Offshore and International Law. Offshore companies registration.

What is considered an offshore company?

Offshore jurisdictions are jurisdictions that offer non-residents special conditions for conducting business, and companies that take advantage of such special conditions are called offshore companies. Normally, the owner of an offshore company (beneficiary) does not reside in the jurisdiction where the company is incorporated, and the company itself does not conduct activity in its country of incorporation. Meeting these conditions (“non-residency” of the beneficiary and not conducting business in the country of incorporation) makes it possible to free such companies from paying taxes in the country of their incorporation; however, they are obliged to annually pay a certain state duty the amount of which may depend on the amount of the authorized capital of the company.

In addition, offshore companies are usually prohibited from conducting certain activities – those that imply special regulation and require licensing (banking, insurance, etc.). Normally, only local resident companies are allowed to conduct such activities.

Due to global trends:

• towards higher transparency of business of offshore companies,

• towards strengthening fight against tax evasion (including elimination of the double taxation situation for companies incorporated in offshore jurisdictions) and

• towards strengthening fight against money laundering and terrorist financing. Many classic offshore jurisdictions make changes to regulation of activity of offshore companies. It takes place under pressure of international organizations and associations (such as OECD, FATF, EU).

Oftentimes jurisdictions follow the path of evening offshore and local companies in terms of their rights and status, i.e. offshore companies are allowed to conduct business in the territory of the country of incorporation and with residents of the country of incorporation and own real estate in the country of their incorporation. In this case, territorial tax system applies, which means that only companies that conduct business in this jurisdiction are subject to taxation. Essentially, companies retain the offshore status and even get new opportunities, but an additional obligation arises: obligation to file certain forms with tax authorities, i.e. activity of offshore companies become more transparent, but they, as before, do not pay taxes in the country of incorporation, unless they conduct business there.

Requirement of economic substance in the country of incorporation may also be introduced. In this case, companies that conduct relevant activities must become tax residents of such jurisdiction and show sufficient presence (economic substance) in the jurisdiction. What amounts to sufficient presence in order to meet legal requirements can depend on certain activity of the company, scale of business, and other details, and shall be determined individually in each separate case.

By the way, banking and insurance, among others, are usually classified as relevant activities, which, as we mentioned above, traditionally were unavailable to offshore companies. Thus, we can also see certain evening of the status of offshore companies and local resident companies.

Companies that do not conduct relevant activities continue to exist in their customary order, but they must file additional forms with state authorities to confirm the fact that they do not conduct such activities (such forms must be filed annually and when the company changes its activity). And again we can see manifestation of the global trend towards higher transparency.

Concurrent application of the two mentioned approaches can also be found: introduction of the territorial tax system and economic substance regulations.

In spite of all the above innovations, offshore companies remain a handy tool for the functioning of international business.

What are the advantages of using offshore companies?

There are quite a lot:

· relatively low cost of incorporation and maintenance of an offshore company;

· fast incorporation of offshore companies (compared to the long procedure of incorporation of so-called onshore companies, which sometimes can take months);

· no taxation in the country of incorporation (when certain conditions are met regarding activities / regions where business is conducted);

· no obligation to file financial statements with state authorities or undergo audit;

· confidentiality of the company’s ownership;

· reinforced protection of business owners against illegal alienation of their property (so-called hostile takeovers);

· comfortable legal regulation developed to, among other things, draw foreign investments.

Let’s take a closer look at some advantages.

The cost of incorporation of an offshore company is normally significantly lower than the cost of incorporation of an onshore (local) company. It also applies to maintenance costs: it is not only due to the fact that offshore companies most often are not required to file audited accounts (financial statements and tax accounts) and pay taxes in the country of incorporation (which significantly decreases company maintenance costs), but also due to the fact that cost of services of service providers, lawyers (consultants, notaries), accountants and auditors is usually much higher in non-offshore jurisdictions. In addition, onshore companies are often required to lease an office in the country of incorporation and hire local employees (including payment of all necessary fees: social security, healthcare, pension funds, etc.), which itself substantially increases maintenance costs of such a company.

