Offshore company setups are considered as a sort of taboo in the Middle East. There are many reasons for such hatred, of course. This article has been carefully crafted to tackle all the myths concerning Offshore company formation. The creation in the Middle East, and the various factors & motivations that drive these myths:
What is an Offshore Company?
The offshore company is one that operates in a different country as compared to stockholders. Moving a little deeper, we understand that an offshore company is a company that is usually set-up in a different country that has better standards for the company to exist in. Various factors determine the reason why offshore companies even exist.
Benefits of Offshore Companies
Some of these factors are:
After the massive Panama leak, thousands of businessmen’s offshore companies in Panama were leaked. Offshore companies are gaining a reputation for being created only to evade tax.
Tax is different from country to country. Some countries force companies to pay more tax than others. This is the reason why offshore companies exist to not pay a huge ransom of money as legal-tax to the government.
A great example is a fact that the United States pays 38% corporate tax when the United Kingdom pays only 21%.
IP and legal protection
Because of the nature of offshore companies, offshore company formation make it challenging to claim the property. It’s hard to claim the intellectual property of a company that is made in a popular community. For example, it is much harder to claim the IP of a company in the United States as compared to in the South Pacific – say Indonesia.
Offshore companies can also be set-up in countries that don’t have strict laws dictating how businesses should be run. It makes it easier to get legal protection.
Protect against unnecessary public information
Some countries enforce that certain parts of a company should be made available to the public. Other smaller countries do not have the budget, or the effort required to implement these laws. Companies would sometimes like to reduce the amount of information that they leak to the general public. They do it possible not to help competition gain the upper hand. In several cases, it is simpler to get a patent in a smaller country too.
The Cayman Islands have no laws dictating that a company’s information should be made public – attracting many offshore companies.
To make shell companies
Shell companies, like the name suggests, are shallow companies that are business in name only. They have no employees or office activity. Offshore companies are usually present in the form of shell companies. These shell companies are set up so that people can do business with them or sell them at a profit. Because these offshore companies, businessmen often just create them to avoid having to pay taxes for their possessed money. It is legal in many countries to open an offshore bank account, but not legal to operate a business within that country.
Is it easier to commit white-collar crimes by setting up an offshore company?
White-collar crimes or crimes that are committed behind the desk are punishable by law if proven. Because of the previous benefits of offshore companies, it’s easier for an evil doer to determine an offshore company setup. It’s easy to indulge themselves in white-collar crimes like money laundering and tax evasion. They can even fraud without much repercussion from the government.
Types of Offshore Companies
There are many offshore company formations available right now. If they were to be generalized, there are two main types.
The two main types of offshore company formations are:
International Business Company (IBC)
The IBC offshore company formation is the most popular right now. This is because companies in this formation do not have to pay taxes on the income. It the revenue that they generate outside the country.
An IBC of shareholders names does not need to be registered in public forums or documents. The only record requirements are in the business’ Stocks Register Book – and can be kept anywhere in the world.
You need at least three directors to run an IBC. IBCs can have their assets as well as bank accounts and securities. All stockholders are responsible for their investment.
Limited Liability Company (LLC)
The other primary type of offshore company formation is LLC. LLC works very similarly to an IBC but must make the information of at least two partners publicly available. They should do it in the articles of incorporation. Similarly, an LLC offshore company formation requires that the company must have at least one administrator.
Myths Concerning The Offshore Company Setup
Because of the nature of offshore company formation, and the way these companies are set up, there are myths. There are many myths concerning the nature of this work. People tend to create an image of something based on the very little information they have available. This often leads to myths. Offshore companies in the Middle East, especially, do not get the appreciation. Here are some myths concerning offshore companies:
Offshore companies are unregulated
Some people very strongly believe that all offshore company setups have no regulations. Nothing governs their laws. This simply is not true. Almost all countries have at least some extent of laws that ensure that companies don’t do whatever they want. Even IBCs and LLCs make sure that they follow the unique rules like having at least one administrator. Some rules require at least three directors to run an office.
This myth is entirely off-the-mark and is baseless. Even countries like the UAE, which is a country full of businesses, has offshore jurisdictions. Those jurisdictions that allow the government of UAE even to enforce their authority on offshore businesses.
