Last Updated: September 17, 2020 Dateline: Belgrade, Serbia What is the best country for incorporating your company? If you are doing business in a high-tax country, you may have considered incorporating offshore in order to reduce your taxes. But knowing that an offshore company can help lower your taxes and knowing which jurisdiction is the best place to register your business are two very different things. If you’ve searched the internet, you’ve no doubt seen offers to incorporate a new company in the British Virgin Islands, Panama, Hong Kong, or even The Gambia. In each case, some “lawyer” or corporate service provider in that country was likely ready to sell you a shiny object that may or may not have solved your problem. The reality is that there is no universal best country to incorporate your business overseas. There is no perfect zero-tax country for offshore company formation or online business where everything will magically fall into place for absolutely every individual. I always say that the guy who sells Panama companies will sell YOU a Panama company if you let him, promising that his solution will work for everyone like a bag of magic beans. Sadly, there are a lot of guys on the internet who charge low rates for off-the-shelf offshore companies with no customization, no support, and no help maintaining tax compliance. These guys do the old bait-and-switch, offering a cheap price on – for example – a Panama company, but then suggest that you incorporate several companies and an offshore trust, just for good measure. But the truth is that the simplest structures are often the best offshore company structures, especially if you are a US citizen with offshore reporting requirements. Most importantly, the best offshore company jurisdiction for you is different than for anyone else. Everything from your citizenship to what you sell will determine which option for offshore company formation is the best for you. Yet, most people continue to treat one of their most important tax-saving assets like the decision between Fuji and Granny Smith apples at the grocery store. All they want to know is where they can get the cheapest offshore company formation. But before you form an offshore company, you need to ask yourself some questions to determine the best structure for you. Could it be the cheapest? Perhaps. But probably not. What this type of diagnosis will ensure is that your structure is fully compliant with the laws everywhere you operate and where you live while also lowering your taxes. In this article, I will share the top ten questions I go over with clients to determine where to help them set up an offshore company. This is not – by any means – an exhaustive list, but it will point you in the right direction and get you thinking with an offshore mindset about your business and the ways you can capitalize on opportunities overseas. https://www.youtube.com/watch?v=486kqOxITz8&t=7s
HOW TO CHOOSE THE BEST OFFSHORE COMPANY
Going where YOU are treated best requires a very personal and unique strategy in order to be successful. That is why doing a little diagnostic work to determine your best options for offshore company incorporation is advisable if you want the structure to actually work. If you don’t want your new company to work, ignore this article and throw your money at the incorporation service that charges $7 less than the next one. But if you want my advice, don’t fall for the hype. Do your research and find what will work best for you and your company. The best offshore company structure and the best offshore company location are going to be personalized to you. And there are many things that need to be taken into consideration to determine your best offshore company jurisdiction. Here are the questions you need to consider:
1. WHERE DO YOU LIVE?
Where you live is one of the most important parts of where to form an offshore company. Thanks to factors like tax residency, offshore income exclusions, and CFC rules, merely earning income in a foreign company while living in a high-tax country will NOT help you save taxes. The saying goes that in our modern era of transparency, “Moving your ass is more important than moving your assets.” While there are ways to reduce but not eliminate taxes by offshoring your business even while you personally remain in a high-tax country, this will involve far more careful planning (and possibly higher audit risk.) Furthermore, living in some countries may make you ineligible to form a company there, or at least to access the offshore tax benefits available in the country. Knowing where you live, where you want to live, and the type of lifestyle you want to lead is actually important when forming an offshore company because of the different tax systems around the world and how they influence other parts of the offshore equation. While you may have a zero-tax company in Seychelles, your residence in Belgium may cause you to pay corporate tax there instead. In this way, understanding how the system of taxation where you live works plays a role in where to incorporate offshore.
