If an offshore company is free of tax burden, does it mean that there are no fiscal payments at all? What costs are incurred by offshore residents?
If entrepreneurs transfer their business to other countries, do offshore companies pay taxes? Short answer: it depends on the reputation of the jurisdiction, in quality zones tax rates exist. In jurisdictions with a dubious reputation, the authorities do not pay attention to offshore business, but such residency does not bring investors any benefit, but even harm.
Now let us explain: to incorporate in an offshore zone does not mean to escape from taxes and reporting completely and forever, in the transparent and global world of digital information this is no longer possible. Becoming a resident of an offshore jurisdiction means gaining more control over your business, more freedom and opportunities, and changing the tax regime to a more comfortable and favorable one for the company, rather than getting rid of such obligations 100%. Offshore companies simply pay taxes where the government has created more convenient conditions for business development.
Let’s take a look at a few popular offshore jurisdictions and their fiscal policies to explain that paying small taxes is better than paying none at all.
To begin with, it is worth explaining that the well-known free trade zones in the Emirates are not offshore, and vice versa – these are two different regimes for business registration. These jurisdictions have different regulations and different tax systems. As of 2023, there are only three zones where you can register an offshore company: JAFZA, Ajman and RAKICC. Residents of these areas are not subject to the UAE tax regime, which means that businesses do not pay:
- VAT 5%.
- Corporate tax 9%.
- Income tax.
- Import tax.
- Capital repatriation tax.
- Tax on dividends, interest, royalties, property.
Among the preferences: an offshore company can purchase real estate in the parent zone (but not a physical office), use the services of banks in the UAE, the founders can be confident in the confidentiality of data, there are no requirements for the minimum authorized capital. At first glance, the conditions look attractive. But such freedom has its consequences:
- Who does not pay taxes is not considered a resident of the country, which means that founders, investors and employees of an offshore company can not apply for a residence permit.
- One cannot trade or enter into any commercial transactions with mainland companies in the country, business can be conducted outside the Emirates.
- Annual tax returns still need to be filed.
- Company registration is not free, on average you need to allocate about 18,000 dirhams ($4900).
- There are no taxes, but there is an annual permit to operate offshore, the average payment is about AED 11,000 ($3000).
As you can see, the tax-free regime in the Emirates for offshore business has its price and some pitfalls, such conditions will not suit every company.
Offshore businesses in Belize that are registered in the IBC (International Business Company) format enjoy the following tax benefits:
- Full exemption from corporate and income tax, on capital gains, on dividends, on transfer of assets.
- Free exchange of currencies, no requirements for mandatory conversion of money.
- Budget to register a new legal entity is only $1000.
Among the business costs and liabilities:
- Annual payment of a fixed annual fee to the government ($1000).
- Fees to maintain a registered office in their jurisdiction.
- Payment of authorized agent fees.
- Annual filing of tax returns, financial statements, declaration of assets, and bookkeeping.
- Payment for various additional services as needed: nominee directors and shareholders, virtual office, other administrative costs.
As you can see, the exemption of offshore companies in Belize from standard business taxes does not mean that corporate costs are absent as such. Annually or even quarterly owners will have to pay various fees and charges. Among the good news: Belize is considered a low-cost jurisdiction.
In fact, Georgia is not a classic offshore zone, investment experts call this jurisdiction a midshoring – that is, an intermediate regime. But there are good reasons why it is profitable to register a business in Georgia:
- As of 2023, this country does not participate in the automatic exchange of banking information, however, the OECD website says that joining the CRS format will happen in 2024.
- The country has a territorial principle of taxation. This means that income that individuals or entrepreneurs received from abroad is excluded from income tax.
- Impeccable reputation of the jurisdiction. Georgian authorities fulfill the requirements of international regulators regarding the exchange of tax information, so the country has never been blacklisted as a tax haven.
- Standard taxes for business, without benefits, are so loyal that for many organizations it will be more profitable to become a tax resident of Georgia than to spend on various permits, duties and fees in classic offshore jurisdictions.
- There is a possibility to reduce rates several times if you choose special preferential taxation regimes for small businesses, micro-enterprises, participants of virtual zones, and international companies.
The last two types of legal entities can be characterized as offshore organizations. Let us consider the principle of taxation of such enterprises.
Participants of virtual zones in Georgia are companies that provide various services and sell digital products to foreign clients. Such residents are exempt from export customs duties, 18% VAT and 15% profit tax. At the same time, for participants in virtual zones, there remain obligations to deduct:
- Dividend tax 5%.
- Property tax 1%.
- Taxes on employee salaries 20%.
- Contributions to the Pension Fund 4%.
Another format of incorporation in Georgia, which is similar to an offshore organization, is an international company. Enterprises whose activities relate to the IT sphere and maritime business can obtain this status. Tax rates for such residents are fixed but reduced, for example:
- Corporate tax – 5% rather than 15%.
- Property tax – 0% rather than 1%.
- Taxes on salaries of salaried employees – 5%, not 20%.
- Dividend tax – 0%, not 5%.
- VAT – 0%, not 18%.
And this small base can be further reduced by deducting expenses on research and scientific work and on salaries of resident employees.
Summing up, we can come to the conclusion that companies in offshore jurisdictions also pay taxes, only these payments may be called differently, for example, a duty or a permit to operate. There are about a hundred offshore, onshore and mid-shore jurisdictions in the world, and each zone has its own rules regarding incorporation and doing business. Therefore, you should consult with investment advisors, make a selection of the most suitable jurisdictions, compare conditions and requirements for applicants and carefully calculate all future costs. Perhaps, after such research work, it will be discovered that paying taxes is much more convenient and profitable than not paying them. After all, companies migrate to offshore jurisdictions not only to reduce tax rates, but also to protect assets and bring business to the international level. Therefore, it is necessary to choose a jurisdiction that will maximally meet the goals of the business, and only then pay attention to the taxation system.