This word is widely used in business vocabulary and media publications, but frequent use does not mean proper use. Offshore companies often mean only illegal schemes of doing business with the help of shell foreign companies. This is not entirely true. Offshore zones are a legal option to reduce the fiscal burden on a commercial organization. This method is resorted to by many well-known companies - BMW, General Electric, Microsoft, Pfizer and others.
Taxes reduce the profitability of any existing business, so the owners of the companies do their best to minimize fiscal payments. For commercial organizations, there is a legal way to reduce contributions to the state treasury (that is, an option that does not contradict the current legislation of the country in which the company operates). One of the most common schemes is the registration of a company in a foreign jurisdiction (a particular country or a special part of its territory), where there are conditions that are most conducive to reducing taxes.
This option has several advantages. The main one is that such an organization makes fiscal payments at the place of registration, and not in the country of operation. Due to the difference in legal requirements, this helps to significantly reduce costs. In total, there are three options for choosing jurisdictions for registration, each of which has its own advantages in relation to a specific situation:
- A classic offshore (translated from English offshore means “offshore”) with a lack of reporting and a symbolic amount of payments to the state budget. It is implemented in the countries of the Caribbean (Bermuda, Bahamas, Belize, etc.) and other small states, which are called "tax havens." Attractive business conditions attract many Russian entrepreneurs here. The process of moving companies offshore is called offshore, and today it is a serious problem of the national economy.
- Low tax jurisdictions. Already by definition it is clear that fiscal deductions are present here, but in a reduced amount. A good example of such jurisdiction would be Cyprus. It used to be a popular offshore of the classical type, but after the country joined the European Union (May 2004), tax reporting and audits became mandatory for registered organizations here. If classic offshore companies are suitable for minimizing fiscal payments, then low-tax jurisdictions are optimal for capital accumulation or international payments.
- Onshore (onshore means "onshore"). Registration in the jurisdiction of the place of business. This implies the payment of full taxes without any benefits, but with the possibility of lowering them if certain conditions are met (for example, choosing the optimal fiscal deduction regime).
The first two options fit the meaning of the word offshore. This term can be explained as a jurisdiction where there are preferential conditions for doing business by third parties. The above definition refers to the territory itself, and not to a specific organization, so expressions such as "offshore company" will be incorrect. The very concept of jurisdiction is not always identical to a particular state. This may be a separate territory within the country, for example, the American state of Delaware, where convenient opportunities have been created for registering and implementing business projects.
Regardless of the location of such jurisdiction, the defining feature of an offshore will be a significant reduction in the tax burden for registered organizations whose activities are geographically located elsewhere. The possibility of minimizing fiscal payments leads to the fact that the creation of such firms is often formal in nature and is carried out by dummies. The different options for offshore jurisdictions are shown below.
This area includes Andorra Luxembourg, Switzerland, and other countries / territories. The data on the owners are not classified here, privileges apply only to certain types of business, audits are required here and other ways of counteracting black bookkeeping are applied. All this leads to the fact that these jurisdictions:
- have a high level of reputation;
- many financial analysts are not considered offshore in its purest form;
- require a higher payment for the maintenance of the company than in other offshore territories (it can reach several tens of thousands of dollars per year, compared with $ 1000 in the Bahamas).
The most famous representatives of this category are the countries of the Caribbean - Barbados, Aruba, Bermuda and others. The territories of the Indian and Pacific Oceans (Cook Islands, Vanuatu, etc.) are not so popular, in which traditional taxation is also replaced by an annual contribution. Accounting can not be kept here, and the closed information about the owner of the company makes the island offshore very attractive for dubious or illegal businesses. For this reason, the organizations registered here cause distrust among other businessmen who are wary of working with them.
Certain state territories / entities may also introduce preferential tax treatment. For example, this applies to individual US states or the island of Labuan (Malaysia). There are Russian offshore entities, they provide for the provision of exemptions not in all types of business, but only in certain areas (tourism, port, etc.). For example, the number of domestic territories of technology-innovative orientation include Dubna, Tomsk, Zelenograd. Until 2004, entire regions could provide tax benefits - Chukotka, Kalmykia, Mordovia.
Offshore companies and organizations
A feature of such firms is specialization in specific areas of business that help to effectively use the advantages of offshore companies (in short - OK). The most common activities of OK are:
- Trade. Along with sellers of goods, this category includes manufacturers and carriers of these products.
