Limitată (SRL) – Moldova, Romania
• Sociedad de Responsabilidad Limitada (SRL) – Panama, Costa Rica, Dominican Republic

Confusingly, some IBC jurisdictions permit companies registered as IBCs to use the suffix LLC in their company name, despite not actually being proper LLCs. This means that while it’s technically possible to form a company called Example Trading LLC as an IBC in the Seychelles, it is not a true LLC.

Then there are really only two popular options to consider:

• Société à Responsabilité Limitée (SàRL) – Monaco, Luxembourg, Lebanon
• Limited Liability Partnership (LLP) or Limited Partnership (LP) – United Kingdom, Mauritius, Singapore

SàRLs share similarities with LLCs in that they are largely hybrids between corporations and partnerships. They are however typically subject to corporate tax and have share holders.

LLP is a flagship in UK tax planning. They allow for a tax neutral pass-through entity to be formed in the highly reputable UK. The law has only been around since the year 2000 but has exploded in popularity.

There are a couple of company types remaining, none of which I find interesting or relevant enough to bring up here. Non-resident sole proprietorships, for example, make no sense.

Jurisdiction

Choosing jurisdiction for your offshore company is highly dependent on the company type you want.

Some things to consider when picking jurisdiction are:

• Does it have the company form I want?
• Is it a reputable jurisdiction? Does it matter to me?
• Has the jurisdiction signed any tax treaties that relevant to me?
• What is the corporate tax rate, if any?
• Are there requirements on resident directors, shareholders, or other role?
• What are the reporting requirements?

The first point assumes you have already decided on the right company form. If you have decided that an LLC is the best solution for you, your choices become drastically limited, whereas someone seeking a corporation structure will have nearly every jurisdiction in the world at their disposal.

Reputability is an abstract measurement of the international perception of a jurisdiction and companies from that jurisdiction. Here, I will refer you to another post: Assessing the Reputability of Offshore Jurisdictions, which also goes into why reputability matters. Of course, it doesn’t always matter.

I usually advocate transparency and consider tax treaties to be largely positive elements, but I’m well aware that many seek confidentiality with their offshore structures which often comes at the cost of reputability. Whatever your reason for wanting to find out about a jurisdiction’s tax treaties, OECD runs a website called the Exchange of Information Portal which lists jurisdiction’s TIEAs and DTAs. Although OECD does a good job keeping this website up-to-date, it doesn’t always have the very latest developments nor does it have all agreements available for download. You may want to visit the websites of relevant government authorities in the involved jurisdictions (usually the one you live in and the one you seek to incorporate in).

Although it might seem implied that tax rates of tax havens is zero, this isn’t always the case – not even for IBCs, with Barbados famously taxing its IBCs.

KPMG maintains a list of tax corporate rates around the world, but it’s missing a lot of jurisdictions and does not take into account territorial taxation. Deloitte publishes a good series of papers called Tax Highlights which go more in-depth into the basis of taxation and definitions of company residence. Many governments publish tax rates online.

A handful of countries have requirements on resident directors and shareholders. The perhaps most noteworthy example is Singapore, which requires at least one resident director. This drives up the costs of incorporating in Singapore significantly and is one reason many opt for Hong Kong instead.

Many jurisdictions also require a local secretary. This typically costs a lot less and is merely a ceremonial role. The secretary is essentially an extension of the registered agent.

Picking a Registered Agent or Trustee

A registered agent (RA) is a company or – rarely – a person, which is regulated by a jurisdiction’s financial services commission (or equivalent) and which is licensed to provide services, such as company management and incorporation.

The registered agent incorporated the company on your behalf and uses their own address as the company’s legally required registered office. This process is, on a high level, essentially the same across all jurisdictions. The only difference tends to be name. Registered office should not be confused with virtual office, which is never required to form a company.

However, nearly all offshore service providers (OSPs) out there are not licensed registered agents. They are merely intermediaries and instead are partnered with registered agents.

I personally prefer to go straight to the source and only work with licensed and regulated agents and trustees, but over the years I have had the pleasure of working with several very good intermediaries, for example Kaizen and HBM Group.

There is no easy way to pick a registered agent or OSP if you are starting from scratch. It comes down to researching them, speaking to them, and coming up with your own assessment.

