Incorporating a company overseas, also known as an offshore company, is one way for business investors to get around certain tax laws in their home countries. If set up right, there is nothing illegal about these offshore companies as a way to engage in business. While tax reasons are paramount in deciding to set up offshore companies, they could also offer other advantages. Offshore companies are not an unmixed blessing, however, and also come with some disadvantages.
Some countries try to lure foreign business investors by offering them corporate tax rates that are very low. This way, business investors end up paying out less in tax and holding on to more of the money the business generates. This incentive is also beneficial for the host country since it benefits economically from the presence of the offshore company. Certain Caribbean islands are famous for such tactics.
Safety of Assets
Another advantage to offshore companies is that they help business investors transfer assets so as to protect them. If an investor is concerned that his assets may be seized, he could shield the assets from creditors through the use of an offshore company. Then in case there is an adverse legal or business development against him, he can be assured of the safety of his assets.
There are confidentiality laws in the countries that want to attract offshore companies to ensure the privacy of business investors. However, this does not give offshore investors carte blanche. They are still liable to follow the law. The host country could disclose identities to aid investigations relating to unlawful activities. If the offshore company engages in drug dealing for instance, the host country is not obligated to maintain confidentiality, to the extent the host has any useful information to provide.
While offshore companies offer certain advantages, one major disadvantage is that they are expensive to set up. First of all, there are legal fees involved to establish and incorporate an offshore company. There are also certain minimum thresholds for investment in the companies. And the host country could require the investors to own property in the country. Another disadvantage is that the U.S. government is tightening the tax laws to discourage these offshore company strategies. The Internal Revenue Service has tried to cut down on such activities so as to get its share of tax revenue.