Establishing an offshore corporation is not as difficult as many people think. It’s also a practical move that can provide benefits in a number of situations.
Before taking this step, it pays to learn more about what an offshore corporation happens to be, how it can be structured to provide the widest range of benefits, and why it pays to remain up to date on current domestic tax laws and how they relate to your corporation.
Here’s some basic information that will help you get started.
What Constitutes An Offshore Corporation?
The basic definition of an offshore corporation is an entity that’s established in a country other than the one where the owner resides and is a citizen. In a broader sense, it’s a corporation that’s set up and operates in some way within a nation that offers a more favourable tax environment.
In some cases, you can set up the corporation in what’s considered a zero-tax country. That doesn’t mean you won’t pay local taxes, although that’s possible in some nations. What it does mean is that how your tax liability in your home country is determined may not involve any of the assets held by the offshore corporation.
What’s The Process For Establishing An Offshore Corporation?
In some ways establishing an offshore corporation is much like setting up a domestic one. You do need to settle on a name for the entity and there is the need to register it with the proper authority. Doing so involves preparing and submitting the documentation required by that registering agency. At the time your corporation is granted legal status in the country chosen, it’s also necessary to render any applicable fees and charges.
One aspect that’s a little different is determining which offshore location would work best for your new corporation. This requires looking closely at the incentives offered by different countries as well as the tax requirements involved. It helps to understand what information, if any, that country reports back to domestic tax agencies. You also want to know what sort of local taxes you may need to pay, as well as how much in annual fees you must pay in order to maintain the corporation.
After deciding which country is the right one for you, check with the banking authorities there to identify the specific process for setting up your corporation. In some nations, those same authorities can handle the details on your behalf.
Remember that your offshore corporation may be part of a broader plan to protect assets that you place in different types of offshore banking and investing accounts. By holding them through the corporation, they become less subject to the same laws that apply in a domestic setting.
How Would I Benefit From Setting Up An Offshore Corporation?
There are several possible ways that you could benefit from establishing an offshore corporation as part of your plan for savings, retirement funds, and investments. Here are some examples to keep in mind:
- Protect your assets from changes in the political climate. Having your assets held by a corporation in a relatively stable nation means they are not subject to shifts in the political arena that ultimately undermine the domestic economy. Many people have experienced losses due to recessions and other unfortunate economic conditions. If your assets are held within an offshore company, they are likely to be protected to a greater degree than your domestic assets.
- You can utilize the corporation to buy and hold real estate. This is a great approach if you eventually plan on retiring to the nation where the real estate is found. In the interim, you can rent out the property and generate income. There’s still the need to pay for maintenance and property improvements. You’ll also need to pay local taxes associated with ownership. All of this can be done through the corporation.
Keep in mind that current US laws would require you to pay on any passive income generated by the properties. That includes any rent collected after you’ve covered local taxes and maintenance expenses. There is a specific form you would include with your annual federal tax return. In some cases, you may be eligible to convert the corporation into what’s known as a disregarded entity. While there’s still a form to file, the positive effect on your tax obligation makes it worth considering.
- Assets held in the corporation are typically protected from any type of legal action taken against you. This would mean if you are sued and the outcome is not in your favor, the assets that are in the possession of the corporation cannot be seized to settle the judgment. Even if every penny in your domestic accounts are seized and every other tangible asset is used to settle that judgment, the assets in the offshore corporation remain intact.
- The corporation can hold assets that you want to grow as part of your retirement plans. Investments, as well as term deposits and lifestyle accounts, can be established in the company name. You can also establish trusts in this manner. Doing so allows you to take advantage of investment opportunities that offer the potential for greater returns. As a means of generating wealth for later years, this approach is difficult to beat.
- Don’t overlook the benefits of accessing funds that you can use while traveling abroad. A debit or credit card account held through the corporation can help you pay expenses with greater ease. You may even enjoy a more favorable rate of exchange by using that card rather than one of your domestic cards. Along with paying general expenses, this approach may allow you to settle any medical costs with greater ease.
Why Should I Be Mindful Of Changes In Domestic Tax Laws?
Domestic laws affecting ownership of international accounts, even those held in an offshore corporation, are subject to change. In some cases, those changes may be in your favor. At other times, you may need to restructure your international assets in order to remain in full compliance with domestic tax laws. The only way you will know if and when any change occurs is to stay on top of those changes, including when they will go into effect.
Remember that while accountants and others who manage your taxes are likely to advise you of the changes, knowing about them is ultimately your responsibility. A perk of staying on top of the changes is that you have the opportunity to respond now and enjoy the best possible outcome. The alternative is to create additional difficulties for yourself by not finding out about the changes until they are already in effect.
There are a number of advantages associated with establishing an offshore corporation as a way to manage your foreign assets. Talk with investment professionals today and determine how this approach could work for you.
Even if now is not the ideal time, you could begin setting funds aside and work toward the day when this type of financial strategy does become practical in your case.
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Luigi Wewege is the SVP, and Head of Private Banking of Belize based Caye International Bank, a FinTech School Instructor and the published author of The Digital Banking Revolution. You can follow his posts on trends shaping the banking and financial services industry on Twitter: @luigiwewege
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