Whether you are selling intangible, virtual goods or offering your services remotely or even in person, you may at some point have considered reducing tax, simplifying accounting, increasing your privacy, reduced liability, or for other reason move your freelancing to an offshore jurisdiction.
Reducing Tax
This is entirely dependent on where you live and the structures available to you vary immensely. In some jurisdictions, this is completely out of the question, whereas in others you can utilize different forms of offshore structures to reduce your tax liability.
If you live in a jurisdiction that only taxes income remitted from within or into itself, you can stash profits offshore.
Whatever you do and whichever structure you opt for, ensure that the structure itself costs less than the taxes you would otherwise owe. I know from experience how fickle a freelancing budget can be before things start taking off.
Simplify Accounting
You might not be able to reduce your tax rate much if at all, but by invoicing your customers through an offshore company. The funds would then sit offshore until such time you transfer them onshore. This can for example be structured by having a local company which either owns the offshore company and acts as a holding company, or has a service agreement with the offshore entity.
Again, what you can do relies entirely on where you live and applicable laws and tax codes.
The advantage here is that the offshore entity likely doesn’t have to do any significant bookkeeping, if any. Some consider bookkeeping to be a huge chore.
I’m not convinced the benefits here are all that great. Bookkeeping isn’t all that hard. Rent a book at your local library about how it’s done or outsource it. Smaller accounting firms often charge quite humble fees to keep your books for you.
Increased Privacy
Many, if not most, freelancers are registered as sole-proprietorships, which are registered to the proprietor’s residence. Not everyone enjoys this.
Some therefore opt to offshore part or all of their freelancing to a jurisdiction where the names and addresses of shareholders and directors are not public information.
Reduce Liability
Similar to above, because many freelancers are sole proprietors, they have an unlimited liability, meaning their private assets can be claimed by creditors.
By shifting the company offshore into a Limited Liability Company (LLC) or similar, the freelancer may be freed from personal liability. The reality of this will depend on applicable laws.
Other Reasons
Another common reason for transferring one’s freelance work offshore is for jurisdictional reputability. If you are a freelancer based in a country with a poor international reputation, you may be able to attract more business if you act as a company registered in a reputable jurisdiction.
Similar to the above, another reason many freelancers choose to form an offshore company is to open a bank account in a more financially stable country and ensure that the funds in that bank account are owned by a legal entity in a different jurisdiction than their own.
Hi Streber,
Firstly thanks for such a great blog. I am an IT consultant starting out in the big wide world and looking for some guidance.
Currently I am an Australian tax resident living in Canada. I imagine next financial year I will become a non-resident Australian for tax purposes and will be a resident in Canada. The catch is, I don’t know how long this will be for.
I like the idea of setting up a Hong Kong company for privacy, security, liability and independence from the countries that I am residing in. I understand that any wage I pay myself from my company would be subject to taxation in Australia or Canada, what I don’t know is:
– If I am the sole director of an offshore company, do I have to pay tax on the companies’ earnings to Australia?
– If I became a Canadian resident, would this be the same?
– Is it worth it? Is there a “price point” where it would be worthwhile?
Thanks in advance.
Hi Andrew,
Thanks for your feedback!
First up, Hong Kong companies do not enjoy a particularly high degree of privacy. All details about the company are available on public record. The cost of obtaining copies of all company documents is just a few hundred Hong Kong dollar.
Your first two questions are essentially about tax advice and I can’t comment on that. It’s something you’re better off discussing with a tax adviser who knows Canadian and Australian tax laws. Since there are a lot of similarities as well as close ties between the two countries, I can’t imagine it would be very difficult to find a local adviser who could help you out.
All I can tell you is the probably obvious that you owe tax to the jurisdiction or jurisdictions where you are tax resident. Tax residence isn’t always a very straight-forward assessment, though.
As for the third question, what you’ll end up doing is comparing the pros and cons of running an offshore company against running a local company. It’s unlikely you’re looking at any tax savings here, but it might be easier to run/manage a foreign company for an international audience. While Canada ranks highly when it comes to things like incorporation and paying taxes, it could end up being cheaper in the long run to operate under a Hong Kong company by for example outsourcing record keeping and audits for less than you’d be paying in Canada.
Thanks Streber, that is very helpful.