2. WHAT IS YOUR TAX HOME AND CITIZENSHIP?
Where are you a citizen? Where do you pay tax? Are they the same place or are they different? The country that you consider your tax home is going to affect the rest of the factors we will address in this article and change how the structure you’ve built works. This largely applies to US citizens because the US will always be their tax home unless they renounce their citizenship, and that carries with it many legal obligations and tax burdens. But it is also important for other western citizens from places like Europe, Canada, and Australia to understand the importance of establishing a tax residence outside of their home country to make their offshore structure work. The mistakes people make with offshore companies in regards to their citizenship and tax home usually start when they hop online and research “best places to incorporate offshore” and end up on the phone with a firm on an island like Nevis or Seychelles with favorable corporate tax laws for foreign investors. Oh, and the incorporation fee is cheap. What many offshore promoters will fail to tell you is that just because your income isn’t taxed where the company is incorporated doesn’t mean that it won’t be taxed where you live or where you are a citizen. For example, many US citizens believe that merely not repatriating money to the United States means it is not taxed there. Nothing could be further from the truth. In both citizenship-based taxation systems like the United States and residential-based taxation systems common in the rest of the West, you are liable to pay taxes on your worldwide income. It doesn’t matter where you earned it or if it has ever entered your tax home, if it’s your money, you will pay taxes. That is, of course, unless you structure things properly. Europeans, Australians, Canadians, and others have the opportunity to become tax non-residents of their home countries to avoid paying tax on the profit of their offshore company. It’s not a simple process and where you incorporate may influence where you choose to set up your new tax home, and vice versa. US citizens, on the other hand, may get some tax relief with certain offshore structures and exclusions, but they likely won’t be able to live completely tax-free unless they renounce their US citizenship.
3. WHERE DO YOUR CUSTOMERS LIVE?
This is a question I always ask people when they come to me for help. I go over who their customers are, where they are located, how they market to those customers, and what their presence is in those countries. There are several errors I regularly see offshore newbies making in regards to where their customers live and how that will affect their company structure and overall tax situation. The first is that they assume that they must incorporate where their customers live. It is worth considering where your customers are located, but it may not affect where to incorporate. If you own a frozen yogurt stand, then where your customers live is clearly important because it’s also where your business lives. It is hard to argue that a business physically planted in London shouldn’t pay tax in London. However, for location independent and internet businesses, your customers may be irrelevant. Contrary to what people believe, you can sell to many different countries (including to the US) and ostensibly pay no taxes. In fact, it’s best if you sell to various markets around the world. Selling into one country may require additional planning to ensure that your structure is compliant with that country. Even so, if you set it up properly, you could sell your product into a country without triggering an income tax issue. The trap some people fall into is that they flip this idea around. They live and set up their business in the US, but sell to countries all over the world and think that because they aren’t selling to the US, they won’t have to pay taxes there. That isn’t how it works. The issue isn’t that you’re selling your products to the US. The issue is that your business is in the US. If your business is set up inside the US, it will pay taxes there no matter where the products are being shipped. If all you’re doing is shipping a product into the country, that may not cause an income tax issue. But depending on what percentage of your business is made up of the sales in any one country, that could be an issue. The specific details of where products are coming from and where they are being sold do matter. If you aren’t careful, it can create all kinds of tax problems for you. For example, we recently worked with someone who sold live yoga retreats. The booking and selling took place online, allowing them to control that part of the tax equation. However, since the service was being performed in another country, there was an argument that could be made for where the actual sale was taking place. Where you sell your products has the potential to vastly change how your company is taxed. However, there are ways to create an offshore structure that allows you to sell into one country without paying tax there. The issue is determining where your “nexus” is, and how each country your customers live in deems your activities there. Where your customers live can also impact your choice for the best offshore company if, for example, your customers are American companies who are uncomfortable wiring money to a Belize bank account. If that’s the case, then a Belize company may not be the best idea, even if it is acceptable from a tax perspective. Lastly, some countries – namely those offering IBCs, or international business companies – forbid you from selling to people in their country as part of enjoying a zero-tax rate. Belize corporations are taxed at normal income tax rates, but Belize IBCs pay zero tax so long as they don’t do business within Belize. So, if you want to incorporate in Belize, make sure you don’t have any Belizean customers before you set up shop. The same can be said of many other offshore company jurisdictions.
