Contrary to popular belief, most of the reasons to use an offshore company are legal and tax neutral.
Despite what the media would have you believe, there are numerous legal and legitimate reasons to use an offshore company.
In the past, those who dealt in offshore circles used fake names and fake stock photos as they sought to represent the arguments for the true value and purpose of international diversification from the shadows.
Their masked approach didn’t do much to help the reputation of offshore activity.
One of the reasons I began Nomad Capitalist was to bring more transparency to an industry that was unnecessarily secretive. And it seems that we have inspired people to become a bit more transparent.
Obviously, some people are still skeptical. Decades of bad press take time to overcome. But the good news is that there are many legal reasons to be involved with offshore activity like foreign investments, offshore banking, second passports and, yes, even offshore companies.
I came across a presentation recently by one of the do-gooder tax folks where they broke down the reasons for forming an offshore company into three areas: red – harmful, yellow – challenged, and green – ordinary.
Their point was to discuss what parts of going offshore are morally acceptable and which are, indeed, shady business.
While I found the chart intriguing, I found their moralization of the topic a bit unconvincing.
The problem with turning the debate about offshore into a list of what is moral and what is not is that you can slip into too many gray areas. I like to think in black and white – legal vs. illegal – and let the moralizing take second chair.
I didn’t agree with the qualifications set out by these do-gooders. Their moralizing was different than mine. And your set of rules may be different from mine as well. Laws, on the other hand, are definitive. It is clear which side of the line you are on, and clarity like that is vital to good business.
Where I agree with the do-gooders is in their argument that, for the average small business owner, consultant, cryptocurrency trader, etc. there aren’t a lot of ways to reduce your tax burden if you own and operate your business in the United States.
And even for those for whom there are ways, it’s rather complex. The bottom line is that you can’t just stay in the United States 365 days a year and benefit from an offshore company. People think that all they have to do is set up a BVI company and they can run it from the US and avoid taxation.
In fact, in many cases, it will make their tax situation worse. These days, real offshore solutions are about finding ways to move your a**, not just your assets.
Moving your assets used to be enough in the days when hiding your money was the name of the game. Now, however, it’s all about transparency and how both you and your business can think globally to reduce your tax burden and get other benefits.
One of the underlying principles of my five magic words is that none of us chose where we were born. Simply because you were born in the United States, Australia, Canada or wherever else does not obligate you to live there forever.
You can go where you’re treated best.
And if you’re not sitting around using all the resources in the United States – if you legitimately move what you’re doing and move yourself for a good part of the time outside of the United States – why should you pay tax as if you were still there?
You shouldn’t be forced to pay anyone just as some homage because you were born there.
Again, if you stay there and keep milking all the services and screw everybody else by getting out of taxes, that’s not really fair.
So, while I don’t agree with the moralizing approach to the offshore discussion, I do believe in drawing a line and staying firmly on one side. It is either legal or illegal. I’m not here to judge, just to tell you where the line is.
However, other people will still judge, which is why I help the people who come to me to understand how to present their strategy to the people that matter – their bank, for example.
Tax guys are great at telling you where the line is, but they also don’t have much, if any, experience with the bank itself. They do not know what the bank wants, only that the bank should take your company… in theory.
But how you present your story still matters.
Even if you are doing something completely legal, you have to be prepared to explain it to those who remain suspicious of offshore activity. And that’s where having a plan becomes so valuable. Even if you have a totally legal offshore structure, the onus is going to be on you to show legitimacy.
So, let’s look at all the possible reasons for using an offshore company for your business and, where necessary, discuss how those reasons fit into the bigger story you will have to paint to show the legitimacy of your offshore activity.
I believe that you’re entitled to privacy. However, I also believe that some people go too far with privacy. I’m not a privacy nut who’s going around with tinfoil on my head. I use Google. But I do recognize that financial privacy and safety are important.
What many people don’t understand is that privacy isn’t always an issue of wanting to hide your money. And this is yet another issue with moralizing offshore activity. Just because something can be used for immoral ends does not make it immoral by default.
For example, I had a client from Mexico who explained to me that he was looking for greater privacy because, in Mexico, when you have $100,000 or more in the bank, your name is quickly leaked to people who start calling your home with threats about knowing where you live and how they plan to come after you and your money.
Do you think those people need financial privacy?
Somebody in Mexico who’s got a lot of money might want to set up a foreign corporation to add a layer of privacy to their operations. They may not even be doing anything to avoid tax, they may just be trying to protect themselves.
Heck, they could even set up their offshore company in the United States! If their issue has nothing to do with saving tax, a Mexican could set up an “offshore company” in the US to give themselves greater financial privacy and safety.
