It seems to be quick and easy to set up an offshore company. You go to one of the many websites that offer incorporation services and click through the various options. Hong Kong costs $1,500, Ras al-Khaimah (UAE) $1,250, Panama $990, the Seychelles and Belize are for sale at $860 each, and then there is this incredible $550 deal for Singapore. Sounds like a bargain, doesn’t it? And incorporation only takes 1-3 days. Great, let’s do it.

Before you enter your credit-card details and agree to the purchase, take a short breath and think. What looks like a bargain can turn out to be a useless or unnecessarily expensive investment.

There are many traps and pitfalls for newcomers to the offshore world. But with proper preparation and by following the four steps below, you can incorporate a company smoothly and at reasonable costs:

  1. Define your business model
  2. Clarify why an offshore company is the best choice
  3. Chose the right offshore jurisdiction
    • Legal requirements
    • Annual maintenance costs
    • Banking options
  4. Find the best provider of incorporation services

Define your business model

Before incorporating any company, you should have a clear idea about its business model. What product or service do you want to sell? Where are your future suppliers and customers located? Will special licenses or permissions be required to operate the business?

Additional questions regarding company structure and funding should also be answered at this stage. Do you need partners to start the company? What shareholder structure do you prefer?  Who is going to provide funding and how much?

You don’t need to prepare a detailed 300-page document, but you should be clear about the main features of your business. Only then does it make sense to continue to the next step.

Clarify why an offshore company is the best choice

Offshore companies don’t have the best reputation, as some of them have been used to conduct criminal activities, launder money or evade taxes. Though this is unfortunately the case, many onshore companies are used for the same purpose. If you are British, you might be surprised to learn, that according to the  International Consortium of Investigative Journalists (ICIJ), a large number of U.K. registered LLPs and LPs have been formed with the sole purpose of laundering money. Similar examples exist for other Western jurisdictions. Offshore companies per se are not illegal and there can be good reasons to establish them.

Tax avoidance is one of them. Contrary to tax evasion, which occurs when individuals or legal entities either evade tax assessment or tax payment, this a fully legitimate activity and most people engage in it in one way or another, even without forming an offshore company (e.g. by using tax deductions and tax loopholes). We generally consider it a duty for everyone with sufficient means to contribute to society by paying taxes. However, due to a lack of tax fairness and the squandering of public funds by politicians, tax avoidance is an understandable reaction.

Many digital nomads that we talked to were convinced, that by setting up an offshore company, they would have to pay zero income tax. Though offshore companies in many jurisdictions are indeed not liable to corporate and other taxes, this does not apply to the owner, who lives in another country and receives a monthly director’s salary and an annual profit distribution. If your offshore company is subject to local corporate income tax, you might even end up paying more taxes, if there is no double tax treaty between the offshore jurisdiction and your country of tax residence.

Offshore companies with an operational base in another country might be subject to corporate income tax in that country. Value Added Tax (VAT) or General Sales Tax (GST) and transfer pricing are other tax-related issues to be considered. The topic is very complex and if you don’t want to end up with a big fine or even go to jail, it makes sense to seek advice from a competent tax consultant regarding corporate and personal tax liabilities. This can be quite expensive if several jurisdictions are involved, but a good consultant is worth the money.

Offshore firms are particularly suitable for location independent businesses. Many digital nomads, who move from one country to another, have set up such entities to sell their services, as many companies don’t contract with individuals to avoid labor law issues. If they only visit their country of birth for a few days per year, there is no reason to set up the business there. And they also can’t open and close a local business each time that they move to another country. However, they should check with local tax, labor and immigration law specialists to ensure, that their activities are legit in the host nation. As digital nomad related legislation is underdeveloped or non-existent in many countries, they often operate in the twilight zone.

There used to be a time when all company employees had to sit in the same office. Cloud sharing and video conferencing have made this obsolete. Many people don’t seek regular jobs, but are happy to work as freelancers. An increasing number of companies have no fixed office or fixed employees. They operate in a virtual way and combine the best freelancers from around the world for each project. For them an offshore solution makes perfect sense.

People living in underdeveloped or politically unstable countries might want to form an offshore company to enjoy asset protection or have access to a good legal framework and a better banking infrastructure. The reasons for opening an offshore company are manifold. Most make sense and are completely void of any criminal intent.

There are businesses for which an offshore company makes no sense. If all your assets and employees are located in one country, incorporating your company in another country makes no sense and will most likely cause more trouble than it provides benefits. The same can apply, if you have no physical presence, but all your customers are located in one another state. Incorporating in the country, where most of your business is concentrated, makes sense and is often also the only legal way to operate.

Chose the right offshore jurisdiction

There are all kinds of different offshore solutions. A jurisdiction that is perfect for one company can be unsuitable for another. To prevent bad surprises in the future, it is essential to do your homework.

 

Legal requirements

Laws and regulations in the various offshore jurisdictions vary greatly. Rule out those countries, that don’t allow their offshore companies to engage in the type of business selected by you. The same applies to jurisdictions, that require expensive local licenses or a costly domestic organization to run it. If you incorporate your company there, you might end up having to transfer your business to another country at a high cost, or to incorporate a new company elsewhere.