4. WHERE DO YOUR EMPLOYEES LIVE?
Where your company does work is also an important factor in where to incorporate. That’s because one of the key aspects of business taxation is where the work is being performed. If you go offshore and have employees sitting in a company somewhere working for you, they will be creating a tax nexus in that country. I worked with someone recently who had people in Australia doing customer service. There was some serious potential for a problem there because this customer service team was engaged in business inside of Australia. We wanted to figure out a way to peel the customer service team off of the main business and put them in a separate structure such as a staffing company. That creates more complexity but will reduce the pull of the tax nexus you might be creating for yourself so that you can ensure your business is taxed where you want it to be. If you’re just starting out with the hiring process, it is always better to follow our advice on hiring contractors and building a location-independent team overseas from the get-go. You’ll be able to keep your business as simple as possible while reducing the chance that it’s is going to get caught up in a country’s tax net. Remember, you can set up as many offshore companies as you want, but if your work is being done in the United States, you’ll almost surely owe US taxes. The same goes for your employees and independent contractors. You can hire US citizens to work for you, but if they are doing their work from US soil, you will likely have an issue. The same goes for some offshore jurisdictions. Some Hong Kong companies may qualify for an offshore tax election, but if you or your employees are performing the work from Hong Kong, you will be asked to pay corporate tax there. That means that you should consider where you and your employees live, do work, meet clients, sign contracts, and more before incorporating.
5. WHERE ARE YOUR OFFICES?
This is the same principle for where your employees are located. If you’re selling things through Amazon or doing some kind of e-commerce business where you can manage everything on a computer that just comes in and out of your backpack, you’ll be in a fairly flexible position. But, what if you had a mailbox somewhere? Generally, this won’t be something to worry about, but if you had a mailbox in Texas they will send you mail to the end of your days looking for you to pay $50 because you don’t need to file a tax return. But, what if you have a bigger office somewhere? If you had even a simple virtual office in a state like California, they could find a way to drag you into their tax net. I don’t want anything set up that could potentially force me to pay taxes in a place like California. And if you had an even bigger part of your operation, like a warehouse for staging merchandise, you’ll find yourself get pulled in even more easily. If product is being shipped there, if people are working there on your dime, you’re eventually going to have some expensive complications. That’s going to impact where your offshore company needs to be based and what the entire structure of your offshore plan is going to look like You need to set up your offices in a way that prevents them from infecting the rest of the operations of the company.
6. HOW DO YOU COLLECT MONEY?
How you receive payments and where you collect money for your business could impact where you should incorporate your offshore company. If you’re receiving money from a company like Amazon where they just deposit the money into your account, that makes things a bit easier. In fact, having a US or UK bank account can be easier for getting paid through companies like Amazon. If you receive money through wire transfers for services such as affiliate marketing or consulting, things will be even easier. It makes your situation much more flexible and gives you a lot more choices if people are simply wiring money in. The bigger issue is if you need a merchant account to accept credit cards, or a PayPal account or other customer conveniences. If this is your situation, you will need to strongly consider the quality of the jurisdiction where you set up your offshore company. Most offshore companies are relegated to high-risk merchant providers with poor ease of operations, slow settlement times, and high fees. Traditional offshore companies in places like Mauritius or Labuan or Nevis have little infrastructure for merchant accounts and there is a small and dwindling list of banks that accept their companies. On top of that, PayPal accounts in foreign countries often come with far more restrictions on withdrawing cash as well as higher fees. As a result, you may need to consider a simple two-part offshore company structure in order to accept credit cards. This may mean incorporating your business in a place like the BVI and then setting up a billing company or subsidiary somewhere else. This will certainly create more complexity and add some tax, so it is important to go back to the questions of what you sell, how much you’re selling it for, where you’re selling it, and how you’re getting that money in. US citizens, in particular, should ensure that their offshore company has the ability to open foreign bank accounts in the first place. A company without a bank account is of little use, and many island companies are now being shut out by main banks in the developed world. Just last year, Latvia closed the door to all BVI companies. And while a Bulgarian can get an account at many Caribbean banks, many of those same banks generally refuse to accept US citizens, meaning your company may have trouble getting a bank account. That is why I say that onshore is the new offshore; you must move beyond considering only tiny islands to incorporate. Too many people have called me saying that they got their company and their bank account but it has been a year and they can’t get any money in because their customers can’t pay them. Going for the cheapest offshore company could leave you in a very similar situation. Depending on what you sell, you may be able to set up in Hong Kong and avail yourself of some merchant accounts there. They have become notoriously difficult and are often only available to local businesses paying taxes, but there are a few good options now. For example, Stripe is now in Hong Kong, but they also require a site visit in most cases, meaning you’ll be taxed if you use them. Again, some people have had success with them, some haven’t. However you go about it, factor in how you’re going to get paid first. The fewer the payments and the more trusted the parties, the better and easier it is.