After living in other countries and seeing the issues that people deal with on a daily basis, it can be frustrating seeing these big western governments come in with their economic and political weight to pressure other countries to make cultural, social and political changes in a culture and context that they nothing about to begin with. But somehow it is their responsibility to tell the rest of the world how to live. Every country should be like them.
A common reason to set up an offshore company is to meet the legal requirements of the country where you want to buy property. For example, I own property in Malaysia where it’s possible to own property through select foreign companies. In many countries, this is not possible.
Instead, you must purchase the property through a local company – an offshore company. For instance, if you want to use money from your US company to buy a factory in Nicaragua, the Nicaraguan government won’t let you. You cannot have it titled. You would need to set up a Nicaraguan company – whose shareholder could be your US company, so it’s a subsidiary – and then you would be able to make the purchase.
That is a completely legitimate reason to have a foreign company.
Now, in many cases, it’s beneficial to own property in your own name. There has historically been a reason for US citizens who own businesses overseas to invest through corporate structures. That incentive has somewhat been diminished with the recent tax reform, but for the average person who wants to hold property overseas in their own name, the tax structures in many foreign countries are more beneficial to just ownership in your own name.
However, I was in Montenegro recently and they actually have a revision through which you can be refunded for their 19% VAT when you purchase new real estate (not resale real estate, but real estate from a developer) through a local company. To do this, you could set up a Montenegro company – an offshore company – and then receive the refund.
Somewhat similar provisions are available in Turkey where you can actually benefit from incentives in the country’s tax system purposefully aimed at bringing more companies into the country to buy properties. They want people to open offices in Turkey, so you can set up a Turkish company and purchase property in Turkey as well.
An investment fund run by various individuals from different locations may need a tax-neutral location where they can combine capital from different sources.
The Cayman Islands is often a top choice for investment funds because their rules are relatively lax and the fund will not have to deal with things like the Security and Exchange Commission. By doing this, these funds can often access different investments unavailable to US investment funds.
Again, a tax neutral location may offer more benefits than simple tax reduction.
Similar to the Mexico example above, if you live in a country where things are a mess and everything is inefficient, you might not mind paying more in taxes to get a better legal framework.
There are certain countries where taxes are somewhat low, but setting up and running a corporation can be extremely bureaucratic and inefficient. Even moving money around can be difficult. In that case, setting up an offshore company is not a tax issue.
In fact, some people may be willing to open a company in the EU in a place like Bulgaria to gain better operational efficiency, better legal architecture, and access to better courts. They may not get lower taxes, but an offshore company will solve so many other issues that it will not matter.
The right offshore company can give you access to better banks.
When I look at some of these companies that people set up in these tiny little jurisdictions, I have to shake my head. Many folks will call me and explain that they want to set up a Labuan company or a Marshall Islands company and I have to warn them that their company may have more limited banking opportunities.
The reverse can be true as well. If you live in Peru, you may have difficulty getting banks to take your Peru company so you may choose to set up an offshore company that will give you better access to banks.
A bank may not take your Peru company, but they’ll take your Bulgarian company or your Cypriot company or your Hong Kong company. Again, these countries may or may not be tax neutral, but they will give you better banking infrastructure and that benefit alone is enough.
Beginning with asset protection, the next four reasons to use an offshore company are those that the list I found deemed to be in the yellow zone. Again, I feel that they are moralizing about practices that I generally don’t see as problematic.
Many people will set up an offshore company to protect their assets from creditors, plaintiffs, attorneys, family members, ex-spouses, etc. In places like the United States where people sue on a whim, just having a simple offshore corporation can be a lot more beneficial than setting up a trust or an offshore foundation. You can get enough asset protection from a foreign corporation.
If you set up a company in a place like St. Kitts and Nevis, somebody would have to post a bond before they could sue you. Obviously, the moralizing comes from the chance that you are stopping people who legitimately have a claim.
But the issue is that a lawsuit is filed every 16 seconds in the United States. At a rate like that, it is safe to argue that many of those lawsuits are illegitimate. And who doesn’t want protection from a system that is out of control like that?
Every country is different and every country has different capital gains tax laws. This post is not to provide tax advice, but it would appear that some countries allow structures by which you can avoid capital gains tax through indirect transfers of assets.
If you’re a US citizen, you can’t avoid capital gains tax, especially if you’re living in the United States. So, while other countries may have this issue where you can avoid capital gains by transferring assets, it is not an option legally available to US citizens.
