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.