Tax havens often offer beautiful beaches and clear seas. But they also offer an ideal environment for entrepreneurs and their offshore companies. These countries are characterised by low or no taxes and a high degree of anonymity for their entrepreneurs. But nothing is as perfect as it first appears. In this article, we take a closer look at the issue of tax havens and offshore companies.
An offshore company is a company registered abroad, usually in a place with low taxes or special legal conditions (e.g. greater privacy protection). This company is then subject to local laws that are more favourable to it than the laws in the country where it actually operates.
A tax haven is a country in which companies pay significantly lower taxes than usual, or no taxes at all, or a country that is attractive to companies for other reasons (e.g. a high level of privacy). At the same time, these countries tend to be politically and economically stable and therefore safe.
The most famous tax havens include the Seychelles, the British Virgin Islands, Bermuda, Panama, Cyprus in Europe and even the United States and Hong Kong.
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For offshore companies, the benefits of a tax haven are clear – low taxes that mean a lot of money saved. But you may be wondering how this relationship benefits the countries themselves, which are referred to as tax havens, if they are actually losing money in taxes. There are a number of reasons for this:
On the other hand, however, tax havens must also reckon with the many disadvantages that low taxes and corporate anonymity bring:
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The conditions for setting up an offshore company vary based on the country in which you want to set up the company. You need to study the laws and rules of the country in question, which can be quite complicated. For this reason, many people choose the services of intermediaries to set up an offshore company for them. It is also common practice to choose a so-called ready-made offshore company. This is a company that already exists but is not active and is simply transferred to you.
Yes, it is legal to own an offshore company. In terms of the legal framework, the establishment and operation of offshore companies is in accordance with the legal norms and regulations of the country in which they are registered. On the other hand, they can be problematic in some respects:
The main purpose of offshore companies is often to avoid paying taxes in the Czech Republic. This means that the Czech Republic loses significant revenues that are needed for the state budget and to finance expenditure on, for example, education or health care.
In particular, large multinational companies use offshore companies to shift profits to avoid higher taxes. For example, they set up a subsidiary in a tax haven, to which they transfer income through royalties or fictitious consultancy services.
A specific example is the US company Apple, which used tax optimisation through Ireland and Dutch holding structures to minimise taxes in Europe. The European Commission eventually ruled that Apple had to pay €13 billion in taxes to Ireland because of illegal tax advantages.
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Some tax havens provide such a degree of anonymity that it is not clear who really owns or runs the company. As a result, this makes it difficult to monitor illegal activities such as money laundering and can lead to the development of corruption.
An example is the Panama Papers affair, which revealed that a number of politicians, celebrities and businessmen used offshore companies to hide assets and avoid taxation. Among those exposed was, for example, the then Prime Minister of Iceland.
Sometimes offshore companies are used to undermine the local legal system. For example, in an attempt to evade justice or to avoid enforcement of obligations to creditors.
For example, a debtor in insolvency may transfer his assets to an offshore company and claim that he technically owns nothing.
A concrete example is the affair of Denmark’s largest bank, where $230 billion of suspicious transactions flowed through its Estonian branch. Many of these transactions were conducted through offshore companies that served as intermediaries for Russian oligarchs, state corruption and organised crime.
An offshore company is a company registered abroad, usually in a tax haven, where it pays lower taxes and benefits from overall more favorable terms. Well-known destinations include the Seychelles, Cyprus, Panama or Hong Kong. For entrepreneurs, this means a lower tax burden, asset protection and greater privacy. At the same time, these countries gain revenue from company registrations, strengthen their financial sector and attract investors.
However, the existence of offshore companies also has negative consequences. Countries where companies do real business lose tax revenues, are more prone to inequalities in society and have problems with transparency of financial flows. Offshore companies are also often abused for tax evasion, money laundering or financing illegal activities, as the Panama Papers scandals or the profit shifting scandals of large corporations have shown.
Not sure how to do your taxes correctly so you don’t get it wrong? We can help you navigate the law, whether it’s dealing with a specific tax situation, preparing for an audit by the tax authority or defending yourself in court.
Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.
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