If you are a Perpetual Traveller, or try to live your life according to Flag Theory, at some point you’ll come across lawyers and agencies specialising in company registration (both offshore and onshore). It turns out that not all jurisdictions allow you to set up your company without special localised help. You almost always need a local agent to deal with the authorities (a lot of the time because you aren’t even in the country).
There are many types of agencies and law firms. On one hand, there are the big companies, the big four (KPMG, PWC, EY and Deloitte), with offices in the world’s biggest financial centres. They have luxurious and eye-catching brochures and offer lots of additional services through specialists in all kinds of fields.
Then there are the small firms in Caribbean islands you’ve never heard of, that don’t even have a website, or if they do, it’s seedy and old fashioned.
And finally, you have between the two extremes a wide range of agencies that also claim to help you set up your offshore company from offices in all kinds of places. The vast majority of these are small and, if it weren’t for Google, you’d never have found them.
When you enter the offshore world or want to set your company up offshore, it’s completely normal to feel very insecure, surrounded by all kinds of agencies trying to sell you things, while aware that, if you don’t have experience or know enough about taxation, you have no way of knowing which are good and which aren’t.
So, with today’s article (and, more generally, the information in free ebooks and blog posts on Tax Free Today), I’d like to give you some information that’ll help you navigate the offshore world and deal with those agencies.
Cheap doesn’t always mean good, but nor does expensive.
Sometimes, you find a small agency or professional that helps you set up the company properly and at a good price. At other times, you find that the structure they’ve sold you comes with many hidden costs and wasn’t necessary, or even that they haven’t opened you a business account at all with the company you’ve registered (making it totally useless, since you can’t make any deposits), or that you can’t use payment gateways.
Black sheep are common in the world of tax havens and offshore jurisdictions. Always be careful, even when dealing with seemingly highly qualified tax law firms with fees in excess of €500 an hour.
They don’t necessarily have any reason to lie to you, but they might exaggerate certain matters while avoiding others entirely.
And don’t make the mistake of thinking that the incorporation agency, the tax advisor or the nice lawyer you’re talking to know the laws of the country you live in, together with what you need to set up an offshore company. In fact, this is what most commonly goes wrong, and is one of the things we pay the most attention to in our consultations.
I can say from experience that practically no tax advisor knows what’s required of you when you register and/or manage an offshore company from a high-tax country, nor do they know about the taxes and withholdings you’ll face.
Agencies that help set companies up offshore do not know (nor do they care about) what you need to bear in mind in order to avoid problems in your country of residence. In fact, they won’t even ask you where you live.
Of course, if you’ve chosen a good country to live in this isn’t a problem, but not when you live in a country with countless rules and regulations like Australia, Spain, Italy, France, the UK, Germany…
So, we’ve done the job of selecting from Tax Free Today which agencies are worth it, and we only work with ones that sell complete packages without nasty surprises, that guarantee that they can open a business account, not leave any loose ends, or omit to tell us about any present or future costs.
Below are 6 truths or fundamental facts about the offshore world that are rarely talked about.
Fact no. 1: Setting a company up outside your country has no reason to be complicated or expensive.
Although, of course, only if you know what to bear in mind (something that, if you are a regular reader and subscriber of Tax Free Today, will already have started to seem clear to you).
Once you’ve overcome the language barrier, especially if you’re prepared to move and fill out forms, opening an offshore company isn’t expensive.
You can also set up a Limited Liability Company (LLC) in Wyoming for about 500 dollars, or a Limited Company in Bulgaria for about 600 euros (you’d have external help with these ones).
Fact no. 2: Agencies are only interested in their own wellbeing, not yours.
For agencies, helping you register your company or business abroad is a business that seeks to make them a profit. This doesn’t mean they won’t help you (it’s logical for businesses to want to make a profit), just that you have to ensure that the interests of the parties involved are correctly aligned.
Some agencies thus lend more importance to the long term and seek the best deal for their clients. After all, you make more money in the long run when things go well, and thus they can continue charging for administration or for extra services like accounting.
But there are so many black sheep promising you something and then not delivering on it. In the worst cases, you pay a lot of money and never hear from them again. For this reason, it’s important you’re always informed about the licensing and registration of the agencies in question.
As a rule of thumb, avoid any agency that doesn’t follow the usual KYC (client identification) procedure. We’ve already talked about the KYC: you’ll generally have to present a copy of your passport or complete a questionnaire so that they know who you are.
Not all black sheep necessarily have bad intentions; they may just be misinformed or saturated. There are currently many entrepreneurs who have set up a Hong Kong Limited company but have not managed to open a bank account there.