It is worth dwelling on confidentiality of ownership of an offshore company. In spite of the trend towards higher transparency of business (transparency of company ownership, full clarity regarding companies’ activity, transparency of cash flows, etc.), most offshore jurisdictions do not have open registers of companies’ beneficial owners (in contrast to, for instance, many European jurisdictions, who have historically been classified as onshore). Of course, information on beneficiaries is requested but stored by registered agents of companies or, besides being stored by registered agents, it is filed with state authorities / centralized registers; only employees of certain agencies have access to this data (beneficial owners’ details are not available to the public). The full and absolute confidentiality does not exist anymore, but it cannot exist in the present day. Offshore companies provide a high degree of data protection within the limits set by international organizations and associations.

Previously, high degree of confidentiality (but also a possibility to have big problems with identification of real owners) was guaranteed by bearer shares, but a fight against them had started long before the introduction of registers of beneficiaries. Back in the early 2000s, many offshore jurisdictions started to limit issue of such shares (for example, by increasing the annual government fee for companies that have issued bearer shares) and apply immobilization of bearer shares (i.e. transfer them for safekeeping along with recording holders’ data, which itself made the use of this tool for the purpose of increasing confidentiality of the company’s ownership pointless). Issue of this type of shares is now prohibited almost everywhere.

When discussing confidentiality and tax preference matters, it is also worth noting that classic offshore jurisdictions rarely become parties to bilateral double taxation agreements, which, among other things, contain provisions on tax information exchange. Entering into double taxation agreements with offshore jurisdictions is inexpedient: since there is almost no taxation for offshore companies in countries of their incorporation, these is usually no risk of double taxation. However, offshore jurisdictions have lately been entering into another type of international agreements – bilateral Agreements on Exchange of Information on Tax Matters / Tax Information Exchange Agreements. And, of course, we cannot overlook the multilateral Convention on Mutual Administrative Assistance in Tax Matters of the Council of Europe and OECD, parties to which already include many classic offshore jurisdictions.

How to select a jurisdiction to incorporate a company?

Selection of a jurisdiction for formation of a company is always different: there may be substantial differences in regulation of certain corporate aspects even between offshore jurisdictions. Selection of a jurisdiction for company incorporation depends on many factors:

· kind of activity of the future company;

· necessities and preferences of the owner of the future company;

· budget (money that the owner is ready to spend on incorporation and subsequent maintenance of the company);

· the client’s willingness to open a real office in the country of incorporation (if, for example, the jurisdiction has legislation on economic substance and the client’s activity is classified as relevant);

· special wishes of the owner of the business

· requirements of the main counterparties of the future company.

Specialists of GSL will help you take into consideration all necessary factors and choose the most suitable jurisdiction for incorporation of your company.

Can a company’s jurisdiction be changed after incorporation?

If legislation changes in the jurisdiction chosen by the client, which negatively affects use of the company, or some significant circumstances of the client have changed, which caused the necessity of changing the company’s jurisdiction, then so-called redomiciliation can be done. In most jurisdictions, redomiciliation of a company, i.e. transfer of the company from one jurisdiction to another is allowed in both directions: in and out. There may be exceptions from this rule; please contact consultants of GSL for more detailed information on the jurisdiction that you are interested in. Our specialists have vast experience in the procedure of redomiciliation in different jurisdictions, and they will be glad to give you a consultation and, if necessary, they will organize redomiciliation of your company.

What is the procedure of incorporation of an offshore company?

The procedure of incorporation of an offshore company will, of course, depend on the chosen jurisdiction, however it will contain the following important stages (steps):

Step 1 – determine important corporate aspects

First of all, the owner of a business, besides a jurisdiction, needs to decide the desired name of the company. In any jurisdiction, a company’s name must be checked for uniqueness. For this reason, we recommend our clients propose several name options, so in case one of the names is rejected another option could be checked without losing time. If a client does not have any certain wishes regarding the company’s name, we can propose our options.

The name of a future company is checked for uniqueness and compliance with legislation of the country of incorporation and, if the check is positive, it is reserved for a period of time (possibility to reserve a name and reservation period depend on the jurisdiction).

Besides the name, a client has to decide on the company’s structure, amount of the authorized capital and distribution of shares among shareholders (members).

Different jurisdictions have different requirements regarding the minimum amount of the authorized capital. There are also jurisdictions where no minimum authorized capital is stipulated by law, but there is established practice of incorporation of companies with a certain amount of the authorized capital. Our specialists will help you understand subtleties of legal regulation and features of the established practice in the jurisdiction that interests you.

