Offshore company – how it works

Pauline Familara
Pauline Familara
2 December 2020
Offshore company – how it works

Offshore company – how it works The key purpose of an offshore is to reduce tax burden and increase real profit, the primary goal of every business. Taking into account the form of activity, the first step is to choose a country with the most favourable taxation policy, as well as a scheme of an offshore registered under the jurisdiction of that country. To maximize your profits you should have a deep knowledge of how an offshore works in order to arrange cooperation between it and the primary office.

Offshore schemes

There are many ways to reduce taxes by using offshore zones. To understand more about functioning of offshores, we will review some of the most popular schemes that are used worldwide.

Transfer pricing

Companies engaged in trading use this method. Transfer pricing involves using an offshore company as a mediation between sellers and buyers.

The scheme works as follows for export operations:

  • Producer or supplier of products opens a company in one of the offshore zones;
  • Signs a contract with that company to supply products at bottom prices, often at prime cost or a small margin, which will be used to pay off taxes in a residence country;
  • Offshore company then resells products to end-customers at the most favourable, market price;
  • Profits are accumulated on accounts of an offshore company, which pays a small amount of money or a tax (depending on offshore type) in its jurisdiction country.

Imports through an offshore company also includes underpricing in order to reduce custom duties and VAT. However, a significant reduction of product’s prices will result in higher income tax, which can be reduced by signing a contract for services with companies working under simplified taxation scheme.

Construction scheme

To minimize taxes in the construction sector, an offshore company is used as a general contractor:

  • Full payment for construction is transferred to offshore company;
  • Offshore company hires a resident company as a subcontractor to perform construction works;
  • Construction material expenses and costs of subcontractors’ works are covered from offshore account, which also accumulates the largest part of income; since there is no income for subcontractor, it shall not pay any income tax.

Provision of services

This is one of the most widely used business scheme which involves concluding an agreement with a company under jurisdiction of an offshore zone, supposedly – for provision of certain services, such as consulting. In fact, there are no services, and the payment goes to production costs, which lowers tax rates. This scheme is being supervised by control bodies of the residency country, as this method is often a part of a money-laundering scheme.

Production scheme

An offshore company concludes a manufacturing agreement, paying for raw materials and works. Finished products are sold through an agent; earnings are fully transferred to offshore accounts. An intermediate party gets agency fee and pays taxes from this sum.

Schemes listed above are only a few examples of rather usual operations, provided that a company conducts legal business in its own country.

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