Offshore Incorporations – Advantages and Disadvantages

An offshore incorporation is commonly referred to as a company incorporated with an offshore bank. It could also mean an incorporated company that operates outside of its jurisdiction.

In the past, offshore companies have been thought to be involved in illegal activities like terrorism, fraud, tax evasion and money laundering. The reputation of offshore incorporations has improved since the 1980s. However, traces of the infamy are still apparent today.

Despite the ill repute offshore companies have acquired, many of the world’s largest businesses use offshore bank accounts and incorporate themselves with offshore jurisdictions to protect their assets and minimize tax exposure.

Offshore incorporations have its advantages. Some of them are:

1. Taxation. In some jurisdictions, authorities do not necessarily tax companies which are non-residents. Some jurisdictions have regulate nominal fees though.
2. Reporting. Most jurisdictions make it easier for companies to set up their business because reporting requirements are minimal, not like onshore jurisdictions, although banks and other financial centers are exceptions.
3. Asset protection. Most jurisdictions have strict policies in disclosing financial information. Thus a court may not be able to perforate offshore bank accounts due to corporate governance rules.
4. Anonymity. Offshore companies execute transactions under a private company name, making the name of the principal company excluded from documentation. This feature of offshore incorporations can become possible means for money laundering though. To prevent this, authorities often require financial institutions to inspect structures.

While there are several advantages of offshore companies, there are disadvantages as well:

1. Depending on the kind of company, some jurisdictions do not allow companies to employ residents of the jurisdiction of incorporation.
2. Oftentimes, there are restrictions on the kind of business companies can carry out without having a license. This policy is much the same in onshore jurisdictions.
3. Due diligence in highly regarded offshore areas are stricter than most onshore centers. For instance, in opening an account under an offshore company name, the bank usually will need verified documents and recommendation letters from an accountant or attorney.