The agencies they contracted simply didn’t know that the application process for bank accounts has gotten harder and harder, to the point where it has long been virtually impossible to get a business account* in Hong Kong if you don’t have a very good income.
After all, three years ago, any digital nomad hippie could get a bank account in HSBC, even if he went there in shorts (this really happened).
Agencies specialising in offshore services generally see themselves as providers of a ‘pure’ service, disconnected from everything else. They are executive contractors who do not advise on tax or any kind of law. The Panama Papers show that their most profitable option is often tax evasion.
They deny all responsibility and often don’t tell their clients that they are breaking the law.
Certainly a large portion of the entrepreneurs who want to or have already set up their tax-free offshore business have never heard of the CFC rules, the actual place of administration, the obligations in identifying foreign assets, or of the international transparency laws that exist in many Western countries.
Of course, there are also very different options for setting up an offshore company.
For example, through E-residency you can legally contact the Estonian authorities and do the accounting and tax declaration online. But since offshore financial services create employment, it’s unlikely that other countries will follow suit.
This means that, since you depend on them, these agencies will continue making money by obtaining a high margin beyond the process of registering the company. In general there are a total of two strategies, albeit with infinite nuances.
- A seemingly cheap offer compared to its competitors, but which costs the agency nothing. Automated procedures, standard documents and the pure foundation of a company without any other additional service, which often turns out to be very straightforward. The agency doesn’t care if their clients are satisfied and stay with them: registering the company has already earned them something. Ultimately, their clients almost always do stay, even when unsatisfied, since they offer the best prices. Sometimes there are hidden costs that must be paid separately (e.g. registration fees and state taxes). Changing agency is a complicated process, and many people are unwilling to close the company because they don’t want to lose the time and money they’ve invested (cf. the sunk cost bias). You should generally avoid cheaper agencies, or at least that’s my experience. The less specialised the agency, the more likely they’ll fit into this category.
- Premium offers with a complete package and consultations included (not paid separately by hour). Despite costing more than the offer described above, this premium packages often work out to be cheaper. Organising business accounts and witnessing and apostilling personalised documents requires much more time and money than just setting up a business. The agencies that work with this kind of offers earn more money long term because they manage to keep their clients satisfied. They usually make a large profit on annual administration fees, but they give you unlimited advice and often also take care of accounting and tax consulting. Since they risk their clients switching to a cheaper competitor after having set up the company with the complete package, the service they offer is good and fast. I prefer these agencies by far, who, in order to be more specialised, often only offer their services in a few jurisdictions. But there are many combinations.
Whatever happens, always remember that the main priority for the agency, the advisor, the lawyer or the accountant is their own profit, so try to find someone who’s looking for a long-term professional relationship and whose interests are aligned with yours.
Fact no. 3: It’s not easy to open business bank accounts
Many agencies do not offer complete packages, but separate business bank accounts. However, jumping to the conclusion that everyone can thus easily open their own offshore account is a mistake.
As I said, registering and creating a business is often very cheap and simple. What’s really expensive and complicated concerns the bank account, because it requires additional costs and effort. For example, all the documents must be witnessed by a notary, or even require an Apostille. Customers must additionally comply with the KYC policy (client identification), which means that the agency has to confirm that you’re not a money launderer, terrorist or any other type of criminal. You also need to fill out an endless amount of forms with confusing details, which is why most people need help. Overall, this is the reason agencies only offer business accounts with the registration of a company. They’ve often been working for years in partnership with other banks, thereby at least minimising some costs.
If you still think that banks are looking to take on new clients, you’re very wrong. Having offshore companies as clients is very costly for banks as, since they’re especially prone to being used for money laundering and other criminal activity, they require a much higher level of supervision. This translates into higher costs when opening the account, as the bank is obliged to investigate the client thoroughly. Operational costs are also higher, as that company’s transactions will likely have to be manually approved due to the high risk involved. All of this makes offshore clients more of an expense than a source of revenue. This is what leads many banks to ask for minimum deposits, income or very high fees, in order to dissuade small companies (that’s if they even let you open the account, or if, after opening it, they don’t decide to close it directly, as has happened to many of our readers).
Of course, many are used to the EU facilities for opening bank accounts. In Germany and other European countries opening a bank account is the easiest thing in the world; in some cases the whole process can be done online. Don’t expect it to be so simple for your offshore company.
Fact no. 4: Agencies don’t tell you everything, and sometimes withhold essential information.
Either on purpose or due to a lack of knowledge (of the agency as a whole or of the specific person you’re communicating with), many agencies disregard certain things. In some cases, this can lead to real problems.