Especially for complex, innovative or unusual business models it is indispensable to consult a qualified offshore law firm. This is not going to be cheap. Don’t be surprised to be offered rates of $500 to $1,000 for a partner, per hour not per day.

A very important aspect is legal security. Is there sufficient regard for private property, especially if it is owned by foreigners? Do courts follow the law, or is corruption wide-spread and decisions are influenced by the authorities. Stability is also a major factor. Has the political and social situation been stable, or are coups and mass riots common?

Don’t underestimate reputation. While Singapore and Hong Kong are considered as sound jurisdictions, Belize, Panama or the Seychelles might raise some eyebrows. Make sure that your targeted customers, suppliers and other business partners don’t object to doing business with your offshore company.

In some countries, there is a public register displaying the names of shareholders and directors, in other countries there is no such requirement. For investors, who prefer to stay anonymous, many agents offer to provide nominees. In our view, this is not only expensive but, in some cases, also risky. If you plan to run a legit business, being mentioned in a public register should not be a main concern.

Regulations regarding shareholder and management structure differ. Many offshore companies can be founded by a single foreign shareholder, who can also act as the sole director. However, some countries demand more than one shareholder, or that at least one of the directors is a local resident. Further differences exist regarding minimum capital requirements, mandatory documents for incorporation, and accounting and auditing standards.

 

Annual maintenance costs

Agents that charge less than $1,000 for the incorporation of a company don’t cover their cost for this activity. Their profit needs to come from another source, usually company maintenance fees.

There is an annual government fee, that needs to be paid to keep the company alive. In most cases it only amounts to a few hundred dollars, but depending on jurisdiction and company size, it can also reach a few thousand dollars.

The majority of offshore jurisdictions requires you use the service of a registered agent, that files all incorporation documents, provides the official company address, pays the annual government fees, keeps all main company documents, and updates information with local authorities whenever necessary. The agent charges an annual fee of about $600 – $2,000 for basic service. Additional services required by you (e.g. mail collection or provision of a virtual office) will be charged extra.

Some offshore locations demand, that at least one of the company officers must be a local resident. Most agents are more than ready to “provide” such officers. Respective fees can range from a thousand dollars to a nice 5-figure amount per officer and year.

A major difference between offshore jurisdictions is, that some require the annual filing of audited financial statements while others don’t.  Singapore requires this and will also make the information available for public downloads through the ACRA BizFile system. Expect annual costs of at least several thousand dollars. The British Virgin Islands (BVI), the Cayman Islands and other nations don’t have auditing and filing requirements. However, they stipulate clearly that proper financial records need to be kept. Failure to do so can result in large fines.

Yearly maintenance costs can reach thousands of dollars even for a small company. It is advisable to compose a small excel file to compare various jurisdictions and have a clear understanding about future costs.

 

Banking options

Without a bank account, a business can’t operate (except if it does all transactions with cryptocurrencies or gold, which is unrealistic). Don’t be surprised, if you have incorporated an offshore company, but can’t find a good bank that is willing to accept it as a customer. While setting up a company can prove to be harder than expected, opening a competitively-priced bank account with a reputable bank can be an even bigger challenge.

The obvious choice is usually a local bank in the country, where the company is incorporated. If this is Singapore or Hong Kong, you will have no major issues. There are plenty of banking options available, that offer professional service at reasonable prices. However, if your company is headquartered in the Seychelles, Belize, Vanuatu or Panama, you might be in for a big surprise.

The banking sector in many offshore jurisdictions is not very well developed. Often there are only very few banks that accept offshore companies as customers. Many of them have week balance sheets, the service level is low and most employees only have rudimentary knowledge of English. Options regarding multicurrency accounts as well as debit and credit cards are limited, minimum deposits and regular fees are high, and there is often a requirement to be physically present for account opening.

Many company owners have found out, that a local banking option is either not available for them or not worth the high cost and low service. And those who succeeded in opening a local bank account often had to realize, that customers and business partners didn’t want to transfer money there, for fear of being flagged or even blacklisted by their own bank for potential money laundering activities.

Banks in respectable financial centers are not waiting for you, except if you run a sizable business, are willing to deposit hundreds of thousands of dollars and don’t raise any flag in the Know Your Customer (KYC) / Anti Money Laundering (AML) process. Small and medium companies must usually prove close business affiliation with the country, in which the bank is located. To succeed with account opening, you need to prove that many of your customers or suppliers are located there.

Account opening conditions are important. Can you open a USD or EUR account, or just a local currency account? Are debit and credit cards available for the selected account type? What is the minimum deposit? For the latter, expect 5- or 6-figure numbers and monthly penalty fees of tens or hundreds of dollars, if your balance falls below the required level.

Banking fees can be very high. There are account opening fees and monthly minimum account fees, that easily add up to $1,000 and more within the first year, even without a single bank transaction. And while mentioning transactions, expect international transfer fees to be considerably higher than what local customers pay. Last but not least many banks require that you show up personally for account opening. This does not only add considerably to costs, but also prolongs the whole process.