- Transport services. In this case, OKs register yachts or vessels on more acceptable conditions than in other countries.
- Trusts They are organizations that control the transfer and management of trust in the interests of a third party.
- Banks These structures are created to concentrate capital or conduct transactions with similar institutions or third-party firms.
- Insurance. Such firms organize large enterprises to accumulate reserve funds abroad.
Feature and Features
The work of a classic offshore company is not like the activities of a regular company. The main differences are as follows:
- QA activities take place outside the country / jurisdiction in which it is registered.
- Such firms do not pay tax (with the exception of the annual registration fee, the amount of which is insignificant, compared with the amounts that they would pay in Russia). The provisions that help free entrepreneurs from it are official in nature, enshrined in law and are part of the financial policy of this state to attract capital for the country's economy.
- The registration and management procedure is simplified. The use of nominee (dummy) directors is common. Requirements for organizational meetings of the company are formal.
- Tax reporting, auditing and foreign exchange controls are minimized or absent.
- The anonymity of the owner of the company for third parties is protected by the law of offshore jurisdiction. Moreover, the principle of confidentiality does not apply to the process of registration of a company where documents of the final beneficiary (beneficiary, actual owner) are required.
Taxation and financial reporting
Minimization of fiscal deductions is the main advantage of opening OK. Depending on the type of offshore jurisdictions, the principle and amount of these payments varies:
- For classic offshore. Taxes in the direct sense of the word (percentage of profit, etc.) are absent here, and all fiscal deductions are replaced by an annual fixed fee. This amount is included in the cost of the package to accompany the company (for example, for Belize, its size is $ 900). At the same time, for most of these territories financial reporting is not required and an audit is not carried out (as an exception, you can bring Seychelles, where since 2014 there is a formal requirement for accounting). Information about the owner of the company is closed to third parties.
- For low tax jurisdictions. Financial reporting and auditing are mandatory here. Fiscal deductions are present in a reduced amount (compared to Russian rates). For example, income tax in Cyprus is 10%, for our country its minimum amount is 15.5%. Information about business owners is not confidential and is disclosed in the usual manner.
How to open a company in offshore
Interested in preferential terms of doing business, many merchants seek to register a company in a tax haven or jurisdiction with reduced fiscal payments. There are two ways to do this:
- Independently. At the same time, the businessman personally visits the chosen jurisdiction and resolves issues on the spot. The disadvantages of this method include the cost of a trip abroad, the need to know the language and laws of this state. Often this method is used when registering firms in European low-tax jurisdictions.
- Through intermediaries. This method shifts all the cares of registering OK to a third-party organization. Choosing an intermediary with extensive experience, a businessman saves his money and time by getting a turnkey company. In most cases, the registration of OK in the countries of the Caribbean and Pacific regions is resorted to this method. The current rates start from 750 euros for registering a business in Belize and Seychelles up to 2,900 euros if the organization is opened in the Dominican Republic.
The first acquaintance of Russian businessmen with offshore companies was due to intermediary organizations - in 1991, an office of the Swiss company Riggs Walmet Group was opened in Moscow. She was involved in the registration of companies in low tax jurisdictions. The convenience of cooperation with an intermediary office also lies in the fact that interaction with it can take place on a long-term basis. Some of the most common services offered by such organizations include:
- selection of a suitable offshore zone for a particular business;
- a full package of services for registration (including the development of statutory documents, obtaining certificates, stamps, etc.);
- opening bank accounts;
- legal support of activities;
- providing nominations for nominee administration;
- comprehensive office services (phone number, faxing, call forwarding, secretary, etc.);
- courier services, mail delivery.
Various algorithms for increasing income with the help of offshore companies are mostly based on the reduction of tax deductions due to the peculiarities of Russian and international legislation. Such multipass schemes can be used by up to 3-4 companies, and are based on:
- On a tax-free regime in classic offshore jurisdictions. A sufficient number of examples on this topic have been considered above.
- On the application of the Double Taxation Treaty (SID). This international document has been concluded in Russia with a number of countries and helps to reduce fiscal deductions at the place of registration of a foreign company. So, if a Russian shareholder receives dividends from a company with registration in the Russian Federation, then the tax is 15%, and if payments are made to the organization’s account in Cyprus, then the deduction will be only 5%. Our country does not have SID with tax havens, which makes direct offshore transactions meaningless and increases the number of participants in many schemes.
