Offshore-registered companies have been used as powerful business instruments since the middle of the previous century. Today, all large multinational corporations have some business units registered in offshore jurisdictions. Offshore branches and subsidiaries help giant corporations optimize their business processes and save on taxes.
Offshore company registration industry was booming in the last decades of the 20th century but the rules of the game have changed since that time. In particular, offshore companies allowed reducing operational costs significantly. In the modern world, however, some benefits that offshore-registered companies used to have before are unavailable any longer. Below we discuss an important factor that you should find out about before you incorporate an offshore company.
Economic substance requirements
It has become virtually impossible to have an offshore company that exists only on paper. A few decades ago, you could register an offshore corporation that would have the registration certificate, the corporate charter, and the company seal. That was it: some offshore jurisdictions did not require that companies domiciled there should have any employees, any property, any registered office, etc. Things have changed today, and all companies registered in offshore jurisdictions have to have some economic substance.
What is economic substance? Economic substance refers to the tangible assets that the company possesses, to the property in the country of registration that is written in the name of the company. What is important to realize before you register an offshore company is the fact that different offshore jurisdictions will have different requirements as far as the company’s economic substance is concerned. The amount of the economic substance will have a direct bearing on the company setup and maintenance costs. It follows that you should inquire about the economic substance requirements before registering an offshore company in all cases. We suggest that you should seek professional advice on the matter.
In some offshore jurisdictions, the economic substance requirements are still rather lax. Any company has to have a registered address but in some countries, it can be simply a mailbox address. As far as the company office is concerned, you may be able to get away with a virtual office in some countries. There are places where one person (or one corporate entity) can combine the role of the company Director and the company Secretary. Moreover, it may be the case that the company founder is allowed to fill both positions at a time.
However, the number of offshore jurisdictions where the economic substance requirements are so mild is growing smaller. When browsing offshore countries where you could set up a company, you will often find that a local company Secretary and/ or a local company Director needs to be hired. It is going to be a ‘professional’ company Secretary/ Director, which means working for your company is not going to be a full-time job for that person. (A ‘professional’ company Secretary/ Director provides services to several companies at a time and he/ she, therefore, gets paid by several companies. Most adult citizens of Liechtenstein, for example, are professional company Directors.) Consequently, you won’t have to pay a full salary to your offshore company Secretary/ Director: only a couple hundred dollars a month. Anyway, the company Secretary/ Director’s salary is going to add to the overall company maintenance costs.
In some countries, you may have to sign a job contract with a local accountant as well. The local corporate legislation may make it obligatory for all (foreign) companies registered in the country to acquire accounting services from a professional accountant or an accounting firm. Again, no full salary is due to the accountant but you will have to incur some additional expenses anyway.
Hiring an auditor may also be required but this will depend on the corporate structure of your offshore company. If you set up an LLC in a foreign country, it usually does not have to have an auditor on the staff. If the name of your offshore-registered company ends in ‘Inc.’, however, an auditor may be legally required. Normally, one person or one accounts-and-audit agency can fulfill both the role of the auditor and the role of the accountant.
In addition to that, your offshore-registered company may have to have a physical office in the country. It will often be enough to have a shared office, which is an address that many companies in the country use. In some instances, however, you may have to rent a full-fledged brick-and-mortar office. A rent pay is going to be due in either case.
Some countries will also require that your company should have a corporate telephone number and a corporate website.
You may find the economic substance requirements a bit frustrating if what you want to do is perform business operations in other countries while simply using your offshore company bank account details for transactions. However, economic substance is of great importance even if you are not planning to engage in active business in the offshore jurisdiction where your company is registered. The matter is that the bank that you apply for services to is going to be very much interested in the economic substance that your offshore company has in the country of its registration.
With the KYC requirements currently in place, banks in all countries of the world have become extremely cautious about providing services to offshore-registered companies. Many of them make it obligatory for all prospective corporate clients to have economic substance if they are to be eligible for acquiring banking services.
To conclude, registering an offshore company does not come at no or low cost these days. A registration agent is required in all cases without exception and the agent needs to be paid. On the other hand, the benefits that your offshore-registered company can bring to you will outweigh all the expenses associated with its formation in all likelihood.