I cannot agree with the argument that seeking a lower tax rate is wrong. I’m all for lower tax rates, not just because they benefit me but because I understand that there’s a reason why other countries offer lower tax rates. Often, it is to foment development in their country. And who is the United States to say that Lithuania or Estonia should be deprived of business?
The Baltic countries have come out with very low tax rates in an effort to develop their economies. Estonia even offers zero tax as long as you do not take the money out of the company.
These are former Soviet satellite states that have joined the EU and become pretty pro-capitalist free-market societies. They want low tax rates because they don’t need to fight wars. They can develop their economies much more successfully by attracting businesses and wealth with low tax rates than they ever could by overtaxing their people.
And if somebody wanted to move part of their operations to Lithuania and hire some Lithuanians, what’s wrong with that?
Now, there are rules on transfer pricing. Remember, you can’t just run a company in the United States and shift all your profits to St. Kitts and Nevis or Vanuatu without any reason. There are established principles in most countries.
That’s where the moralizing comes into play because you have to ensure you are getting that lower tax rate through legal means.
If you have a company with 99 employees in Boston and one employee in Thailand, you can’t pay that guy in Thailand 50 times the salary of the guys in Boston. It’s just not going to be allowed.
However, can you set up your business offshore to get a more competitive tax rate? Absolutely. And if you run part of your business in a low-tax jurisdiction and part in a high-tax jurisdiction, I have no problem with apportioning the proper tax revenues where they belong.
We don’t come across tax treaties as much in what I do because I choose not to work with big corporations. I work with individual people who are becoming nomadic and their businesses are nomadic, but tax treaties exist for a reason and so that’s a possibility for some corporate structures.
Tax evasion is the old-school approach to offshore where you’d set up a numbered Swiss bank account and then simply not report that money. Numbered bank accounts do not exist anymore. And reporting is now clearly and legally the obligation of all US citizens.
In the age of transparency, we have FATCA, FBAR, huge IRS penalties, and the CRS (the common reporting standard) for the rest of the world with 104 countries signed up to share information as of 2018.
The days of hiding money are over. Transparency is here.
So, sure, are there still ways to do it? I suppose. There’s plenty of dopey structures where people try and put their friend’s name on something to get past reporting requirements. But most of the time, even these “genius” ideas backfire because then the friend has a tax problem.
Do I recommend hiding the nature of money or the true loaner or evading taxes? I don’t.
Tax avoidance is what is legal. It’s up to you to determine if it is moral. And, in my opinion, if you can establish your business through legal practices, I don’t see a reason not to do that.
What is not legal is tax evasion – hiding money, not reporting earnings, etc. Of course, that’s illegal. And it is definitely not recommended.
This is what the media wants everyone to believe that people are doing offshore: hiding ownership from law enforcement authorities, dealing in corrupt practices, stashing the proceeds of crime, financing terrorist activity, laundering money, etc.
And, of course, this is illegal.
But the reality is that there are millions of people who just live overseas. They’re traveling, they’re digital nomads, they’re expats, and they choose to base their operations in the most convenient place, which often isn’t back home.
Again, the politicians and the people who want to spend your money don’t like yachts being registered to the Marshall Islands. They’d rather you register in the US where they can charge you a fortune. But if you have a yacht and you’re not docking it in the United States, why would you pay 10 or even 50 times the taxes to the United States when your yacht is not using any of their services?
But thanks to all these criminal activities and the fact that certain banks have been involved with them, the people who suffer the most are those who run legitimate businesses. People have their accounts closed at banks like HSBC in Hong Kong every day. I just had a friend who had his account closed at an OSBC in Singapore.
So, while criminal activity certainly exists offshore as it does everywhere else, the vast majority of people using offshore companies and banks do not do so to get away with illegal activity.
Most of the reasons to use an offshore company are legitimate. Half of them are legitimate by any measure and are potentially tax neutral. Most of the remaining reasons are legal, although morally debatable. And only two of the reasons are completely illegal.
The small number of reasons that are actually harmful and illegal are mostly overblown to make everything else on this list that is legal and legitimate seem like shady or even criminal activity.
The moral debate is mute in my opinion. The politicians make the laws. We don’t. We just follow the laws. So, if the politicians want to complain that people follow their laws, that’s their problem.
Of course, the people who want free money from the government or wherever else want to moralize the issue. But, quite frankly, if I’m going to pay tax I want to pay it somewhere where they respect my values and they respect me.
For me, that’s reason enough to go where I’m treated best.
I think I watched the exact same presentation by the do-gooder tax guy this week… I understand what he’s trying to do… it’s like throwing stones at your enemies at people like you and me.
But good for you for taking it on the chin Andrew, and very nice article.