One pervasive myth is that of accounting. Businesses are only completely exempt from accounting in a very small number of jurisdictions, but this is often presented differently. In many cases, it is not obligatory to file accounting documents, but it is to have them. Practically, this won’t make any difference, and will continue not to for decades, because there’s no point going over the accounts of a business that’s tax-free anyway. But if in the future the country decides that companies should start filing their accounting documentation, it could cause you serious problems. You should at least be able to provide a basic list of past income and expenses.
More importantly, there are the particular local characteristics, as in the US. Virtually no agency will tell you that you are going to fall under U.S. tax evasion laws, FATCA (Foreign Account Tax Compliance Act), simply for being involved in a U.S. business, even if you don’t live there and don’t have to pay taxes. For instance, every owner of an LLC in Wyoming or Delaware has to meet the deadlines for filing the FBAR (a foreign bank account report) each year, in which you must list all of your foreign assets that have been ordered by a foreign bank if their total value exceeds $10,000. Fortunately, you can just file this form online in about five minutes. But don’t forget anything. Bear in mind that, due to its espionage activities, the US probably knows more about your bank accounts (whether offshore or not) than you do.
In any case, you should follow these rules, since the U.S. tax authority, the IRS (Internal Revenue Service), can be very unpredictable. Even if you have nothing to do with the U.S. beyond your LLC, you could face huge fines if you don’t comply with regulations.
Fact no. 5: Agencies are likely to have no idea about your business model and your needs.
The typical story about the failure of an offshore business is in Hong-Kong, where it is very unlikely you’ll get a company bank account at the moment. But even before the current situation, many people who, tempted by tax exemption, had set up their company in Hong Kong, and had a lot of problems.
The problem is that many entrepreneurs think that they can manage their offshore business like any other business in their home country, without taxes and regulations, but they are very wrong.
Aside from the problems with bank accounts I’ve already mentioned, there are other obstacles. Invoicing with your Hong-Kong Limited company in your home country, or in countries with an even worse reputation will be very difficult; impossible, even. This means that they are unusable for a wide variety of business models (not long ago we wrote an article on how to invoice from offshore companies).
Are you used to the full functionality of PayPal or Stripe and their (relatively) low rates? Forget about it if you get into the offshore world. You’ll encounter several problems even where PayPal allows you to open a company account. The fees will be much higher, and it’ll cost you to withdraw money. PayPal requires the business and the bank account to be in the same country in order to allow linking, which is often not possible or recommended.
You may need a bank account in the U.S., which could be difficult to get. Or you could just make transactions from one Visa card within the same country.
PayPal lets you create multiple accounts from different countries, so you might be able to avoid these problems by sending money. But, this will be very expensive due to the massive fees; it’s not an alternative.
Now that we’re on the subject of fees, are you used to free transactions within the SEPA? EU banks that open offshore accounts, such as in Latvia, will charge you €40 per transaction to or from the SEPA. Most Caribbean banks will charge you €80, plus high maintenance costs.
You should properly calculate if the benefits of being tax-exempt offset the costs of maintaining the offshore business and its corresponding bank account.
There are many obstacles and problems involved in offshore business that you would avoid with a business within the European Union.
For this reason, you need a solution fully tailored to the special needs of your business model, which is something very few offshore agencies and lawyers will offer you.
NB: for those still in doubt, yes, using offshore business still makes sense, especially if combined with onshore companies, especially in the Limited Partnerships (LPs) in Canada and the UK.
Fact no. 6: Knowledge of the offshore world is neither exclusive nor secret.
Even if they don’t actually advise you, agencies will present themselves as ubiquitous experts. This, however, is impossible, since the offshore world is in constant transition. Apart from that, it’s not that surprising: everyone can have that knowledge. Understandably, most people don’t have the time or desire to acquire all this knowledge, but that doesn’t mean it’s secret. This is precisely why you have the Tax Free Today blog, to get informed. If you’ve read a few blog posts you probably already know more than most offshore registrars.
The knowledge behind Flag Theory is no secret and anyone can acquire it.
Tax Free Today’s goal has always been to show everyone their options so that they can free themselves from the weight of the State and live a freer life according to their needs, regardless of how wealthy they are.
Everyone deserves to be free, and so do you!
For this reason, you should be sceptical about everything you read about the offshore world, even what you’ve just read here. Anyone can live tax-free, in a relatively short amount of time, if they want to, but they’ll have to be willing to make a few compromises and concessions.
If you already know what you need, take advantage of our contacts with agencies and law firms, specially selected to avoid nasty surprises. Email us at firstname.lastname@example.org.