Offshore finance companies are normally established for the purpose of inter-group treasury management. Interest payments from group companies may be subject to withholding tax, but these taxes differ from the standard corporation taxes. Many large companies establish their own offshore companies for the purpose of mixing dividends of subsidiaries and deriving maximum advantage from tax credits. The interest paid can be a deductible charge for taxation purposes, thus consolidating interest payments in an offshore finance company provides a tax saving.
In certain countries, foreign exchange losses are not deductible for tax purposes. For example, if an offshore finance subsidiary that has been set up suffers a foreign exchange loss and that subsidiary company is then liquidated, the investment should be a tax-deductible item for the parent company.
Offshore finance companies are also used for leasing, particularly where an offshore structure is rich in funds which, if they are not invested, may be repatriated or subject to high levels of corporate taxation.
Offshore finance companies are often utilized as part of structures for acquiring foreign entities, real estate and other investment related projects.
Other benefits of such a company to the multinational entrepreneur are:
Offshore companies are regularly employed to raise venture capital through equity or debt issues in capital markets. Many corporations have sough to mitigate risk by accessing markets through offshore companies while at the same time reducing certain taxes.
- Protection of capital funds introduced from abroad to foster a self-owned project.
- Tax relief on the cost of borrowing the funds.
- Freedom to return interest on funds lent to the tax haven, so they can be reinvested at the best tax-free advantage.
This technique is a refinement of the offshore investment holding company. With prudent management, it can prove very profitable by itself, apart from accumulating tax-free profits.
If a company in a service industry operates affiliated companies in various countries, the formation and financing of an offshore company to acquire capital equipment used in its operations could prove beneficial. The equipment is rented to the affiliate at market rates, and net income is left to accumulate in the offshore company. Alternatively, it can be attractive for a company in a high tax area to purchase the capital equipment, claim the usual allowances, and lease the equipment to the offshore company at commercial rates. Hence, profits are generated, which are not liable to tax assessment, while rental payments in most cases are tax deducible in their countries of origin.
One of the major objectives of many tax mitigation clients is to ensure that wealth established during their lifetime is not fettered away by future generations/circumstances. To avoid this tax planning firms can often provide a whole range of 'tailor-made' companies, trusts, foundations and establishments which can be used together with many of the other tax mitigation mechanisms already outlined. In particular, they can often be formulated to allow, whilst the original "settlor" is alive, for initial investment flexibility followed by a "fixed" structure upon his or her demise. In addition, with the correct advice, "asset protection schemes" can also legally avoid the almost universal "forced heirship" provisions of civil law jurisdictions.
Where a person is domiciled outside a territory and owns assets located in that territory, for instance, property, then such assets may be protected against inheritance tax and higher rates of taxation by holding the assets through an offshore investment company.
A high net worth individual with properties or other assets in a number of countries may wish to hold these through the medium of a personal holding company so that upon his demise probate would be applied for in the country in which his company was incorporated rather than in each of the countries in which he might hold assets. This saves legal fees and avoids publicity. Again, not everybody wishes to advertise wealth and an individual may wish to hold property through an offshore entity simply because of the privacy which the offshore arrangement gives.
Many large corporations in economically and politically uncertain countries often diminish the perception of risk by moving ownership of assets and the base of their operations offshore.
Many offshore banking institutions have been established in tax havens in recent years. Many of these institutions are subsidiaries of major international banks. Such institutions pay interest free of withholding tax and engage in international financing from offshore bases which are free from exchange controls. Such banking institutions and their associated trust companies are able to provide a wide range of financial services to their international clientele. Offshore banking institutions are also used by the smaller business Organisation and indeed in some cases by individual owners to act as offshore cash management centres.
There are a number of offshore havens which are keen to encourage the establishment of insurance companies which like banking companies bring employment and investment to the country of incorporation and generally enhance its reputation and its range of financial services. In a number of offshore havens it is possible to incorporate insurance companies which pay no tax in respect of their premium or investment income.