Find the best provider of incorporation services

In most offshore jurisdictions you can’t apply directly with the authorities for the formation of a company. Consequently, you need to work with an intermediary. There are three types of intermediaries: Registered agents, lawyers and incorporation service providers.

To work directly with the registered agent, that will serve your company in the future, makes sense. Such agents are well familiar with the requirements and processes, and as you only have to share your information with one company, the whole process can be smooth and fast. Unfortunately, without a detailed knowledge of the respective industry, the ordinary investor will find it difficult to identify the best agents available. Some of them only work upon introduction by a third party, such as a law firm or an incorporation service provider. In addition, a registered agent does not provide legal or tax advice, which has to be obtained somewhere else.

Lawyers can be a good choice, provided that they specialize in offshore legislation and can also advice on the best jurisdiction for your business. The latter is not necessarily guaranteed. Many individual lawyers and even law firms just specialize in one jurisdiction, which they try to sell you. Some of the larger law firms are a better choice, but their price tag is far beyond what many people are willing to pay.

Incorporation service providers are usually companies, that sell most or all of their services online. Their websites contain a lot of marketing information on the various choices. Some can be used by newcomers to get a first idea about the various solutions available. But all data should be treated with utmost care. Be aware that some websites are scams and many others just aim to earn a fast buck.

Some websites don’t provide any information on the company and its management, which in our opinion is a definite no-go. Others claim to be incorporated in Singapore or Hong Kong, but you can’t reach them under the listed telephone number. In case that you send a polite email to them asking for a meeting in their office, which is pictured on the website void of any employees, you are almost certain not to get a reply.

More often than not, the displayed prices are decoys. Some essential documents, such as a Certificate of Incumbency or an Apostille, might not be included in the incorporation package and need to be paid extra, even though they are often required to open a corporate bank account or complete other business transactions. Information on annual maintenance costs is often hidden in footnotes.

Promised timelines of 1-5 days to incorporate a company are completely unrealistic. It takes much longer to assemble the documents to be submitted. You need a copy of your passport and proof of residence (both certified), a bank statement and in many cases a bank or professional reference letter. Most banks don’t issue such letters to individuals and companies are reluctant to certify, that you are a person of highest integrity, have no criminal record, and have never been declared bankrupt or been the Director of a company subjected to a judicial enquiry. Decent people find it difficult to obtain such a letter, whereas criminals have no problem to procure them.

Once all documents are ready for submission, the process can take another 2-6 weeks. And after you have obtained the official incorporation documents, you need another 4-10 weeks to open a bank account in a respected jurisdiction. Instead of 1-5 days, plan with 2-5 months until you are all set to start your business.

Websites contain some information but give no advice. They expect you to choose a jurisdiction by yourself and then purchase the incorporation service via the websites. Before paying, you have to agree to their general Terms and Conditions that basically declare, that they can’t guarantee the successful formation of the company (there is definitely no money back guarantee), are liable for nothing and that there is hardly any legal recourse for you.

Once you have paid, you need to submit all personal documents, often in unencrypted form. In case you have questions, you can email (but not always phone) your “incorporation assistant”, who might be located in India, the Philippines or another low-cost country. You are never sure whether your contact is a full-time employee of the company or just a freelancer (if they use a Gmail or Yahoo email addresses for communication, they are probably the latter). You also don’t know, whether your data is kept strictly confidential and only used for the intended purpose.

Many incorporation service providers claim to provide banking solutions for your newly created company. They offer to establish a contact with the preferred bank and help you fill out the application forms. However, they don’t state the specific requirements of the bank, nor the likelihood that you will be accepted as a client. Fees for this service range between USD 300 and USD 3,000. Of course, there is no guarantee, and quite a few customers end up without a bank account or one at a different bank or jurisdiction with very limited value.

The registered agent for your company is chosen by your service provider and all future correspondence also goes through it. Some people find that ok, but we strongly recommend to establish direct communication with your registered agent. To do this, you have to change the agent which is not only time consuming but also costly. Expect transfer-out fees from the old agent and transfer-in fees from the new agent of somewhere between USD 500 and USD 1,000 each.

From the above it is obvious, that we are not the greatest fans of web-based incorporation solutions. They are only suitable for bargain hunters with simple requirements and high risk tolerance, and only after they have fully checked the credentials of the provider. In our opinion it is better to use the service of an established offshore law firm or a local service provider, even if the offered price is higher. Paying more initially for consultation and a tailor-made service, can save you a lot of trouble and follow up costs, and in the end is likely to be superior to any standard solution.

 

If you are unsure how to proceed, we can help you finding the right jurisdiction and incorporation intermediary. Be assured that we only work for you, as we don’t accept commissions, kick-backs or other benefits from third parties. Please contact us at info@adexoconsulting.com to discuss details.

Disclaimer: The above is for informational purposes only. It is not an offer or advice to buy or sell any products or services. Adexo Ltd does not provide specific investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this blog.