Today, I will touch on a number of concerns you may face if you are thinking about running an ecommerce business through an offshore company. Ecommerce here refers to the sale of goods and consumer services. Freelancing, consulting, and affiliate marketing comparable services (typically B2B) are not specifically included here.
I will not solve any problems here; merely point them out. Let this serve as a good starting point for your own research.
Intangible Goods
If you are selling web hosting, software, ebooks, and other virtual or digital goods and services, it’s a fairly trivial thing to offshore your ecommerce business.
On paper, it would really just be about forming the offshore company and open an offshore bank account. Then you simply change the terms and conditions on your website to refer to Example Software Limited, your class II GBC in Mauritius and transfer assets to your new bank account, for example with MCB in Mauritius.
While that may simple, a question should appear – why are you even doing this?
As I have touched on in the past, you cannot in 99% of all cases expect any form of tax benefits in doing this. Tax evasion is of course always an option but breaking the law doesn’t require an offshore company (although it makes it easier). This is an especially important aspect to consider for VAT (sales tax) within the European Union. Dodging VAT with an offshore company won’t work (legally), unless you also take steps to leave the EU.
Why would you invest upwards of 2 – 3,000 EUR to create an offshore company for your intangible-goods online shop?
What benefits do you seek? How are they fulfilled by forming an offshore company? Are they really?
Consider also the challenges you will face when it comes to accepting payments. See Accepting Online Payments as an Offshore Company.
You may lose PayPal or be required to use PayPal through an intermediary. An intermediary will usually cost 1 – 2% more than going directly with PayPal and they might hit you badly on foreign exchange rates. Are the offshore benefits worth this to you? Why?
Tangible Goods
In addition to the challenges above, you also face the challenge of having to maintain a stock somewhere of whatever it is you are selling.
If your operations are large enough and you can justify the costs, it might be worth looking at setting up a warehouse in a free trade zone (FTZ) or free port that doesn’t tax you (let alone ask questions) as long as nothing is imported into the jurisdiction. There are many out there, with some popular options being Hong Kong, Macau, Singapore, UAE, Shanghai, Liberia, Malta, Bahamas, and Panama.
There is no easy answer to what is suitable in a particular situation. No two FTZs or free ports are precisely same.
But how do you get your items there? If you are manufacturing things yourself, it will probably be an impractical amount of work to ship your goods to the offshore warehouse and from there disperse to customers. The costs will simply be astronomical, not to mention import (and export) taxes as applicable.
In reality, this is almost only feasible if you import from an overseas supplier and have the goods delivered to a warehouse in an FTZ. For example, your supplier in Indonesia manufactures 1,000 bamboo garden chairs for you. These are then shipped and stored in an overseas warehouse, from which you distribute to your clients.
What are you trying to achieve, exactly?
Taxes
So why can’t you just set up an offshore company and magically reduce your taxes? The company is its own entity and as long as funds stay within the company it’s fine, right?
No.
Tax residence is something we have discussed extensively over on the forum. I will dedicate an entire article to it at some point but the gist is that your company is in most cases going to be considered resident and therefore liable for tax wherever you live. Incorporation has virtually zero bearing on taxation other than to classify you as tax resident in that jurisdiction, as I mentioned in my article on the United Kingdom. A typical IBC is not resident where it is incorporated.
Worst case, the company is considered resident where you live and where it is incorporated (or more jurisdictions). This is where a double taxation avoidance treaty can help you.
OK, but what if I don’t want to pay tax?
Then you might want to read two articles I published recently:
Reputability
I have mentioned this several times. The reputation of the jurisdiction in which you incorporate can have a significant impact on how your customers and business partners perceive you.
Reputability is basically an attempt to quantify the risk you pose; risk of you committing fraud, tax evasion, money laundering, or other crimes or unethical activities.
Secrecy by definition lessens transparency which makes it difficult (usually impossible) for a customer or business partner to fully and truly know who’s behind a company and how to reach the company in case of a dispute.
As an example: selling Indonesian-made bamboo garden chairs from a Vanuatu IBC will be an eye-sore to many. Your payment service provider will be even more suspicious when you request settlements sent to a bank account in Seychelles.
Does reputability matter to you?
Can you lessen the damage by incorporating in a more reputable jurisdiction?
Conclusion
Moving your ecommerce endeavour offshore can be done and many do it. Your biggest challenges are going to be to justify the cost (unless you are already well-established) and how the change in company jurisdiction may affect your relationship with your tax authority, your business partners, your payment service provider, and most importantly your customers.
If you merely seek privacy from public records, nominee or corporate directors and or shareholders may be a much more efficient solution.
Since you mention Mauritius is it a fine jurisdiction for ecommerce? When I think of Mauritius, I think of no tax and medium to highly reputable. I guess they earned their reputability with transparency so that wouldn’t possibly be the best option I guess when trying to open an offshore company with no official management abroad (= evading tax). Can you think of other jurisdictions, that would be fine places to incorporate an offshore company with medium to high reputability, low or no tax, secrecy and low running costs (no need to file your books for example).
Mauritius is fairly popular for ecommerce. I see it used.
Although Mauritius’ (relatively) strong reputation comes from transparency, class II GBCs are effectively as secretive as IBCs. The authorities do not know who owns the company but can – just like in nearly all jurisdictions – compel the registered agent to disclose such information.
Bahamas is comparable although keep in mind the public registry of directors, which helps transparency and reputability but obviously isn’t great for secrecy. Costs are usually about the same as Mauritius.
Some like Anguilla and Samoa have pretty decent reputations, although they are mostly unknown.
Brunei strikes an interesting balance between reputability and secrecy. As of latest reports, Brunei cannot comply with EOI requests for IBCs as its authorities lacks powers to compel registered agents to disclose information. However, it is a fairly well-known and wealthy country which makes it superficially reputable.
UAE (Ras al-Khaimah offshore) is in a similar position reputation-wise, although it can comply with requests for information.
For ecommerce specifically, there isn’t a lot of difference generally speaking. It might depend on your suppliers, payment service provider, bank, and so on whether some jurisdictions are more favourable over others.
Dear Streber, you mention that Ras al-Khaimah “can comply with requests for information”. Is this something they usually do, or have you heard of many cases?
I read on a RAK company formation site that in the Emirate “a court order would be required to disclose any information to third parties”.
On the other hand, the UAE seems to have committed to automatic information exchange by year 2018.
It would be great if you could do a Jurisdiction Spotlight: UAE. Thanks for your blog.
UAE is a bit of a legal maze. On paper, it is able to comply with EOI requests. However, there are laws on how information can be shared between the individual emirate authorities and the general government. I’ll go in-depth on UAE in a few months.
The bit about court order is the usual sales pitch used about all jurisdiction. It’s true – unless there is a tax treaty. Seychelles, Belize, BVI, Mauritius – they all have that clause. But laws which provide for EOI override it.