There are several dozen workable options for increasing income using OK. The most common are the following schemes:
- Transfer pricing. It is used to optimize fiscal payments during export or import.
- Construction. Requires subcontractor searches for basic work.
- Production. It can be used in the production of a wide variety of products (for example, forms for staff of a supermarket chain).
- Royalty payments. It implies optimization of the amount of payment for the use of intellectual property.
- Registration and opening of new enterprises. Minimizes tax deductions when paying dividends to the founder of the organization.
- Logistics and freight. Reduces fiscal deductions for international cargo transportation.
In this case, an offshore company acts as an intermediary between the supplier and the buyer of the goods. The specific implementation of this scheme depends on the specifics of the trading operation. The algorithm of actions for export will be as follows:
- A Russian company sells goods to a foreign company not directly, but through OK. The price is set at the minimum.
- Further, the offshore company sells the goods to the real buyer at real cost.
- As a result, the entire amount for the transaction is sent offshore, and the Russian company does not receive profit, and for this reason does not pay tax on it.
When importing, the algorithm of actions is reversed, but there is a need to reduce customs duties. In this case, the cost of the goods is artificially reduced to the minimum size of fiscal deductions - this amount the buyer can pay the seller directly. The importer receives the rest from OK. As a result, the goods were imported into the country with great savings on duty (and in some cases, for example, when paying a single tax on imputed income, the buyer can also expect a VAT refund).
By implementing this scheme, an offshore organization acts as a general contractor. All money for the construction work is credited to her account. The second company is a resident (registered in Russia), it acts as a subcontractor. The net value of the work performed and the materials purchased are transferred to him. As a result, the income of this resident company is insignificant, which minimizes fiscal payments, and the bulk of the profit is concentrated in the offshore and is not taxed.
This option is similar to the previous two, because it also uses intermediaries in the sale. In this case:
- A manufacturer (for example, a garment factory) receives from OK payment for materials and services, thereby minimizing its fiscal contributions with a slight profit.
- The finished product is shipped to an agent who sells it to the final buyer and receives his commission for this.
- The final amount, not taxable, is transferred to OK.
This scheme involves the registration of a trademark (or other intellectual property - copyrights, patents, etc.) in an offshore jurisdiction. In the future, the right to use it, for a set fee (royalties), is transferred to the Russian company.Often this is done not directly, but using an intermediate link, through another company with a suitable state affiliation (for example, located in Cyprus).
The use of an intermediate link (another organization) is necessary to minimize fiscal payments. This scheme uses the agreement concluded between our country and Cyprus, which helps to avoid double taxation. Therefore, the fiscal rate for the Russian counterparty is zero. If the payment was carried out directly to the offshore, then it would have to pay 20% of the royalties to the treasury. The counterparty in Cyprus receives its commissions, most of the transfer (95-98%) is transferred to OK, and the Russian company reduces its taxable profit.
Registration and opening of new enterprises
This scheme uses a double taxation avoidance agreement, therefore it is not suitable for classic offshore companies, but can be implemented for commercial structures from low-tax jurisdictions. For example, a company from Cyprus establishes a Russian subsidiary, transferring to it a significant part of the authorized capital. Moreover, the payment of dividends in favor of the parent organization is subject to a special tax of 5% (at the standard rate of 15%), which makes the total income higher.
Logistics and freight
This is another scheme that successfully applies SIDN. In this case, the prerequisite is the international nature of the transportation of goods. The Cypriot company that provides the service pays at the place of registration a reduced tax compared to the situation when the payment would be made to the Russian organization. Further offshore transaction minimizes this amount.
How are offshore zones regulated?
Developed economic countries are interested in controlling financial transactions conducted by OK. The main reasons for this have already been discussed above:
- such firms minimize the payment of tax at the place of direct business;
- modern schemes for withdrawing money to offshore accounts are ideally suited for laundering criminal capital (while, in practice, most OKs have not been noticed in this);
- the transfer of assets to the offshore zone makes them inaccessible to control of third-party states.