Dear,
Congrats for the blog. One of a kind.
Usually the off-shore banks work only with intangible investments or virtual companies, but whenever it gets to a point that you wanna run a physical business, they see a problem and hold you back.
So, how it would be possible to have an offshore company investing (equity exchange) in a physical company based, let’s say, in Paris, London or wherever but not an off-shore place? What about the compliances and relations to banks, as it’s not an intangible asset?!
Thanks
Hi Lucas,
Thanks for your feedback!
If I understand you correctly, you are asking about using an offshore company to own an onshore company, is that right?
That’s usually not a problem when it comes to banking. The offshore company is effectively going to be just a holding or investment company, which banks tend to consider as lower-risk companies than companies that trade. If it’s an investment company with multiple investments, you might need to prove to the bank that you are experienced investor and that you’re not just going to lose all your money and wind up the company.
What you may face, though, is scrutiny from the tax authority where the onshore company is based. They might be suspicious if an offshore company owns all of a very large part of a local company. If you’re just talking about a small investment, where you are just one of many shareholders, it’s not a very likely risk.
How does the CFC compliance typically work in practice? Lets assume the clients of the IT contractors are mainly Scandinavian small businesses, and IT contractor is a perpetual traveller. Clients know him well. If clients get invoiced from say a HK company, I understand it would seem perfectly fine. But if the invoice would mention a registered address in BVI or Anguilla, what would be the consequences/risks for the Scandinavian client, in an audit for example? If client can say its contractor is legitimate and its the de-facto UBO, wouldnt it be ok?
Having a IBC would limit options of banking partners you mentioned, what banks in the Baltics would be more open to BVI/Anguilla companies?
One only tries to look at cost-effective solutions here, given its a startup. According to Kaizen you look at an estimated 3,500 usd total annual cost of renewal fees, registered office, company secretary, accounting and audit for a HK Private Company. One could potentially reduce that amount by 50% or more by having a Anguilla company, not mentioning the less hassle with audits and accounting.
The implementation of CFC varies regionally. AFAIK, Scandinavian companies are forbidden from having loans from companies in tax havens since that is an often-used method of laundering money or evading tax. Now, you won’t be lending them any money, but that kind of stringent regulation might mean that they have to prove to their auditors that the offshore contractor company they used (you) is in fact owned by so-and-so. They might have to ask for copies of proof of company ownership structure and show those to their auditors. In all likelihood, it’s not going to be a huge issue but it’s something to keep in mind.
Pretty much all banks in the Baltics will open accounts for offshore companies. The Scandinavian banks (SEB, Swedbank, DNB) sometimes decline unless you bring a lot of cash and a good business plan to the table. I’d stay away from Lithuania, though. The banks there are generally of bad quality. In addition to the Scandinavian banks, some good ones in the Baltics are Norvik Bank, Versobank (should start issuing cards this summer, I’m told), Rietumu, and ABLV. Baltikums is a very easy-going bank but quite mediocre in their services. I’ve recently been introduced to TKB and so far so good, but it’s still very early.
IBCs are indeed a lot cheaper and easier to run than most other forms of companies. Gibraltar (and even Malta and Cyprus) can be quite affordable, though. Costs more than IBC but less than most other jurisdictions. If you have a partner, a UK LLP might be an interesting option.
I’d be much more worried about your own domestic CFC regulations than those of your clients depending on where you live. A lot of people who start opening offshore companies and accounts end up as tax evaders without knowing it. Many never get caught but generally if you do ignorance isn’t a defense.
Generally, my experience is people who try to get greedy too early get burned. Make no mistake transacting internationally is more of a hassle than doing so domestically if you live in a country with a well developed infrastructure (or need to operate in one that isn’t from one that is). Some common examples of what people run into:
– Can’t write checks
– Clients aren’t set up to make payment by wire so it could deter them from doing business with you
– Often simple things like Paypal accounts won’t work with many of these jurisdictions as you can only use them to load not to receive, etc.
