Nasir Pasha, Esq.

Six Myths about Offshore Corporations

Organizing under the laws of a foreign jurisdiction, probably in the Caribbean, has a certain cachet, not to mention a faint whiff of illegality.  Is it a good idea for small business?  Not unless you have a particular reason to set up your business in a foreign jurisdiction.  Let’s explore six areas of possible misunderstanding about international business corporations or offshore corporations.

Isn’t it Illegal?

Every jurisdiction has its own laws about setting up a business. The laws of Panama are not the same as the laws of Belize or Switzerland. You would clearly need competent local counsel to give you unbiased advice about the laws of that country.  If done correctly in accordance with the requirements of the foreign jurisdiction, there is nothing illegal about establishing an offshore corporation.  Neither is it prohibited by U.S. law.  Using a perfectly legal business entity to commit illegal acts gives you no protection, though.  That is against the law.  Because of a history of some dodgy dealing, you should anticipate at least some negative perception about establishing an offshore corporation.

Can I Reduce My Taxes?

Remember that at this point, you will be dealing with two layers of tax law — the tax laws of the host country and U.S. tax laws.  Many Caribbean countries, for example, seek to encourage foreign investment with very low corporate tax rates.  The benefits vary widely from one country to the next, so do your homework carefully.

If you are a U.S. citizen and earn income from an offshore corporation, you must pay U.S. income tax on that money.  Make sure that your attorney or accountant has thoroughly explained Controlled Foreign Corporation (CFC) rules to you.  Finally, some  suggest that you may increase your risk of being audited if you establish an offshore corporation.

Is it Risky?  Can I Protect Assets from Creditors or Litigation?

There is always some risk in moving assets to an offshore country or location. As with anywhere in the world, you need to be careful about whom you do business with.  Generally, however, foreign countries with strong legal systems provide protection from fraud that is comparable to the protection that you have in the U.S.

You may be able to shield assets from creditors or protect them from adverse legal or business developments. The extent of that protection may depend on treaties between the host country and the U.S.  That protection may also disappear when and if you repatriate the assets.

What About Privacy Protections?

Some of these jurisdictions have stringent financial secrecy laws.  This may make sense as a defensive posture, but can make growth difficult.  It may be harder to attract potential financial partners or investors if they cannot determine what your company is worth.  The same is true of lenders, who may be additionally reluctant to work with someone against whom they have no effective legal recourse.

Are There Trade Restrictions?

It depends on your industry and the host country of your IBC.  Trade benefits designed to help U.S. businesses may not be available to offshore corporations. Some offshore companies are also limited in their activities because of restrictions placed on them host jurisdictions.  This is an area that will require some painstaking research about your particular offshore destination.

Is it Expensive to Set Up?

The legal and financial planning necessary to make an offshore corporation work well for you is not likely to be cheap. It may be worth it, though.  In addition, as in any U.S. state, there are likely to be incorporation and registration fees for an offshore company. There may also be certain minimum thresholds for investment and some host countries require the investors to own property in the country.

So, as an entrepreneur, should I set up my business as an offshore corporation?  The advantages in terms of low corporate tax rates, privacy protections and the protection from creditors would have to weigh heavily against the disadvantages of cost and limited growth potential.  It could be a close question, so the extent of your due diligence is going to be important.

  • How to Protect Trade Secrets

    January 26, 2016

    Coca-Cola’s recipe for its soda is supposed to be one of the best kept secrets ever. The original recipe is said to be kept in a vault in the company’s Atlanta home where visitors to …

  • When the Boss Sells the Company

    December 11, 2014

    I once worked for a company that had been rumored, maybe, at some distant time in the future, possibly, but not certainly, perhaps in connection with a potential sale or not, to be tentatively considering …

  • Changes Afoot in Texas Noncompete Law?

    November 27, 2014

    The Texas Court of Appeals 2013 decision in Nacogdoches Heart Clinic, P.A. v. Pokala raises some puzzling questions about the direction of noncompete law in Texas. It makes sense from a public policy perspective, but …

  • What Should I Pay My Employees?

    October 21, 2014

    If your small business is about to begin to hire its first employees, you may be puzzled about how much to pay them. If you offer too little, you won’t be able to hire who …

  • Should You Finance the Sale of Your Business?

    September 30, 2014

    Truthfully, most sellers don’t want to take back paper. An all-cash deal often looks like the easiest and cleanest way to get on to the next venture, much preferable to waiting for another 5 to …

  • The Cost of Converting Independent Contractors to Employees

    October 06, 2015

    While Uber may be receiving the lion’s share of the attention on the topic, there has been no shortage of court rulings, IRS audits, and labor decisions on the issue of workforce misclassification. With a …

  • Can You Get Fired For Being Racist? [e215]

    August 17, 2015

    Nasir and Matt discuss how racism led to employees getting fired and another instance where a judge overturned a decision to terminate a racist employee. Transcript: NASIR: Okay. Welcome to our podcast where we cover business in …

  • Product Liability 101 for Small Importers

    September 16, 2014

    Global sourcing has lots of exciting potential. The recent entry of onto the global stage along with others such as the FITA Buy/Sell Exchange, Euro Pages and Global Sources seems to presage a new …

  • What to do When a Customer Accuses an Employee of Theft

    July 02, 2015

    This is one of those managerial headaches that may make life on a desert island look attractive. You don’t want to lose the customer or expose your business to accusations of wrongdoing, but you also …

  • Erotic Data on Employee Smartphones: What Can an Employer Do?

    March 03, 2016

    The topic of teachers getting into trouble over sex-related matters has become almost a sub-genre of American journalism for several decades now. In the late 1990's, Washington schoolteacher Mary Kay Letourneau became a tabloid feature …

Read More