Singapore Offshore Company
What Is an Offshore Company?
The term offshore refers to a location outside of one's home country. Therefore, in a broad sense an offshore company is defined as a company incorporated outside the country in which it primarily conducts its operating business or where its principals (directors, shareholders) are located. In other words, we can call any company that is incorporated in a foreign jurisdiction relative to the place of its business activities or the place of its key stakeholders an offshore company.
In the narrower sense, the terms offshore, offshore zone, or offshore jurisdiction is often used to refer to a country or territory that has special business regulations designed to invite foreign companies. These include low or no taxes, simple rules for corporate reporting and governance, and asset protection.
Birth of Offshore Companies
Offshore strategies are not a modern phenomenon; they have been used since the time of ancient Athens, when a two percent import and export tax was introduced by the state. In order to avoid paying taxes, Greek and Phoenician merchants began to go around the territory of Athens and use the nearby small islands to store goods without paying duties and taxes. These islands were the first offshore 'tax havens'.
In the 1930s, Switzerland became the first prototype for a modern offshore jurisdiction. As part of its program to attract capital for its economy, the Swiss government created money exchange centers and institutions of finance and banking. A new law required bankers to maintain records of their clients' accounts in complete secrecy. These changes made Switzerland a haven for those with assets that they wished to keep secret; these development led the transformation of the country into a major offshore center.
The term offshore first appeared in the United States in the late 1950s. It was used to describe a financial institution that escaped government control through geographic selectivity. In other words, a company moved activities that the US government wanted to control and regulate to a territory where the arms of the US government did not reach. In the 1970s, many of the former British colonial territories turned their newfound freedom into an opportunity for offshore activities. By effectively creating safe havens for foreign assets, many were able to generate an influx of capital that was used for development of the newly independent country.
The late 1960s also saw Singapore's emergence as an offshore zone. After gaining independence in 1965, one of the Singapore government’s goals was securing investors to fund the country’s development. Due to a favorable tax regime and pro-business policies, by 1972 one-quarter of Singapore's manufacturing firms were either foreign-owned or joint-venture companies. Singapore also set up government incentives for branches of international banks to relocate to Singapore. As a result, asset growth in Singapore has been phenomenal, rising from $150 billion in 1998 to $1.173 trillion by the end of 2007. In 2020, the value of total Assets Under Management (AUM) reached approximately 4.6 trillion Singapore dollars.
How Offshore Companies Acquired a Bad Reputation
With time, due to the lack of regulations and with the help of clever lawyers, businesses and entrepreneurs started to incorporate offshore companies in zero tax offshore jurisdictions simply to avoid taxes and for no other business purpose. Entrepreneurs would register their companies in jurisdictions that imposed no or very low taxes for non-residents. In addition, such companies typically enjoyed secrecy in both administration and banking matters. Transactions and the ownership of corporations in these tax havens remained anonymous and confidential. Many so-called zero tax havens (such as Cayman Islands, Bermuda, the British Virgin Islands, etc.) became the primary vehicle for setting up offshore companies. Some of these structures were used for money-laundering and the term offshore company gradually started to acquire a negative reputation.
As revealed in a 2016 leak from the law firm Mossack Fonseca (also known as the Panama Papers), numerous world leaders and celebrities have used shell companies to avoid paying taxes. This sort of tax avoidance was also a common practice among a number of well-known U.S. companies, according to a report by Oxfam America. The country’s 50 largest corporations have stored more than a trillion dollars in offshore shell companies to lower their tax rate, the report says. The report analyzed Securities and Exchange Commission filings and determined that large corporations such as Pfizer, Walmart, IBM, and Apple have stashed billions of dollars via more than 1,500 subsidiaries in tax havens such as the British Virgin Islands and the Cayman Islands. Though this practice wasn’t illegal, keeping profits offshore lowered the taxes owed in the United States; Oxfam estimates that these offshore structures cost the U.S. government about $111 billion each year in lost revenue.
Offshore Companies Reinvented
To address the issue of tax evasion, developed countries have started to implement anti–tax haven measures. Such measures include strategies and rules that empower countries to not recognize or admit investments made through offshore havens by their residents. Many international organizations and governments have proposed a series of measures aimed at preventing unfair tax competition between countries. Since 2009, the Organization for Economic Co-operation and Development (OECD) has been at the forefront of this movement to address tax avoidance by multinational corporations. Those countries that still implement dubious tax practices are included in blacklists, and are ostracized by the majority of companies with genuine business activities.
In the current context, tax benefits are not sufficient to attract firms to an offshore jurisdiction. It must offer more — a regulatory regime that is favorable for business, financial, and personal purposes. It is regulatory system that:
- Encourages foreign investments and ensures that the regulatory framework for investment is anchored on sound, stable, predictable and transparent principles
- Offers an attractive tax regime including an extensive network of international tax treaties to avoid double-taxation. Such a tax system must achieve best value for the taxpayer and at the same time contribute to the country's economic growth and employment
- Enables flourishing of world-class banking system and a stable currency
- Provides an efficient legal system and protection of intellectual property rights
- Stands out for ease of doing business along with outstanding business infrastructure and skilled workforce
Traditional tax haven countries with no tax reporting, no accounting, no audits, and no other regulatory requirements are not suitable any more. The OECD regulations have made such countries pariahs in the international financial system. Some may still be useful for select situations or hybrid structures, but for the most part, they are no longer the best option. Transparency is the new norm. Incorporating your company in a jurisdiction that is even minimally opaque or has few to no KYC requirements may shut out your company completely from the international financial system. Before setting up your offshore company, it’s worth looking through “offshore blacklists” drawn up by reputable international institutions. Here are two of them:
- In 2017, the European Union drew up what was then a rather extensive blacklist of "non-cooperative countries and territories," comprising 19 states considered to be tax havens. As of 2022, this list has shrunk to 9 jurisdictions.
- The Financial Action Task Force on Money Laundering (FATF) is an intergovernmental organization founded in 1989 to develop policies to combat money laundering and terrorism financing. The FATF's black and gray list is one of the most internationally recognized and has the highest weight alongside the EU list.
Choosing a country that is on either of the above lists is a risky idea. Alongside avoiding countries that appear on the blacklists, it’s worth taking into account political risks in the country where you are going to incorporate. For example, Hong Kong is constantly under political and economic threat from China. If Hong Kong ceases to be autonomous and comes fully under the domain of China’s political and legal system, it will lose its business freedoms and status as a global financial center.
Incorporating Your Offshore Company In Singapore - The Right Choice in 2022?
If you are planning to set up an offshore company to grow your business internationally, Singapore is one of the most compelling choices at present. Singapore is known worldwide as an investor-focused country with pro-business regulations that form the core of its regulatory policy. Singapore has been on OECD's "white list" since 2009. Singapore’s free trade agreements, no capital gains tax, a meaningful and attractive tax regime, investment guarantee agreements, top ranked legal and IP system, world-class financial institutes, and more than 80 Avoidance of Double Taxation agreements offer a perfect value proposition for business owners and a smooth financial integration with nearly all countries of the world.
The list of advantages that Singapore offers is quite long. For a detailed understanding we encourage you to read our why Singapore article. For the next steps, read our Singapore company registration guide and contact us.
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