– Payment processing (accepting credit cards) can suffer higher interchange rates (they can also be lower if you plan it well but most people don’t have the expertise to make the decision) as well as higher decline rates and your customers can face cross border fees
There can be lots of benefits too but I generally tell people if they wince at the thought of paying $10k+ for a proper offshore structure (really to have an experienced attorney vet it and make sure you’re on side with all the local tax laws is probably going to cost a lot more than that) then you probably aren’t read and should stick to a domestic structure, though of course this might not be the case if you’re in a country where infrastructure is pretty limited or there are a lot of local operating risks.
Loving your blog buddy, great work!
Say one IT contractor wants to setup an offshore company for low cost with little bureaucracy and no tax. His clients are in the EU.
Where would one setup the company, and where would one bank?
If one incorporate in e.g. Seychelles, which is cheap(like Belize, but you didnt recommend it according to your last comment) and requires no accounting, as far as I understand. And you bank in say Latvia.
Would reputation be a weak point here? Would banks in Latvia accept an IBC from Seychelles? Can the IT Contractor setup the bank account remotely?
Would you consider another structure?
Thanks for your feedback and comment!
It depends a lot on your clients. They might have to endure CFC compliance if your company is registered in certain tax havens.
I’d take a look at Gibraltar, Hong Kong, and possibly Singapore – maybe even Labuan (trading company). They are reputable jurisdictions and it’s quite easy to open a bank account just about anywhere. It’s worth noting that Gibraltar companies typically do not bank in Gibraltar, since it may make the company tax resident there (low tax, though). Accounting is required in all four, but this is a good thing and can be outsourced to local or international accounting firms at a pretty low cost. Another option is Malta, which is a bit complicated but usually cheaper than Singapore and Labuan.
If you absolutely want an IBC, I’d avoid the ones with completely tarnished reputations, such as Belize and Seychelles (or worse…). There are far more reputable ones, such as Mauritius (GBC class II, or class I), BVI, and perhaps Bahamas and Turks and Caicos. There are accounting requirements in all these jurisdictions, but in many cases it’s enough to just prepare an annual financial statement of the company. This needn’t be filed anywhere; just to be available upon request. Lately, I have seen a lot of interest in Anguilla from freelancers. It’s basically BVI’s more easy-going little cousin. Quite cheap, not too far off form Belize and Seychelles.
With an IBC, you will be more limited in your choice of banking partners since a lot of banks in Europe will not take you on.
If your clients are mostly in EU, it would make sense to bank somewhere in the EU or SEPA region, for faster and cheaper payments. Cyprus, Malta, Luxembourg, Latvia, Switzerland, and Estonia are good candidates. Bank accounts can usually be opened remotely, whether it’s directly or through an intermediary.
Great post.
I have a question. I am a freelancing consultant in the IT-industry, and during the latest months I’ve been traveling more and more. I’ve now come to the conclusion that I will begin to travel and work permanently, and there for I need a good business model so I can continue my work and commitments. However the business-model should be internationally fitting, and the best of all would be zero tax.
I’ve been thinking about starting a IBC in Belize and opening a bank account in either HK or Seychelles. I’ve read everything on this website, and before I proceed any further I would like to ask you if you have any tips or recommendation for a businessman that is constantly traveling?
Thanks in advance!
Thanks for your feedback!
What this comes down to is what impact you think it will have for yourself when you meet clients. I know some people who found it very difficult to consult as offshore companies in some industries.
Unless you have a particular reason for seeking a jurisdiction that doesn’t have public records, there is essentially no country that beats Hong Kong. Here I’d refer to my post on Hong Kong recently: https://www.streber.org//2014/02/jurisdiction-spotlight-the-special-administrative-region-of-hong-kong-and-macau/ It is quite easy to open bank accounts with Hong Kong companies across the world. You will be accepted by more banks than you would as an IBC.
Belize has a bad reputation. It’s a poor nation with erratic international relations. If you seek an IBC or IBC-like company, jurisdictions like BVI, Mauritius, and Bahamas enjoy a better international perception. They are jurisdictions which take fighting money laundering seriously (or seriously enough to mostly please FATF, OECD, et cetera). The British dependencies and all manners of variations thereof (Cayman, Bermuda, Anguilla, Turks and Caicos) all have a slightly better reputation since they can be made answerable under UK law (in some cases – it’s complicated).
Choice of bank should reflect your own personal needs, but also the needs of your clients. For example, if you have 90% European clients, it might be wise to bank there as well. This reduces transfer costs and times.