International Company Formation
By Lowtax Editorial
16 October, 2013
In a globalized world, where ever-increasing volumes of trade and investment are being conducted with little regard to national borders and huge sums of money can be transmitted around the earth at the press of a button, the demand for international companies, often located in offshore jurisdictions, has been rising steadily over the last two decades or so.
International Companies and Their Uses
International or offshore companies can be used by a variety of people to achieve a number of aims. Expatriates who have become non-resident in their home jurisdictions, or who expect imminent departure for a job or retirement elsewhere, can legitimately use offshore companies to shelter income from high levels of taxation; and offshore trusts remain one of the best ways to minimize cross-generational inheritance taxation, as well as offering asset protection for professionals against liability suits.
While offshore locations continue to offer solutions for the management of private wealth, a major growth sector in recent years has been on the corporate side. There are numberless ways in which offshore locations can offer tax-efficiency to corporates: holding companies for dividend flows; onshore or offshore listing structures; special purpose vehicles; IP management and licensing; international treasury management; real estate ownership and rental.
Offshore Incorporations Bouncing Back
Offshore company formations have yet to fully recover to their pre-crisis levels, and offshore incorporation activity actually fell in the second half of 2012 compared with the first half. Nonetheless, this trend doesnt explain the whole picture, and incorporations in certain jurisdictions are holding up much better than in others.
Despite tough economic conditions, levels of new company registration activity in at least one major offshore jurisdiction continued to increase, according to Applebys latest "On the Register" report, released August 2013, which provides insight and data on company incorporations in offshore financial centres. Bermuda reported a 7 percent increase in activity compared to the first half of the year, according to the report, which looks primarily at the data for the last six months of 2012.
Nonetheless, the on-going weakened economic conditions continued to impact the overall market in the second half of 2012. There were 37,881 new offshore company formations in the jurisdictions covered by the report, a decrease of 3.6 percent from the second half of 2011, and a deeper decrease of 11 percent on the preceding six months in 2012.
Taking the entire year into account, the overall number of new company incorporations for the majority of jurisdictions stayed flat in 2012, which proved to be a year of consolidation following large increases in annual new incorporations between 2009 and 2011.
"Continued uncertainty in some markets and the shift in focus from China/Asia to Africa for jurisdictions such as Mauritius and the Seychelles are preventing a speedy return to the numbers of company formations recorded prior to the global economic crisis," said Farah Ballands, partner and global head of fiduciary and administration services at Appleby. "Add to this several major international events during the second half of 2012 including the US Presidential Elections, continued economic uncertainty in the Eurozone and the once-in-a-decade change in leadership in China, and it's hard to be surprised at the company registrations barometer struggling to quickly improve," she added, "but we are seeing growth in some markets."
The story is similar for the total number of active companies, with most jurisdictions showing little movement from the previous year as new company formations cancelled out the numbers leaving the registries. Hong Kong, as a comparator, saw a 9 percent increase in the total number of active registered companies, with the local register there breaking through the one million mark for the first time. The Mauritius and Cayman registries are steadily returning to their pre-recession peaks, experiencing a 3 percent and 1 percent rise respectively.
Among the reports key findings is that in the second half of 2012:
- Overall volumes of new offshore companies being registered were 11 percent lower in H2 2012 than the preceding six months. After a busy first half of the year, jurisdictions including the Isle of Man, Mauritius, Cayman and the British Virgin Islands were approximately 10 percent down in the latter half.
- The jurisdiction that continues to dominate offshore new company registration activity by volume is the British Virgin Islands, which has consistently maintained a six-fold lead ahead of its nearest comparator, the Cayman Islands.
- The UK and Hong Kong, as comparators, continue to show signs of recovery. Hong Kong in particular showed significant growth between H1 and H2 2012 with a 7 percent increase in registrations. Both Hong Kong and the UK registrations are now well above those recorded in 2009.
Significantly though, Ballands expects 2013 to be a watershed year in terms of offshore incorporation activity, and she anticipates that when this years figures become available, they will show that there has been a universal return to pre-2009 activity levels across the offshore jurisdictions."