Incorporating Your Offshore Company

So you have decided on company form, jurisdiction, and found a registered agent that you have a good feeling about? Excellent!

What happens next is that you place an order with the registered agent (or OSP). The order is received and you will be asked to make a payment. The most common form of payment is bank transfer. This is preferred because it is non-reversible (usually) and cheap. It also implies that you trust the agent to not run away with your money, hence the need for thorough research when choosing RA (registered agent).

Some registered agents offer other payment methods but if you go into this limiting yourself to only paying with for example PayPal, you will rule out nearly every registered agent.

Once payment is confirmed, you will be asked to send personal documentation to the RA. The documents required may vary, but typically come down to a copy of your passport and a copy of a proof of address (utility bill or similar). These usually do not have to be certified copies. Some RAs will ask for reference letter, police conduct report, or other documentation.

If your company will have multiple directors or share holders (or members or partners), documents will be requested for all persons involved. If any of the persons is a legal person (as opposed to a natural person), for example corporate directors or corporate shareholders, full due diligence will be required for the legal person.

You will be required to disclose your identity even if using nominees and, yes, your identity will be released if there is a request for exchange of information under an EOI treaty. See also The Real Deal About Nominees.

After you have sent everything to the RA, they will either send you proposed memorandum and articles of association (also called memorandum and articles of incorporation, and variations thereof). In most jurisdictions (especially IBC jurisdictions), these are usually extremely vague and state that your company may engage in any activities. In some jurisdictions, the articles of the company may limit its activities. This may also vary between RAs, with some requiring detailed articles. This is an often overlooked but extremely important aspect of forming a company. If you form a company whose articles state it will engage in the import and wholesale of car parts, and you suddenly decide to use the company to engage in an unrelated business activity, your company is no longer acting as intended and this can have implications with your bank and RA. They accepted you as a client based on what you told them. Changing this requires giving notice and updating the articles – unless your articles state you can do whatever you want.

If you are forming a company that requires a license to operate, as is common with FTZ (free trade zone) companies, your RA will apply for the license on your behalf.

During this whole process, there are usually a few documents going back and forth that you need to sign. A good RA will tell you about everything upfront and as far as possible accommodate any request to consolidate the paperwork into large batches instead of little bits here and there.

The turnaround for incorporation varies between jurisdictions. Your RA should be able to give you an estimate but it’s not always up to them. Sometimes the company registry in the jurisdictions are overworked. I have seen companies formed same day in some cases and after several weeks in other, but on average it’s just a couple of days to a week. You can sometimes pay extra for express formation, but that should hopefully not be necessary.

And, just like that, you have formed an offshore company.

Bookkeeping and Financial Statements

No matter where you incorporate your offshore company today (almost), there will be some level of record keeping required.

What records need to be kept varies greatly. As a heuristic, the more reputable a jurisdiction is the more detailed record keeping is required.

But this really isn’t even nearly as bad as many would-be (wannabe?) entrepreneurs make it sound. I understand you want to get started with your business, but it is beneficial to do so responsibly.

For a long time, IBCs were exempt from bookkeeping (implied or explicitly so). They could operate completely without any accounting required and no need to prepare reports. The OECD and other international organizations clamped down on this and nowadays there are some degree of bookkeeping requirements in all jurisdictions. Unfortunately, the myth that IBCs do not need to keep records persists. Yes, there are exceptions.

However, IBC jurisdictions are generally content with companies to prepare a financial statement at the end of each financial year which is supposed to be detailed enough to accurately reflect the company’s financial standings. These need not be filed with the government but the RA must know where the statements are located. The company registry may request to see the financial statement of a company and the RA must be able to produce a copy in a timely manner. If the company registry is not satisfied with the financial statement, they can request to see your company records.

This annual financial statement should be backed up by duly kept records. In reality, the risks associated with not doing so are relatively low for now but this will likely change in the coming years.

I don’t really see any good reason to not keep records of even the smallest offshore company. In fact, the smaller the company the cheaper/easier it is.

You can choose to either do it yourself or outsource it. In some cases, outsourcing is the only option since the records must be kept in the local language.

Consider that proper accounting is often required to benefit from territorial taxation, as the tax authority may require proof that you do not trade domestically and hence can be exempt from tax.

Most RAs are happy to provide record keeping services and help you with all the annual government filing. Make sure that you consider this cost when assessing the costs of forming your company.