Thursday, June 20News For London

Explainer: What is an Offshore company?

Gibraltar Rock/Public domain picture

Nadhim Zahawi, the chairman of the Tory Party, was recently fired by Rishi Sunak following a scandal involving a tax bill related to the sale of shares in YouGov, a polling company that Zahawi co-founded in 2020 before he was elected to the House of Commons.

Nadhim Zahaw/Wikipedia

What exactly is an offshore firm?

An offshore company is a corporation or business that is operated apart from the owner’s residence. It is a company that is run outside the owner’s country of residents.

For instance, one of Zahawi’s problems is registering his business, YouGov, a polling company, in Gibraltar, which is situated at the southernmost tip of Europe.

Why do people operate their offshore company?

There are numerous justifications for operating an offshore business or firm, both legitimate and unlawful. According to Nomad Capitalist,- a financial company,  there are mainly nine legitimate and two unlawful reasons for having an offshore corporation.

Photo credit: Public domain picture

1. Financial Security and Privacy

Some owners of offshore companies opt to run their operations elsewhere in order to escape being attacked or kidnapped by some criminals,  and also maintain a humble lifestyle in their home nation. With their company overseas, close friends and relatives would only have little idea about their finances except they (offshore company owner) announce their finances.

2. To comply with legal obligations

To satisfy the legal requirements of the country where you intend to purchase real estate is another typical justification for owning an offshore corporation. For instance, some countries won’t sell you a property unless a citizen of that nation is a shareholder or you are from a specific nation to be eligible. To meet this demand, one would need to buy the company from a local firm in order to be eligible to buy from the desired nation.

3. Funds for Investing in Tax-Neutral Locations

Another justification for joining an offshore corporation is to invest money in tax-neutral locations. To put together their investment fund, a number of people from several countries where their company is based would need a central, neutral location. This is another reason that led some people to have an offshore company.

4. Strong Legal System

Some people who live in a corrupt country where profits are less than taxes paid will choose to establish an offshore corporation despite the high taxes in order to benefit from their business and access better legal services, an effective operating environment, and better courts.

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5. More efficient banking infrastructure

Some people establish an offshore corporation in order to provide their business with stronger banking infrastructure. This includes asking a bank to lend your company a significant sum of money. When the bank is aware that the company applying for a loan has an offshore or subsidiary company outside of their primary operation country, the likelihood that they will grant the loan is higher than when the company has only one base in that country and is not well-known for having a high annual income.The loan might not be granted or it will take a longer time for the bank to grant the loan because they would need a lot of checks to ensure their money is not going into the wrong company to avoid loss. 

6. Asset Defense

Arguments in favour of forming an offshore corporation might be made for the purpose of asset protection. Many people desire to have an offshore corporation to protect their wealth from unwarranted legal challenges that could cause them to lose their wealth due to marital problems, creditors, family members, litigants, and other factors. But with their company operating overseas, there are different laws for different countries, which in some ways would protect their offshore company from losing money or any legal battle..

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7. Avoid paying capital gains tax

Another justification for why owners of offshore corporations choose to operate their business abroad is to avoid paying capital gains tax. However, residents of some nations, such as the US and the UK, are unable to avoid paying capital gains tax because they are required to do so; in contrast, New Zealand does not, in some respects, impose capital gains tax.

Whereas in the UK, “Even if you are not a resident for tax purposes, you must pay tax on gains you make on property and land in the UK.” The government’s official website states that “unless you return to the UK within 5 years after leaving, you do not pay Capital Gains Tax on other UK assets, such as shares in UK companies.

8. Reduced Taxes

One reason some people like to own offshore corporations to pay less taxes and generate more money is because many people always prefer the low payment of taxes to make more profits in their businesses.

Bulgaria, Gibraltar, Monaco, and Montenegro have the lowest taxes among the European nations, according to the world population review.

9. Availability of Tax Treaties

Countries that have an agreement frequently have tax treaties. Countries frequently have duplicate business under one registered legal name, and they agree to refrain from billing twice.

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Illegal Reasons to Use an Offshore Company

1. Tax Fraud

Most people with a fraudulent mindset set up an offshore corporation to evade taxes, but this is prohibited in every country that levies taxes because taxes are used to fund infrastructure projects like roads and other fundamental needs.

2. Criminal Organisations

A few people with criminal intent, including politicians, set up an offshore company to conceal their operations from the law enforcement agencies in their own countries.

Finally, some people do set up offshore companies with criminal purposes, while others just have good intentions and adhere to the law in the nation where their offshore firm is headquartered and the reasons are not far from the above mentioned 9 possible legal reasons.