in Business Planning, Business Tax

Business structure considerations in an international business expansion

There is no legal definition of the word “offshore” and it simply means anywhere else apart from a person or an entity’s own country. There is a myriad of reasons why an offshore structure is sought. In many cases, high net worth individuals will make use of offshore structures as an integral part of an international tax planning strategy.

For businesses, it is often possible and indeed necessary to include the establishment of an offshore structure as part of a business’s international business planning strategy. As we shall see, the reasons for choosing an offshore structure in this case will involve more than just tax considerations.

Choosing an offshore structure

Obviously, the choice of structures will be limited to the ones available in a particular jurisdiction and in this regard, your choice of jurisdiction will have an impact on any decision to be made.

In some tax jurisdictions and offshore financial centres, only incorporated company structures are available, although there may be different types of companies being offered with different types of incentives. Thus, for example, different tax regimes may apply to different types of companies (resident private limited companies, resident international business companies, resident trading companies and so on) and a choice of companies will depend on whether any business activities are being carried on in the jurisdiction itself.
In other jurisdictions, such as the Isle of Man, a variety of different structures are offered, from a private limited company to limited partnerships and hybrid entities.

Factors to consider when selecting an offshore structure

In general, your choice of offshore structure really depends on your purpose for establishing the structure and the use of the structure as well as the impact of any relevant double tax treaties. Some factors to be considered include the following:

  • Will the entity have a physical presence in the jurisdiction?
  • If so, will it be used as a back office only or for servicing customers?
  • Will the entity be trading in the jurisdiction and deriving income within the jurisdiction itself?
  • Is the main purpose of the entity to hold assets only and used as a tax-effective vehicle?
  • Is anonymity required?

Choosing an offshore jurisdiction

The choice of jurisdiction is an equally important decision which must be made before establishing any offshore structure, particularly when implementing a structure as part of an international tax planning strategy under an international business expansion program.

Factors to consider when selecting an offshore jurisdiction

Key factors to be considered include the following:

  • Political climate and stability of the country
  • Legal system, rules and regulations
  • Business reputation of the country
  • Reflection of that reputation on your business

If establishing operations:

  • labour costs and skills
  • procurement or supply chain
  • sufficient and accessible resources

Legal and/or regulatory limitations and restrictions:

  • Public sector transparency and impartiality of legal system
  • Healthy competitive environment
  • Annual compliance costs
  • Sophistication of infrastructure
  • Physical distance
  • Any special grants, incentives or features provided to attract foreign direct investment

The benefits of using an offshore structure for international tax planning can be tremendous. As can be seen, nevertheless, the success of creating a tax-efficient structure within an international business organisation is very complex and involves a myriad of considerations. Strategic thinking and proper implementation of the strategy will determine the outcome of any tax planning undertaken by a business.