Offshore Company Formation: Why, Or Why Not?

Offshore company formation, in its simplest terms

, is setting up a company abroad. Perhaps because of the complexities associated with expanding operations overseas, offshore business formation has acquired an image of a luxury only large or very rich firms can afford. But nowadays setting up a business overseas can be remarkably cheap, safe and easy. Offshore company registration can now occur without even leaving your home and in many jurisdictions the whole process of setting up a business takes a matter of days. And in these turbulent times with increasing risks and constantly changing costs, an offshore company may be a necessity rather than an option for firms seeking growth, or survival.

Recently, offshore company incorporation has gained, unfairly, a negative reputation: being associated with tax evasion and money laundering. Few instances of unlawful behavior by individuals do not change the fact that offshore company formation is still a perfectly legal and legitimate strategy. In a climate where every cent matters for company performance, it is natural all companies should look for ways to become more tax efficient. Different jurisdictions have different tax attractions; some offer attractive tax rates on income, others on dividends. Jurisdictions like the British Virgin Islands and Labuan have gained reputations as tax havens because of their favourable taxation policies.

But the advantages of offshore company incorporation extend far beyond just reduced taxation. The other major advantage of offshore company formation is favourable regulation in jurisdictions abroad. This is especially relevant for firms looking to manage risk and reduce costs associated with bureaucracy. The global financial crisis has seen a backlash against financial markets, which has resulted in increased regulation across the board in many markets. In this environment, offshore financial centers can act as the perfect base for firms constrained by regulation. For instance, offshore firms can use deregulated markets to invest in financial products that help them manage risk better.

An offshore company can even improve the revenue side of businesses. Offshore financial centres can allow financial companies to diversify their products because of favourable regulation. New markets open up after setting up an offshore company. In an age where markets are saturating in the West, setting up a business in a world-class jurisdiction like Singapore or Hong Kong, allows companies to tap in to the rapidly growing markets of Asia. Offshore centres have become the favoured mode of investment into emerging markets. For instance in 2009, 44% of FDI entered India through Mauritius while in Brazil over two thirds of FDI came through offshore centres.

Other advantages of offshore company formation include increased privacy, asset protection, lower capitalization, and lower labour costs. In this increasingly globalized economy, the question now is no longer whether to incorporate overseas but rather how, when and in which jurisdiction to incorporate in?

by: Lawrence Smith

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