How to master off-shore businesses

The gradual advancement of the world into a global village has spurred more investors to set up off-shore companies as vehicles for trading locally and internationally.

An offshore company is one registered in a country in which it does not primarily operate.

Interested in setting up off-shore? Prior to doing so, go through a checklist.

Firstly, it is important to identify the reasons for setting up off-shore and then identify the jurisdiction that best satisfies those reasons.

In doing so, it is important to sufficiently acquaint oneself with the company law and accounting obligations of the target country.

Choosing the right jurisdiction depends on one’s personal or business circumstances.

Ultimately, however, the aim should be to maximise a combined range of tax, legal and commercial advantages associated with incorporating offshore.

Minimisation of tax consequences is often a top-of-the-list consideration and it is important to take expert advice because taxation regimes are complicated.

Although many preferred off-shore jurisdictions are seen as “tax-havens”, it is essential to consider not only the tax laws of the off-shore jurisdiction in which one intends to set up, but also the tax obligations in other countries in which the company has operations.

In this regard, it is important to keep in mind that Kenya has double-tax treaties with less than ten countries.

Tax exemption for the off-shore company does not necessarily translate into exemption for the directors and employees on income received or used in the relevant off-shore jurisdiction.

Another key reason entrepreneurs opt to set up off-shore is privacy.

Many off-shore jurisdictions allow for nominee shareholders and directors and the ultimate beneficiaries of the companies can remain largely unknown.

Jurisdictions such as Marshall Islands are known to have strong confidentiality laws

It should be noted, however, that, in the future, confidentiality may diminish in a move by international organisations to minimise tax evasion, curb money laundering and track down terrorist financing, there is increasing pressure for jurisdictions to share information.

Many off-shore jurisdictions now have public registers and the details of the shareholders and directors are publicly available.

In addition, certain regimes require the accounts of off-shore companies (including private companies) to be audited yearly.

This can result in increase in costs and reduced privacy.

Off-shore companies are also an important vehicle for holding and protecting assets such as real estate, investments and intellectual property.

In addition, if properly structured, they can ease expansion of the company’s operations internationally.

For instance, setting up in an environment with unrestricted flow of capital and transfer of assets can enable an investor to hold and expand foreign investments.

In certain off-shore jurisdictions, the amount of capital needed to register is sometimes lower than that required of resident companies.

Some classes have no minimal capital requirement.

Conversely, the costs involved in setting up and maintaining the registration can be prohibitive.

There are legal and stamp duty costs, annual registration or licence fees as well as operation costs.

Singapore and Mauritius have a mandatory requirement for a certain number of directors to be resident or for a certain number of board meetings to be held there and this can result in additional costs for the company.

In various cases, the Kenyan law requires a company to be incorporated in Kenya to conduct certain types of businesses.

For instance, in order to acquire agricultural land in Kenya, a company must be a private company in which all the shareholders are Kenyan.

Certain jurisdictions such as Mauritius and Dubai also prohibit certain classes of off-shore firms from trading locally in order for them to enjoy tax benefits.

The ease with which an investor can transfer money in and out of the off-shore jurisdiction as well as the winding up and exit mechanisms are also key.

Many countries hold the view that the flow of money should be restricted, regulated or monitored, and obviously, taxed.

For instance, the restrictions put in place by the Federal Reserve Bank of South Africa make it difficult to repatriate monies from South Africa.

What is the future of the offshore industry?

Investors who have set up overseas also need to remain alert to changing regulations.

The increasing crack-down on traditional offshore tax havens has seen a move in jurisdictions like the British Virgin Islands towards becoming more transparent and legitimate tax-efficient jurisdictions.

As such, the attractions which an off-shore jurisdiction has today may not remain true a few years down the line.

Additionally, the international crackdown on money laundering and terrorism financing driven by organisations such as the Financial Action Task Force (FATF) continue to put pressure on the offshore industry, compelling countries to comply with international standards.

Foreign investments

Likewise, the shift in the business environment towards increased sharing of information is also diminishing the benefits associated with off-shore jurisdictions.

Many off-shore jurisdictions continue to offer entrepreneurs efficient strategies for structuring their investments.

As more jurisdictions compete for foreign investments, many countries are keen to be seen as having investor friendly business environments as well as being economically and politically stable.

If properly thought out and structured, an off-shore company can enable an investor to maximise the legal, accounting, tax and commercial benefits the business offers.

Kiunuhe is a Nairobi advocate. Email: ak@africalegalnetwork.com.