Offshore Transparency and Respectability
Its a remarkable fact that the pressure on offshore over the last twenty years from the Organization for Economic Cooperation and Development (OECD), the Financial Action task Force (FATF), the European Union and the G20 has actually had the unexpected result of making offshore respectable. Almost all of the main jurisdictions have fallen in line by reorganizing their local tax regimes, not by increasing international tax rates but by reducing local ones, while they have rushed to sign Tax Information Exchange Agreements and classical tax treaties with larger, high-taxing countries. Indeed, British Prime Minister David Cameron went on the record in the House of Commons in September 2013 to say that it was unfair to call UK dependent territories tax havens, with all the negative connotations that tends to be attached to such a label. Recognising the positive steps taken by the like of Jersey, Guernsey and the Isle of Man recently, Cameron told MPs that: "I do not think it is fair any longer to refer to any of the overseas territories or Crown Dependencies as tax havens. They have taken action to make sure that they have fair and open tax systems. It is very important that our focus should now shift to those territories and countries that really are tax havens. The Crown dependencies and overseas territories, which matter so much - quite rightly - to the British people and Members, have taken the necessary action and should get the backing for it."
It is true that there has been a loss of confidentiality for tax fraudsters, but in most situations, the main offshore jurisdictions are just as secure and private as they ever were. For many people, and certainly for companies, the existence of double tax avoidance treaties is a positive advantage when dealing with an offshore jurisdiction.
However, it is also true that until recently, offshore transparency initiatives were mainly aimed at stopping predominately wealthy residents of high-tax countries escaping their tax liabilities at home with the help of carefully-structured and confidential offshore tax avoidance strategies. It has only been in the last year or two that the focus has turned to corporate tax avoidance in a big way, and since it would be rare to find a multinational company without a tax mitigation strategy that involves a company formed in an offshore or low-tax jurisdiction, new proposals to make companies divulge more information about who owns them, plus the OECDs Base Erosion and Profit Shifting Action Plan, could have a major impact on offshore incorporations if they are successfully introduced.
The Mechanics of Offshore Company Formation
While the events of the last quarter century have undoubtedly brought offshore and onshore closer together in economic terms, establishing a company in a foreign or offshore jurisdiction can still be a complicated business, not least in the company formation process itself. Although many offshore jurisdictions have lots of things in common as regards their company laws, especially the British Dependent and Offshore territories which have tended to follow the English common law, there are still many local quirks and variations, and many of the concepts in civil law regimes especially may be unfamiliar to those who are used to doing business under a common law system. For example, some jurisdictions may permit a company to be formed with just one director, while others will require more than one. There are also differences in the amount of initial share capital needed in order to form a company, or whether bearer shares are permitted.
Company formation procedures are generally a lot simpler and faster than a few years ago thanks to electronic registration systems which have cut down on the amount of paperwork needed. The time taken for a new company to be approved may still vary depending on the jurisdiction, but 24 hours or less is not uncommon these days.
Most jurisdictions charge initial registration and ongoing annual registration fees. While offshore jurisdictions are generally in competition with each other for international business, these fees can still be quite high in some locations, and they have generally speaking been on the rise as governments seek to make up for shortfalls in other tax revenues.
Other more general factors must also be considered when choosing the most appropriate jurisdiction in which to form an international company. One of the most basic, yet also one of the most important things to ponder, is the political and economic stability of the territory in question. Another important consideration is the jurisdictions professional and telecommunications infrastructure. Even the most remote offshore jurisdictions are now relatively well-connected to the global communications network via telephone or internet, but if communicating with advisers across the other side of the world (in the middle of the night) is going to be a problem, it may be wiser to rethink your options. Geographical location is therefore also important, and it is vital that the time zone in which the offshore structure is based is taken into account.
So, as has been illustrated here, forming an international company can be quite a minefield! In all almost all circumstances, the process of forming a company offshore would be handled by a corporate service provider, adviser or local law firm - but it also pays to do ones homework, in addition to seeking out the views of a trusted, knowledgeable and independent advisor in this area.
To view company formation and tax rules in around 50 offshore and low-tax jurisdictions, please visit the Lowtax Jurisdictions Guide.
GIG is an intuitive international business, tax and investment smart tool that searches and compares global jurisdictions for the most effective corporate vehicles and structures based on intended use and ownership preferences.
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