7. HOW DO YOU PERSONALLY GET PAID?
How do you take money from your company? This is potentially an issue when determining where to incorporate overseas because it may be important for your home country and offshore company tax systems to “match up.” Recently, I worked with someone who was living and working in Hong Kong using a Hong Kong company. As many company owners there do, he took dividends in lieu of a large salary because Hong Kong allows its company owners to do that. However, this gentleman was also a US citizen, and although he qualified for the Foreign Earned Income Exclusion and could exclude about $107,600 (as of 2020) of active income per year from taxes, a dividend – especially from a Hong Kong company – is not “earned income” nor tax-advantaged in any way. Basically, he was doing the smart thing in Hong Kong but a rather unwise thing based on his US citizenship. When forming an offshore company, it is important to understand how it will interact with other obligations you have. If your systems are too different, it could create complications. The last thing you want is to have pieces of your puzzle with directly opposite objectives. You also want to consider how your business is going to make payments to others, whether they are employees, contractors, vendors, or service providers. Will they experience restrictions when trying to receive your money? We worked with someone a while ago who had set up their company and bank account in Cyprus. Even though they were incorporated within the EU, when they sent out payments to vendors, the intermediary bank flagged the money coming in from a Cypriot bank as suspicious. The bank was unfamiliar with Cyprus and assumed it was too much risk for them to accept the payment. If you don’t set things up correctly, sorting out how you get paid and how you pay others could become a nightmare for your company. Because of this, the traditional IBCs are just not going to work as well. They won’t give you the operational flexibility that you need.
8. What Do You Sell?
What you sell will directly affect how and where you set up your business structure. Occasionally, someone will come to me with a business that sells herbal supplements, or maybe they do affiliate marketing for casinos. We even had one guy come to us who was in the porn business. This can be an issue. Those types of risky businesses are going to be more difficult to take offshore. Now, there are different ways to separate your company into different structures. Just because you have one company now doesn’t mean you have to have one company forever. You could set up a marketing company, a staffing company, an operations company, etc. But if we’re talking about a casino product, for example, there are some of these countries that are going to be more conservative. In some cases, there are even certain countries that don’t want to be involved in anything that has to do with cryptocurrencies. So, if you’re high risk, a lot of the traditional offshore company jurisdictions aren’t going to be into that. And while the company registrar might not matter that much, the banks that come with that might not like it. For example, banks in Belize are very conservative and don’t want to be taking anything like porn. So, what you sell is important. To add to that, you also want to consider whether your product is physical or digital, such as a service. If you sell services, you should carefully consider where the services you sell are being performed, and for who they are being performed. If you are selling digital products, then you may likely claim that you are to be taxed where the products are dreamed up and produced. In both of these cases, “offshore” may be the answer to both, and you may be able to pay zero tax. However, if you sell digital products, you may be subject to GST, VAT, or sales tax. In other cases, physical products are subject to tax, and in other cases still, services may be subject to VAT. For example, Australia now demands payment of GST by any business that sells more than about $50,000 in digital products per year there (the ”Netflix tax”). On a larger scale, the European Union has created a VAT MOSS system that requires anyone selling digital products to Europeans to go to great lengths to determine which VAT rate to collect and remit. While VAT or GST obligations may not change your best country to incorporate, it’s worth factoring in. In some cases, entrepreneurs trying to be smart incorporated offshore only to realize that it wasn’t cheaper after all of the compliance costs.
