There several ways to do it, some include incorporating technology and machinery into business to reduce labor cost, others get raw materials at cheaper prices to reduce acquisition cost and therefore increasing profit margins, others include process innovation which reduces the cost of production thus meaning larger profit margins, while others register offshore companies in tax haven countries.
Now one may wonder what the hell are tax havens? Well according to Investopedia tax havens are generally countries that offer individuals and businesses with little or no tax liability in a politically and economically static environment.
Their several countries referred to as tax havens and each has its own benefits with some being more conducive for the business than others. Tax haven countries include Switzerland, Ireland, Sweden, Denmark among others. Tax havens offer themselves as places where individuals and businesses can escape high taxes by putting their assets or businesses in that jurisdiction.
The Caribbean is home to more than 10 tax havens which include Barbados, Belize, Costa Rica, Anguilla, Nevis, Dominica, The British Virgin Islands, Panama, and the Cayman and has some of the most popular havens in the world. The most popular include Panama, The Bahama, and the Cayman Islands.
Registering a business in a tax haven country for most businesses is an attempt at increasing capital and saving on taxes, some business also does it to protect their companies from political and social instability, to avoid informing their governments on the state of their companies finances and to protect their assets from possible lawsuits.
The Cayman Islands is one of the most popular tax havens in the Caribbean, in the Caymans there is a complete lack of taxation which can be sustained by a 20-year government guarantee to mitigate against any future tax introduction. To obtain this guarantee the business owner has to apply for a tax exemption certificate. This implies that there are no corporate taxes, no capital gains taxes, no payroll taxation, no real estate taxes, and no withholding taxes and this certificate is available for exempted companies.
The main forms of the business vehicle include Exempted companies incorporated with liability limited by shares or guarantee or with unlimited liability, Limited liability companies (a hybrid between an exempted company and an exempted limited partnership), Partnerships (particularly exempted limited partnerships as described in further detail in, Trusts, Segregated portfolio companies (a single legal entity whose assets and liabilities can be allocated to different segregated portfolios within the company, so of particular use in insurance, mutual fund, and securitization structures), Special economic zone companies (available to those operating in certain sectors (for example, commodities)), which can take advantage of expedited incorporation and immigration procedures.
An exempted company in the Caymans is a company that is limited by shares and can be used by, internet entrepreneurs, international investment and trade, funds and wealth management, and as a holding company. Exempted companies can be incorporated within 24 hours of the relevant documentation is filed and provide great flexibility to investors. They are not allowed to invite Cayman citizens to subscribe to their shares but they can be managed from any country outside the islands.
Exempted companies don’t require resident directors neither do they require the registration of shareholders. Annual general meetings are not mandatory and can be held anywhere in the world. There are no minimum capital requirements and there is no need to file financial statements and audits unless the company is an investment fund regulated by the Cayman monetary authority. There are minimal reporting requirements that only include an annual return stating whether there has been a modification of the memorandum of association and confirming that the business has not been operating in that jurisdiction.
Confidentiality is one of the benefits of exempted companies whereby details of company members are not required to be filed with the registrar of companies. The confidential relationships law 1976 makes it an offence for anybody to divulge confidential information to a third party.
It is mandatory for companies registered in the Caymans to have a registered office and a registered agent, the location of the office is public and any individual can obtain the address after submitting a proper inquiry with the registrar. Most company formation packages in the islands offer registered office and registered agents services. Annual fees are made to the registered agents.
The company must be clearly marked with the company’s logo or name. The address can be changed after getting approval from the registrar following a resolution from directors. The approval is usually issued within 30 days from the date of the resolution. The virtual office package is preferred by many investors when they open an exempted company in the islands, general the offices are usually in high end and prestigious locations that add credibility to a business.
A company cannot incorporate wording that mentions royal patronage; like a bank, insurance, trust, chattered, assurance, mutual fund, company management, or chamber of commerce unless one has a license to do so. Names of shareholders and directors are confidential and not shared with third parties, and there is no public access to the register of directors and officers or the registrar of the shareholders.
The Caymans is home to 324 banks among these is 47 of the largest banks in the world. The islands also boast of high-end professional services including lawyers, accountants, insurance managers, mutual fund managers, administrators among others. $100,000 is the minimum deposit for a Cayman bank account, it is important to note that one can have a Cayman company and a bank in another country, this is in the case where one wants to deposit less than $100,000 a bank account for your company can be opened in another country that allows deposits of lesser amounts. Financial records are not shared with the governments.
Fund and international investment management may be registered as segregated portfolio companies which are sometimes also referred to as protected cell companies. The structure of exempted companies separates liabilities and assets held in one portfolio from others held in another portfolio and or from the assets of the company that aren’t attributable to any particular portfolio.
The Caymans are also an excellent vehicle for movable and immovable assets, asset protection, investment funds ICO’s joint venture companies, private equity transactions, and other corporate transactions. A Cayman exempted company may be used for holding purposes as well as trading and engaging in shipping operations, for real estate holding, as opposed to companies that only used for stock holding to holding and ownership of patents.
It’s is important to note If you live in the US, then operating a business through an offshore corporation is an absolute tax disaster–you would be required to pay more tax than if you simply operated through an LLC. Since the introduction of FATCA, many offshore service providers and banks simply won’t consider taking US citizens or residents as clients. If your business is just starting, the favorability of your tax treatment is unlikely to be offset by the hassle and potential additional expense of dealing with paperwork and agents in a foreign country. If your business begins to sell many, many millions in profit (not revenue) then it might be time to start looking into that kind of strategy. Like all things in business, it’s a cost/benefit analysis. And if you are still relatively small, my suggestion would be to focus on your core business rather than elaborate tax strategies. You are just starting out. Don’t get lost in things that have little benefit to you right now.
Incorporating offshore is more expensive than incorporating in a non-tax haven jurisdiction. Not only that, but there are higher costs in keeping the company running each year. Startups are often bootstrapped for cash and it will make no sense for them to incorporate in a place like the Cayman Islands if they are not even making money. There is no corporation tax to be paid by a company if it is not profitable therefore the costs of keeping the company open would outweigh the tax benefits.
Today a substantial percentage of Cayman companies are formed as investment funds, and so the attraction is not so much the company law structure or other related issues, it is the financial regulator. The Cayman Islands Monetary Authority (CIMA) has carved out a pretty strong reputation amongst offshore financial regulators for open and closed-ended investment funds, and so Cayman now largely dominates this market.
The Cayman Islands is the first UK territory to be added to the EU blacklist. Blacklisted countries face difficulties accessing EU funding programmes, while European companies doing business in those jurisdictions have to take additional compliance measures.
The list, which the EU started in 2017 to put pressure on countries to crack down on tax havens and unfair competition, including 15 countries in 2018 but has shrunk.