Offshore incorporations and accounts are a frequent topic of discussion around the globe. While the act of “hiding” company or personal investment profits for the purpose of avoiding taxes is frowned upon in most countries, often leading to huge fines and occasional time in the penitentiary (even for consultants who help them do this), laws are far less restrictive when enterprises actually incorporate in a foreign country, in order to achieve lower tax rates. Probably the most produced news on this has occurred over the past couple of years in the U.S., as corporations have been moving offshore for a number years now.
The question for private contractors, sometimes just a company of one person, should consider incorporating in a “tax haven” country. Currently, private contractors who are incorporated in the UK face a 20% tax, based upon their net profit, once expenses and liability deductions are taken into account. You can calculate your take home pay using this handy calculator . And, of course, it is wise for contractors to seek the advice and counsel of good tax accountants in order to get the most out of their deductions.
But what if contractors could lower their actual tax rate to as little as 5%? In fact, that is the draw of incorporating in low-tax countries in the Caribbean, a few places in Asia and Latin America, and in places like Malta, Estonia, and Latvia on the continent. Is this a good option?
Stop and Think
You may want to think twice before making such a move.
As a contractor, here are some things to consider as you ponder the benefits and drawbacks of incorporating in a tax haven. While you may be able to find a “legal” method of incorporating offshore, there are big risks involved. And, if you find legal methods of lowering your company tax bill in your native land, that may be a better route to take.
Here are just some of the risks and drawbacks if you make a choice to incorporate offshore and get caught up in a tax avoidance scheme.
Legislation is Changing
Governments of several countries have banded together to mutually offer greater transparency in ownership of “shell” companies and other nefarious entities. While your right to incorporate in one of these countries is still there, you can get caught up in the regulations that new laws incorporate. If you do anything wrong or make a small mistake, you could face the harsh consequences of these new laws.
Individual countries are now adopting new anti-tax haven legislation that does restrict the activities of foreign nationals incorporating within their boundaries. This is an on-going phenomenon, and anyone who does incorporate offshore will have to maintain constant vigilance.
Native countries are also enacting legislation that legally defines a native individual or corporation that moves any of its activity offshore as still a domestic entity and therefore subject to native tax laws. This could even result in double taxation.
Expansion and Contraction
If a contractor scales his/her business, by adding employees or even by “selling” a part of it to someone else, there are all sorts of headaches. Dividing and tracking assets can be a tricky procedure in a foreign land, and the expense of employing local attorneys can become financially cumbersome.
Incorporating offshore just for tax benefits may seem attractive, but a contractor may not be fully aware of the restrictions on business activity. There may be pricey licenses to obtain – licenses that must renewed on a regular basis. Often, foreign entities that incorporate are subject to far more restrictions than native enterprises.
Major Complications With Probate
If you should pass away, the issues with probate, both in the local country of incorporation and in your native country will loom large as legal problems for any heirs. There will be delays, additional costs and lots of hassle.
How You Are Perceived
There has been a lot of “bad press” in the past couple of years about people who have moved money offshore and who continue to use offshore banking “shelters” for clearly illegal activities. Laundering drug money is common; individuals attempting to “hide” their assets from native taxing authorities and doing so in violation of their governments’ laws is common. The recent HSBC scandal, in which a whistleblower was able to access accounts in the Swiss arm of that bank and expose all of the wealthy Brits who were “protecting” their holdings from taxation through the UK domicile laws, is very fresh in the memories of many. The fact that the bank was also protecting some pretty vile criminals just added more fuel to the fire.
The upshot of all of the recent exposures has been that, even if a contractor is honest and operating within the laws of his native and locally incorporated country’s laws, his/her reputation is sullied by the actions of these criminals. And the fact that, out of the entire HSBC scandal, only one individual has been prosecuted, leads people to believe that those who do business offshore are getting preferential treatment. “You are known by the company you keep” is still a widely-accepted principle.
The stigma that may attach to you can very well lose you contracts and business.
By the late 50’s, a large number of American companies had set up operations in Cuba – primarily for tobacco, bananas, and other agricultural production. Batista, the current dictator at the time, welcomed American investments and the revenue it brought to his government and personal coffers. He was, however, cruel and inhumane. When Fidel Castro, a popular revolutionary with ties to the U.S., determined that he had enough support and backing (much of it from the U.S.), he led a successful revolution and overthrew Batista. Only afterward did he announce that he was turning Cuba into a communist state and, in doing so, would be freezing and taking over all American financial assets in his country. This was a blow to a number of foreign investors and those who had incorporated in Cuba itself. Boatloads of money were lost.
We live in a volatile global political environment. What a contractor/freelancer may believe to be a very safe “haven” for incorporation may not be so next month. And there is no recourse when a change in power results in loss of the business entity and the money that is parked in local banks. It will be gone.
Such political changes do not have to be violent, as Cuba’s. There can be freely held elections that put another political group in power – one that is nationalistic and determined to take assets from foreign nationals.
You May End Up Paying UK Taxes After All
You have set yourself up in an offshore location. Your tax rate is much lower. You are happy. And you still live in the UK, because your family and friends are there. Of course, you are earning a great income and you will be bringing some of those funds into the UK for all of your living expenses. What you need to understand is that every shilling you bring into the UK is immediately taxable as income. Your tax advantage has thus disappeared.
You may be looking for the financial advantage, the privacy and the security that you believe offshore incorporation offers. Before you make that leap, however, you need to consider the drawbacks and risks involved. You may just be better off staying where you are, getting great tax advice, and resting your head easily on your pillow at night.