Archive for January, 2010

“Offshore Companies”

Friday, January 1st, 2010

I was reading a promotional discussion that talked about the advantages for business owners to operate their businesses through “offshore companies”.  First and foremost a little clarification.  By “offshore”, we’re really talking about foreign companies or, more specifically, non-Canadian or American companies – hence, outside of Canada’s shores or “offshore”.  The particular discussion I was reading related to setting up companies in the United Arab Emirates but many of these companies relate to Caribbean or European companies – usually in small countries or principalities (for those who want to set up businesses in, say, Lichtenstein).

The thing I smiled the most about when it came to this particular discussion was the title that suggested that it was better to be safe than sorry and the connotation was that you were safer with an offshore company and sorry if you stayed with your plain-old Canadian company.  The discussion also touted the benefits that, in this example, the UAE companies didn’t have to pay Canadian taxes but only UAE taxes, you didn’t have to be a resident of the UAE, the company could have non-UAE bank accounts, etc.  These types of claims are made for the other offshore companies as well.

The first problem with offshore companies is that they involve a huge leap of faith.  Since you are not in the UAE (or Bermuda or Lichtenstein, etc.), there is always the possibility that someone unscrupulous could take over control of your company.  Will it happen every time?  No.  But then again, you have better control of the situation with a Canadian company than with an offshore company.

The second problem is that before you ever get involved in any of these companies you should get specialized taxation advice.  And, even then, you are probably best off to get two tax opinions.  Why is that?  Because it is not uncommon for the promoter to send you to a tax specialist who may not be completely independent.  Unfortunately, some of my clients have learned this the hard way.  This is not to say that the tax expert is somehow “in cahoots” with the promoter, but it is possible that the tax expert may not give enough emphasis to the downside risks that a truly independent expert may put on the situation.

A third problem, which is related to the second problem, is that these promoters may only be focusing on part of the issue.  For example, in this particular discussion, the person was promoting the fact that there was a tax treaty with the UAE that prevented double-taxation.  Fair enough, but this may not be the entire picture.  For example, if the UAE doesn’t tax on dividends at all, then it’s not an issue of double-taxation.  Rather, you still might have to pay Canadian tax with the result that you are still paying the same tax you would have had to pay if you had gone with a Canadian company.  Or, let’s suppose that the UAE tax rate is 30% while the Canadian rate is 35%.  You may not have to pay 65%, but you may still be required to pay 30% to UAE and 5% to Canada – again, no real net savings – and at the cost of the loss of some control over your company.

A fourth issue is to remind you that even if you have an “offshore company”, if you are intending to do business in Ontario, you will still have to register your company as an “extra-provincial corporation”.  The result is that you now have to not only submit whatever corporate forms or returns are required by the offshore country but also whatever Ontario requires.  Is this extra work offset by the potential savings of being offshore?  Maybe.  Maybe not.  But you should take this factor also into consideration.

Finally, a warning of how things could go very wrong.  One of my old clients invested in offshore corporations and sent money to what proved to be fraudsters.  They made off with $20 Million.  The problem was that my client’s money was tied up in U.S. stocks that had been earned through stock options.  The shares were in the client’s name and could not be moved to someone else without incurring huge tax consequences.  However, the client wanted to keep these shares for the benefit of the client’s heirs – which resulted in a further problem because the U.S. had huge estate taxes that would give money to the U.S. government which was unfair since the client and the client’s relatives all lived in Canada and had never worked in the U.S., all work done for the stock options was done in Canada and the only tie to the U.S. was the fact that the shares were traded on the NYSE.  So, the client implemented a tax structure that would minimize the impact through the use of offshore companies that was legitimate, but because control could be taken by the “foreigners”, that did occur and the client lost $20 Million.  After following the monies from the Caribbean to New York, to Europe and then back down through several Caribbean countries, we eventually found $12 Million and then had a huge fight over that money that cost the client tons of money in legal fees for lawyers in many countries.  In the process, the client’s house was sold, the client suffered financial and emotional strains and whatever benefits might have been gained were completely wiped away and then some.  Moreover, the client still had money to be able to fund the lawyers and the financial experts to follow the money and eventually get part of it back.  You may not be able to afford such a process.

Does this mean that all offshore companies are scams and should be avoided?  No.  But they can be fraught with danger and it’s something you should not go into lightly.

Something to think about.