What is offshore web hosting?

First of all, offshore can mean a lot of different things.

In the financial services context, it is usually in reference to secretive and/or low-tax jurisdictions with favourable laws for incorporation, trusts, and banking. Jurisdictions such as Cayman Islands, British Virgin Islands, Switzerland, Belize, and Seychelles come to mind for most people.

In the context of web hosting (physical server location), offshore typically refers to favourable business taxation, strong privacy laws, relaxed legislation for certain types of content (typically gambling but also adult entertainment or other contents), strong freedom of speech, or little to no censorship.

One thing to consider is that many web hosting companies claim to be in attractive jurisdictions, they still utilize data centers with servers physically located in typically non-offshore jurisdictions such as the US and the UK.

Does server location affect taxation?

This is a tricky one. It used to be the case that it would not matter but some tax authorities have taken the stance that server locations of for purely-online business can constitute a place of operations.

While you are unlikely to find such favourable rulings in high tax jurisdictions (unless it’s in their favour), it can mean that living in a low-tax jurisdiction and hosting your 100% virtual business in a separate jurisdiction can alleviate you of the troublesome permanent establishment rules so many expat investors and entrepreneurs face.

Speak to a local lawyer for more information.

Does server location affect privacy?

Yes, it can. But you need to take measures to ensure this privacy.

While for example Germany and Austria have strong privacy and data protection laws, the privilege of privacy is lost if the server and traffic passing to, from, and through it are not secured.

For example, all traffic should at minimum be encrypted using transmission encryption such as TLS/SSL (HTTPS). The transmitted data itself can be encrypted as well. Look into file system encryption.

Email content can be further encrypted using PGP/GPG technologies. This is cumbersome to set up and requires manual intervention by senders and receivers

No system is 100% secure. Know your risks.

Also consider that encryption gone bad (i.e. forgotten passwords) means data loss.

Combined with strong data protection laws, an offshore server location can help create a technical architecture which is able to offer greater privacy and data protection than other solutions.

What content is permitted?

This depends on your location.

Notably, adult content is forbidden or tightly regulated in countries with strict obscenity laws, such as Germany, UK, and countries whose cultures strongly oppose it.

Gambling (both operators and affiliates) can find it difficult sometimes, with some jurisdictions taking a hardline approach to anything that’s even remotely gambling related.

For politically sensitive content, typically offshore hosting might not be suitable for both technical and legal reasons in offshore jurisdictions. The US is popular for its very strong freedom of speech laws, being the digital home to many websites and organizations that would not be permitted or very cumbersome to operate in for example Europe. That doesn’t mean safe from government prodding, though.

Similarly, Iceland has gained a lot of recent popularity for attempting to position itself as an alternative to the US for freedom of speech as well as strong whistle-blower protection laws.

Then there are locations where pretty much anything goes as long as you block locals from accessing your servers’ contents, don’t criticize or go against the local regime, and stay away from the most egregious cultural  taboos (for example, no adult content in Iran).

Now, it also depends on your host or data center. They may have additional requirements and conditions, so make sure you read the fine prints.

Offshore Server Locations

I often encounter people who want to host their offshore servers where their IBC or offshore company is located, which usually is the aforementioned Seychelles, Belize, or BVI.

First of all, in order to host something, there needs to be a data center.

There aren’t any worth speaking of Seychelles and Belize. The Seychelles are an archipelago far off the African east coast. Much of its internet connectivity comes form satellites, and a single submarine cable to Tanzania. Belize is thick with jungle and poor infrastructure. As anyone who has used a hotel wifi in Belize can attest to, internet speeds are atrocious.

While there are hosting capabilities in BVI, they are so expensive that it’s practically only feasible for banks and large corporations to host there. Most local companies even host in the US, which is the nexus point for most traffic in the Americas. Practically all traffic between the Americas and other continents pass through the US.

Some (relatively) well-connected and potentially suitable locations include:

• Austria
• Germany
• Hong Kong
• Iceland
• Luxembourg
• Malaysia (not Labuan)
• Netherlands
• Panama
• Singapore
• Sweden
• Switzerland
• Turkey
• USA

Other Implications

The European Court of Justice (ECJ) recently ruled that an agreement between the EU and the US called Safe Harbor is unlawful. The agreement meant that companies could transmit data information from the EU, which has stronger data protection laws than the US, into the US.

The ECJ found that this arrangement was unlawful because companies that were self-certified for Safe Harbor could not guarantee frivolous government insight into data on European persons.

Data protection is a difficult topic and can turn out to be a major challenge, especially with servers located offshore.

Technical aspects such as latency (ping) and bandwidth can be problematic. Having a server in a remote location can lead to long loading times, especially for visitors far away. If most of your visitors are in Europe and you have a server in Malaysia, those visitors will have a far slower experience than at a website hosted in Europe or, usually, even the US.

The latency and bandwidth issues can be resolved partly with a CDN (content delivery network) which is a third party which hosts parts of your infrastructure locally across the globe to reduce loading times. This is often used for images and scripts.

Cloud Hosting or Distributed Hosting

Cloud hosting is not clearly defined but usually understood to mean distributed hosting, i.e. a technical architecture where content is hosted on multiple servers in geographically diverse locations. This is comparable to a CDN, as mentioned above.

This type of hosting can be problematic in that it can be difficult to know at any given moment where exactly your data is located and in what jurisdiction your application is. Although you may be assured it’s in a certain countries, this can still be problematic. For example, laws can vary greatly between states or special territories of certain countries.

Conclusion

Hosting a server offshore can be expensive and have a negative impact on your visitors.

However, in some cases, the drawbacks can be outweighed by benefits in privacy, taxation, or (other) regulatory advantages such as permitting content elsewhere not suitable.