Step 2 – pass the compliance check

For the purpose of the initial compliance check, a registered agent in any jurisdiction requests information on the company’s planned activity, regions of conduct of activity (i.e. countries), and data of persons in the structure of the company (especially beneficial owners). After this information has been received, so-called KYC check takes place.

So what are the compliance check and KYC procedure?

Compliance system is an internal control system aimed at discovering violations of legal requirements of a certain jurisdiction (for example, if you want to incorporate a company in the British Virgin Islands, then the check will take place regarding compliance with legislation of the BVI) and potential risks (in our case, for the registered agent).

In most jurisdictions, registered agents (entities that help clients incorporate and maintain offshore companies) obtain licenses to conduct their business. If the licensing authority (regulator) finds many violations of legislation by clients of a registered agent or by the agent itself or if there is a huge scandal related to servicing clients indicted, for example, for laundering of money received as a result of corruption, then the registered agent may have its license revoked. Besides that, it is a huge impact on the image of that organization, which, even without license revocation, may result in going out of business because of mass outflow of clients. If the regulator finds such violations and does not revoke the license, it imposes substantial penal sanctions on the registered agent.

In order to avoid such situations, registered agents preliminarily assess new clients and periodically check if there have been any negative changes regarding existing clients. It is important to note that registered agents check if clients comply with regulations of the jurisdiction not just because they want to protect themselves from risks. It is an obligation imposed on them by legislation and local regulators (this is why in the case of failure to fulfill this obligation, registered agents are imposed with penalties and may even have their license revoked).

The commonly used abbreviation KYC is a short form of the phrase “Know Your Client” (or “Know Your Customer”). Essentially, it is a client identification procedure.

There are different factors because of which a company may be classified as a high risk company in the process of compliance check:

· certain activities,

· certain regions where activities are conducted,

· special circumstances related to the personality of the beneficiaries and other persons in the structure of the company and sources of their funds.

The fact that a client or their company is classified as high risk does not mean that the client will not be provided with services or will be refused company incorporation; it depends on the reason why they are included in this category. In many cases, registered agents can service such a client but they have to check the client/company more often and thoroughly, which means they will have to request more confirming documents from the client than from, for example, a medium risk client. The term Enhanced Due Diligence (EDD) is used for such thorough monitoring.

For further information and requirements regarding necessary documents and rules of their certification in each jurisdiction, contact your consultant at GSL.

Step 3 – pay for company incorporation

The cost of incorporation of an offshore company normally includes:

· initial compliance check;

· preparation of documents necessary to incorporate the company;

· payment of the government fee for company incorporation;

· payment for the first year of the company’s maintenance by the local registered agent, including provision of a registered address (an offshore company must have a registered address in the country of incorporation);

· preparation of a set of corporate documents, their apostilled copies (depending on the jurisdiction), and the company’s seal (in jurisdictions where it is compulsory / desirable) for the client.

Step 4 – provide directors, shareholders, beneficiaries and attorneys’ documents

It is necessary to provide documents on all persons in the structure of the future company. The list of required documents is communicated separately (it depends on the specific nature of the jurisdiction and other factors), however the minimum list for an individual consists of two main items:

· identification document (proof of ID);

· document proving the residential address (proof of address).

The minimum list of documents for a legal entity (for example, if the company that is being incorporated has another company as its shareholder) is usually as follows:

· certificate of incorporation*;

· memorandum and articles of association*;

· document confirming the registered address of the company;

· document(s) confirming the corporate structure;

· documents leading to the beneficiaries of the company;

· identification documents and documents that confirm addresses of all persons in the structure of the company.

*these documents can have different names in different jurisdictions

Find out the final list of necessary documents in each particular case with your consultant at GSL.

Step 5 – prepare a set of documents for company incorporation, sign documents with directors, shareholders and beneficiaries and send the necessary set of documents to the country of incorporation

Step 6 – apply for incorporation of the company and finalize the incorporation process (including handing over the set of corporate documents to the client)

Oftentimes steps 5 and 6 are taken concurrently:

· the initial set of documents is prepared;

· the application for incorporation of a company with the chosen name is filed;

· the registration authority registers the company with the stated name (as mentioned before, not in all jurisdictions a company’s name can be checked for uniqueness and reserved) and assigns the company a registration number;

· preparation of corporate documents is finalized (already with the final name of the company and the registration number assigned to it);

· one set of documents is sent to the country of incorporation (normally, these are documents that must be kept by the local registered agent, including KYC documents), and the other is handed over to the client.