9. WHERE ARE YOUR PRODUCTS LOCATED?
If you are fulfilling physical products, you may or may not need to take their location into consideration. The type of warehouse you use and your relationship with the manufacturer may both be potential issues. If you can find a way to use a third-party to fulfill your products, you’re going to be much better off. For example, I recently worked with someone who manufactures his own personal care products. His tax strategy involved taking into account the manufacture, storage, and logistics in the country where the products were made. In his case, it was worth paying a little tax in order to maintain his manufacturing advantage while reducing tax on everything else. However, if you are an Amazon FBA seller, Shopify seller, or drop shipper, you likely have a different scenario in which you don’t touch the products but still need to consider the supply chain in determining your offshore structure. Again, merely selling into a country may not necessitate paying tax there, just as storing products in a warehouse in the United States or Europe does not guarantee that you will pay tax there either. However, if you are shipping and storing physical goods, it is important to consider the logistics and the countries involved to make sure you don’t get a surprise later.
10. WHAT KINDS OF INCOME DO YOU HAVE?
Obviously, not everyone who sets up an offshore company has active income. Passive income, royalty income, and intellectual property are all looked at differently depending on the rest of these factors. There are some places, like Hong Kong, where they’re a little more easy-going when it comes to passive income. But, when you’re talking about royalties and IPs, other countries are really going to be on your case about taxes. The traditional offshore international business companies probably don’t care as much in most cases, but there are others that are going to give you some real issues if you’re coming to them with certain types of income.
MORE TO CONSIDER
As mentioned, this is not an exhaustive list of questions. We ask our clients many, many more depending on their unique situation. While we won’t take a deep dive into these other questions in this article, here are a few more points to consider to figure out where to incorporate your business:
- Do you have trademarks?
- Do you have capital gains?
- Do you earn an income from royalties?
- Where are your business partners or investors?
- Are you planning on going public?
- Do you want to take investors? Where do the investors live?
- Do you have business partners? Where do they live?
- How are you acquiring customers through marketing?
- Do you accept crypto?
- Do you accept paper checks?
- What currency do you need to be dealing in?
It is important to understand that no two plans will ever be the same. Your answers to these questions will be different from your friends and associates, so your plan will be different from theirs. There is no one plan to rule them all! When creating a plan, I try to find one that is going to last the longest and be the best for you. And that means answering these and other questions to create a holistic offshore strategy. https://www.youtube.com/watch?v=i099U47CPoA
Find Your Best Offshore Company
After you’ve considered all of these questions, you should be able to get a good idea of the best offshore company jurisdictions for you. Here are the main questions again for your review:
- Where do you live?
- What is your tax home and citizenship?
- Where do your customers live?
- Where do your employees live?
- Where are your offices?
- How do you collect money?
- How do you personally get paid?
- What do you sell?
- Where are your products located?
- What kinds of income do you have?
In some cases, especially if you’re a small company with location independent people working for you, setting up in a low or zero tax jurisdiction may be your best option. In others, depending on what you’re doing, you may want to consider how to take advantage of tax treaties. But in most cases, your best option is to create an offshore/onshore hybrid that allows you to be onshore as much as possible because being traditionally offshore just doesn’t work anymore. In 2020 and beyond, I don’t want to be offshore with my Nevis company and St. Lucia bank account. There are better ways of creating wealth and going where you’re treated best in this era of transparency. Going forward, using traditional methods isn’t going to work. So, take a good long hard look at the details of your company operations and ask yourself the tough questions and you’ll start to figure out the best options for you. If you are ready to get started on a holistic offshore plan that will help you find your best offshore company structure to save you money, contact us here.