Globally, control of offshore zones is aimed at identifying countries that do not comply with tax standards for the exchange of information, facilitating the procedure for identifying owners of OK and countering criminal cash flow. This regulatory activity is carried out by two international structures:
- Financial Action Task Force (FATF, FATF). This organization issues special rules to effectively counter the legalization of criminal proceeds and the financing of terrorism, known as the “40 + 9 recommendations”. The legal arrangements developed by the FATF are binding on UN member states.
- Organization for Economic Co-operation and Development (OECD, OECD). One of the activities of this structure is the monitoring of countries and territories with a view to providing them with information on tax deductions and financial transactions of companies registered in them. Violators may be subject to economic sanctions.
There is a special OECD classification based on the criteria for jurisdictions to apply international accounting, taxation and audit standards. According to it, all states and territories are divided into three categories:
- Introduced international tax standards (the so-called whitelist). These include the United Kingdom, China (excluding Hong Kong and Macau), Russia, the USA, Germany, France, South Korea and other countries with developed economic potential. Along with them, this category includes the United Arab Emirates and Seychelles, which also support the OECD requirements for tax information exchange.
- Committed to the implementation of these standards (gray list). These are typical offshore companies (Aruba, Belize, Vanuatu, Cook Islands, Panama, etc.) and some world / regional financial centers (Austria, Belgium, Switzerland, etc.) that have not managed to fully apply the necessary requirements.
- Not introducing global tax standards (blacklist). These include Costa Rica, Labuan, Uruguay, and the Philippines. Economic sanctions are applied to these countries / territories, and companies from these countries will have an increased interest in the fiscal authorities of our country. Moreover, of these jurisdictions, only two (Labuan and Costa Rica), which are not popular with Russian entrepreneurs, are among the offshore ones.
Russian legislation and offshore
In most countries, OK financial transactions are under special control. The basic regulatory acts governing the activities of offshore companies in Russia include:
- Federal Law dated 13.07.01 No. 115-ФЗ "On Counteracting the Legalization (Laundering) of Criminally Received Incomes". It says that cash transactions with banks and companies of countries and territories that do not apply global tax standards, with a transaction value of more than 600,000 rubles, are subject to mandatory control by the Financial Monitoring Committee.
- Order of the Ministry of Finance of the Russian Federation of November 13, 2007 N 108 "On approval of the list of states and territories providing preferential tax treatment of taxation." This document provides a special tax rate for a number of financial transactions of offshore companies that minimize the benefits they receive from using foreign registration.
- Tax Code of the Russian Federation. Changes are constantly being made to it, which relate to increasing control over the activities of OK by fiscal authorities and the abolition of a number of benefits for internal offshore zones.
Advantages and disadvantages
A businessman who wants to register OK must weigh all the pros and cons of this action. Benefits include:
- Preferential taxation. By registering in an offshore company is exempted from most of the fiscal deductions that it would pay in its country.
- Placement of assets abroad. The company's accounts are outside the jurisdiction of Russian law, which excludes (or greatly complicates) the application of arrest to them. This requires a court decision at the location of the offshore and other actions that are difficult to control / coordinate from Russia.
- Minimizing risks in critical situations. In addition to the unavailability of the company’s accounts, it is very resistant to raider seizure, and for creditors of such a company to receive debts in the event of default or bankruptcy will be very difficult.
- Confidentiality of information about the owner (ultimate beneficiary). Using a system of dummies in such schemes allows you to carefully hide the true owner of the company. As in the case of the seizure of accounts, its identification is possible only by decision of the court at the place of the offshore, with very large organizational and legal difficulties of this process.
Offshore companies can also highlight the disadvantages. These include:
- Extreme dependence on the nominee hired director. In fact, this person is interested in their own benefit, and not in the success of the enterprise, which largely determines the algorithm of its actions (especially in a critical situation).
- Great interest from government. The registration of an offshore company indicates the desire of the entrepreneur to evade payment of taxes at the place of business, which should increase the difficulties for him from the fiscal services (for example, in the form of creating various restrictions).
- Distrust of potential partners (in the organization of joint projects, etc.). The reasons for the cautious attitude are understandable, because the owner of an offshore company acts as a person who seeks to profit bypassing the generally accepted rules (to put it simply - to cheat).
- Difficulties in obtaining loans. Such a borrower would not be desirable for banks from Russia - its accounts are located abroad, which complicates the settlement of the problem in the event of a critical situation. Such a client is also not attractive for financial organizations of an offshore company - he conducts business in another country, and can easily transfer all available funds there.