Offshore companies always evade taxes
The second myth is that the steps of the offshore company setup make it easier to evade taxes. This is not true. All jurisdictions have their own set of tax laws. Some countries have laws that allow companies to avoid paying taxes. But these companies are usually massive-scale, and they have to follow the rules before they can pass the no-tax filter.
In other cases, some steps of offshore company setup pay a fixed amount of tax to the government. No matter how much gain or loss they make. Huge enterprises own it because they commonly have a significant share in the market. It is because the bigger the profit, the smaller the flat tax rate seems in comparison.
Offshore companies are always up to no good
This one just comes straight out of a comic book. Some people believe that the offshore company setups only lead to no-good. They think that companies in foreign countries are always up to no good. There can be many reasons why offshore companies refuse to release public information. It’s done potentially not to give hints to the competition, but that does not mean that they are committing evil acts.
Businessmen sometimes have no other option other than to open up an offshore company. There are even offshore charitable trusts and foundations.
Are offshore companies a sin?
We will not like to indulge ourselves in the way of religion, but there is a common myth that opening offshore companies is a sin. Looking it up in the Holy Bible, Qur’an and other major holy books, we have yet to find any little piece of evidence that even links to offshore companies being a sin.
This myth is usually spread across religious countries, that have confusion between both religion and political rules. From what we understand, such myths are spread to prevent money from being used outside the country and eventually fade away from the country’s economy. An offshore company setup does affect the economy of the country as a whole, but only when the taxes and rules in the country are unforgiving and unreliable for a business owner. It should be the country’s duty to properly enforce rules that are benefiting for both the company and the country.
Offshore companies are illegal
There is this misconception regarding offshore companies in the Middle East that such companies are unlawful and can result in hefty fines – if not jail. In most countries, offshore company setups are not illegal. This is because almost all countries allow businessmen to operate businesses in any country. If you are still concerned whether offshore companies are illegal in your country, try to hire yourself a lawyer that knows about offshore companies in detail. The chances of such nature of offshore company setup being illegal in your country are more likely not to be illegal.
Offshore companies perform illegal activities like child abduction
This is just a hilarious myth that springs up in one of those weird talks between multiple people in the Middle East. There is no proof of any offshore company formation involving themselves in child abduction, and there is no link between the two. Discussing the very idea is like a waste of precious time and effort. There is another similar rumour that terrorists, criminals and drug lords own the offshore companies. This is not true as well; normal people are the owners of offshore companies who are looking to start a business without having to run through the uncomforting abilities of the country’s unusual rules and the unfair things that companies have to follow
There are international laws for both IBCs and LLCs that dictate that offshore companies in the Middle East cannot participate in:
- Drug Trafficking
- Trafficking of any sorts
Offshore banks are not trustworthy
A very compelling myth in the Middle East before the steps of offshore company setup is that the offshore banks that these companies will engage with are not reliable. People say that these offshore banks are fake and will take your money and run away. Just because your money is now in another country means that the country’s legislation is no longer protecting it.
This is not valid because most of the world’s largest banks and financial institutions are located offshore. If anything, the banks in the local Middle East countries are more likely to scam you with your money. No big bank would want to ruin its reputation and hard-earned respect just by stealing a company’s money.
Offshore companies are costly to setup
All companies are expensive to an extent to set up. The cost of building or renting a place to run the company and the cost of officially registering the company are some of the bills that a business owner has to pay regardless of whether they open a company in their own country or another country.
You will most likely have to pay the same amount of cash for an offshore company setup as a company that is set up in the same country.
Offshore companies only open in obscure countries
There is a rumour going around about offshore companies in the Middle East which dictates that offshore company setups are only successful in areas like the Bahamas, Marshall Islands, Cayman Islands or Panama. This is not true as many businesses are also thriving in the UAE, Ireland, US, Singapore or even Hong Kong.
Another reason some businessmen do an offshore company setup is that some offshore countries are reputable and are more likely to stay protected against outlaws and people who want to steal your business.
Offshore companies are a new fad
There is a popular misconception among youngsters that offshore companies are a new fad, just because of the latest Panama leak. Of course, it is not. The oldest offshore company setups go back as long as two centuries ago. It is mainly due to the improvement of information sharing and transport that these offshore companies have taken off.
We hope that we covered everything there was to know about offshore companies in the Middle East, steps of offshore company setup, and some of the reasons why an offshore company setup even exists.