One of the strongest incentives for forming offshore companies is the tax benefits. Many small countries with little or no economic or business base encourage foreign companies to bring operations there by offering lower income and other taxes, typically between 8% and 15%. Some even offer tax exemptions for the first few years.
Classic offshore company issues
However, the classic offshore company usually has to contend with severe limitations in domestic transactions. They are essentially blackballed from operating locally because domestic businesses cannot compete with them on a level playing field. Offshore companies in most countries have no option but to operate locally but sell abroad.
There is also the problem of tax evasion. Some countries, particularly France and Germany, are taking steps to ensure that local companies cannot get out of paying income taxes by transferring funds to their offshore companies. They pressure “tax haven” countries to provide tax and bank account information about offshore companies in their jurisdiction so that they can identify which ones are trying to get out of paying huge taxes back home.
In the US, all incoming payments are subject to tax. Companies that are currently on the hot seat for tax evasion is Starbucks, eBay, Amazon, Google, and Facebook, Among the tax haven countries, only the Cayman Islands continue refuse to enter into a transparency agreement to disclose account information of their offshore clients.
The tax advantage of free zone companies in the UAE
There is a distinct difference between an offshore company and a free zone company. While a free zone company is still technically an offshore (foreign) company, it is not considered in a tax haven setting. A good example is a RAK offshore company. Ras al-Khaimah is part of the United Arab Emirates (UAE) and it has free economic zones where foreign companies or individuals can set up an independent offshore company, or a subsidiary of a local holding company.
These free economic zones are tax-free because the UAE is really a tax-free jurisdiction. No company in the UAE, offshore or onshore, pay taxes as a rule, except for those engaged in the oil, banking, and tourism industries. As such, these free economic zones are not considered tax havens, and are not blacklisted by any country. In addition, the UAE have Double Taxation Avoidance Agreement (DTAA) treaties with more than 50 countries, including France and Germany. In effect, these treaties protect the income from RAK offshore companies from taxation in their home country. The fact that RAK offshore companies pay no taxes, this means the income is essentially tax-free. There is also no VAT, tax on import and export of goods and services, or tax on wages.
Anyone of any nationality can form an offshore company in the UAE free zone. It does not even have to be a physical person; it could be a corporate entity. The required capitalization for a RAK offshore company can be as little as US$14,000 for a trading company or similar, or US$300,000 for large manufacturing companies. Offshore companies can also enjoy other benefits of operating in the UAE free zones. These include:
- No limits in sending funds outside the UAE
- No restrictions on capital utilization
- Full company ownership by foreigners
- Low energy costs
- Stable political and legal structure
- No restrictions on domestic operations and sales
- Resident visa status
- Confidentiality of company information
- Skilled labor pool
It is easy to register an offshore company in the UAE free zones if you go through the right channels. It would be advisable to consult with a local company that specializes in RAK offshore company formation to get off on a good start.