The procedure will depend on the jurisdiction where the company is being incorporated (for example, sending the documents to the country of incorporation may precede filing the incorporation application, may be done concurrently with incorporation or after the incorporation procedure is done). Additional steps can also be added, but the general sequence of actions will be exactly like this.

How long does it take to incorporate an offshore company?

The total amount of time necessary to incorporate an offshore company depends on:

· the jurisdiction the client chose (and how fast state authorities of the jurisdiction process requests),

· the structure of the company being incorporated (for example, companies with legal entities in their structure often take longer to get incorporated),

· how soon the client provides documents and information requested by the registered agent, and

· other factors.

Normally, there are 2 to 3 workdays between the time when preparatory steps are finalized and the incorporation application is filed and the time when the company is already incorporated (and the registration number is obtained) (in jurisdictions where we are a registered agent and have the necessary license, we often obtain the certificate of incorporation in 1 workday). Then the set of documents will have to be apostilled (where applicable) and delivered to the client; it usually takes 1 to 2 weeks. For our part, we make every effort to complete all the steps of company incorporation in the shortest time possible.

Selling ready-made offshore companies used to be very popular; it is a very useful option when the client needs a company very soon and they cannot wait for the end of the incorporation process and receipt of corporate documents. Now, ubiquitous introduction of registers of beneficiaries (in one format or another) makes use of ready-made companies more complicated and less handy. In addition, incorporation of an offshore company does not take too long, so clients more often prefer promptly incorporating a new company with the name and structure that they need rather than purchasing a “shelf” company (and changing its name, structure and founding documents, etc.). However, ready-made offshore companies are still used. We recommend you contact a consultant of GSL for more detailed information.

Can the name of a company that is already incorporated be changed?

Yes, it can. The new name will also be checked for uniqueness and compliance with regulations of the country of incorporation. A government fee is usually charged for change of a name. Changes will need to be made to the corporate documents and registers, and additional notices may need to be filed with state authorities or centralized databases (depending on the jurisdiction).

What should I know about subsequent maintenance of an offshore company?

Offshore companies annually pay a government fee and pay for services of the registered agent (including provision of a registered address) and professional directors / shareholders (if they are appointed). If the annual fee is not paid, the company can be struck off from the register.

In addition, as we said before, some forms may be required to be filed with state authorities annually. For instance, in many jurisdictions, along with payment of a government fee an annual return shall be filed, which always contains certain identification information on the company, its structure and amount of the authorized capital, and can include some other data depending on requirements of the jurisdiction. Besides, information must be periodically updated for the purpose of compliance checks (how often data must be filed usually depends on the jurisdiction and “risk status” of the company – medium risk company / high risk company).

Is it necessary to prepare and file offshore company’s accounts?

All offshore jurisdictions now have, in one form or another, regulations on compulsory keeping and storage of accounting records and storage of source documents relating to the company’s business. Most often the address of storage of this data can be chosen:

· the address of the registered agent (which normally coincides with the registered address of the company) or

· any other real address, but the registered agent must be informed of where exactly the original accounting records and underlying documentation are stored.

There may also be a requirement to state the name of the person responsible for storage of these documents.

Accounting records and source documents (underlying documentation) must:

· be sufficient to reflect and correctly explain the company’s operations;

· make it possible to determine the company’s financial position with reasonable reliability at any time;

· make it possible to prepare accounts of the company (if necessary);

· be reliable and objective.

These requirements do not mean compulsory preparation of financial statements according to local accounting standards or the international financial reporting standards (IFRS). However, some jurisdictions are now starting to introduce requirements regarding preparation and submission of simplified financial statements (financial summary) by companies.

For more detailed information on the offshore jurisdiction you are interested in, contact consultants of our company.

GSL is an international company that provides services in the field of taxation, law, audit and at the junction of the said fields, engages in consulting and conducts its business around the world. We have many trusted partners in different countries. Moreover, we are directly represented in the most popular and sought-after jurisdictions; we have licenses that allow us to incorporate companies for clients and maintain them thereafter, which decreases both the period required to carry out clients’ orders and related costs. Our company has many years of experience in incorporation and maintenance of legal entities in Russia as well as abroad, in opening bank accounts and many other fields (including accounting services, translation of documents, etc.). You can find more information on GSL here.