Tax Considerations in Offshore Company Structures: An Overview

What offshore tax efficiency actually requires

The headline proposition of offshore structuring — that locating a company in a zero or low-tax jurisdiction eliminates or reduces tax on its income — is broadly correct in principle and considerably more complex in practice. For the tax position of the offshore jurisdiction to be respected, the structure must meet several conditions that the post-BEPS regulatory framework has made significantly more demanding.

First, the company must have genuine economic substance in the jurisdiction: real management and control, real decision-making, and adequate employees, premises, and expenditure. A company registered in a zero-tax jurisdiction but managed entirely from a high-tax country will generally be treated as tax resident in the high-tax country under the management and control test.

Second, the income of the offshore company must not be subject to controlled foreign corporation (CFC) rules in the beneficial owner's home jurisdiction. Most major economies have CFC legislation that attributes the undistributed profits of offshore companies to their controlling shareholders in certain circumstances.

Treaty-based efficiency

Some offshore structuring involves accessing treaty benefits — reduced withholding tax rates on dividends, interest, and royalties flowing from operating jurisdictions to the holding jurisdiction. Post-BEPS, this requires genuine substance and the OECD's principal purpose test allows treaty benefits to be denied where the principal purpose of an arrangement is to obtain treaty benefits without genuine commercial substance.

Home jurisdiction reporting obligations

Whatever the tax position of the offshore company in its jurisdiction of incorporation, the beneficial owner remains subject to the tax and reporting obligations of their home jurisdiction. This typically includes disclosing the existence and ownership of foreign companies, reporting income received from them, and in some cases paying tax on their undistributed profits under CFC rules.

The role of professional advice

Tax planning involving offshore structures requires coordinated advice from specialists in all relevant jurisdictions: the offshore jurisdiction, the operating jurisdiction, and the beneficial owner's home jurisdiction. The interaction between these systems is complex and the consequences of getting it wrong can be severe.