Offshore businesses are defined as businesses that do not operate within their country of incorporation, but rather have their main source of income in their business activities in foreign markets. This typically qualifies firms for tax subsidies and exemptions which result in a 0% tax rate. In other jurisdictions, the corporate tax rate might just be 0%, to begin with. Herein lies one of the main benefits of offshore businesses – tax efficiency. However, offshore businesses have gradually evolved beyond a mere tax planning tool and are able to offer many other benefits to their parent companies, which include asset privacy and protection, access to international trade opportunities, and access to offshore banking. These additional benefits form part of the considerations in our ranking of the top 5 tax-free countries to setup offshore business, although your eventual choice should be tailored to your own specific business activities and needs.
Our top five list is as follows.
- Hong Kong
Starting off our list of the top 5 tax-free countries for offshore businesses, we have Singapore.
Ease of doing business
It is extremely easy to do business in Singapore, and this has been reflected in its World Bank Ease of Doing Business 2020 ranking of 2nd place. This represents how easy it is to do business in the jurisdiction based on a wide variety of factors, including how easy it is to start a business, how easy it is to enforce contracts and taxation policy. In particular, Singapore has scored well not only due to its short and efficient company incorporation process but also due to its taxation policy which makes it simple and easy to file tax returns.
Singapore’s company incorporation process is one of the shortest in the world, taking around 1 business day to complete, and has minimal requirements. Once a company name has been reserved, companies can directly proceed to the incorporation process, which is even available online. Only the basic documents such as personal identification documents and the articles of association are needed. The minimum capital for starting a company will only be US$1.
One drawback, however, is the need for companies to appoint a local director. If needed, this requirement can be easily satisfied by a nominee director service which would also grant more privacy to the investors.
Singapore offers many tax subsidies, in particular to new as well as small and medium firms. Crucially, it is tax-free for firms that do not earn their income within Singapore. Additional conditions such as not conducting business or banking activities within the country, as well as having the company’s legal control out of Singapore must also be met. No capital gains tax, withholding tax or value-added tax will be charged on non-resident companies as well.
These benefits are also made accessible to foreigners since Singapore allows for 100% foreign ownership and the country has not implemented any other barriers against foreign investors or owners. On the contrary, they have remained supportive of international trade and investments, believing it to be crucial for the continued growth of the island nation despite its lack of natural resources. Total imports and exports are almost triple the value of the country’s Gross Domestic Product, exemplifying the continued importance of international trade to the country’s economy; and total international investments hit their 12 years high in 2020 despite the pandemic.
Singapore has combined this attractive foreign investment, taxation, and incorporation processes with a robust and comprehensive regulatory framework. This has allowed it to maintain its reputation and credibility without stifling innovation or entrepreneurship. This credibility lends itself well to a multitude of offshore businesses, especially businesses that require credibility due to dealings with customers and suppliers.
2nd: Hong Kong
Hong Kong only falls marginally behind Singapore in our rankings of the top country for your offshore business. Alongside Taiwan and South Korea, these four economies have been nicknamed the 4 Asian tigers in recognition of their rapid economic growth. In fact, both countries have always been amongst the top few choices for offshore businesses in Asia, just that recent socio-political events in Hong Kong have destabilized the region, pushing it down our ranking.
Ease of doing business
Hong Kong offers the same benefits in terms of ease of doing business since it is only ranked one position lower than Singapore in the 2020 Ease of Doing Business Index. It is equally easy to incorporate a business here, and the taxation policy offers the same tax exemptions which make it a tax-free jurisdiction to set up an offshore business.
For your company to enjoy Offshore Profits Tax Exemption from the Inland Revenue Department of Hong Kong, the requirements are also similar to Singapore. Operations and business activities of the company must be located out of Hong Kong, and the owners or employees cannot be managing the business from Hong Kong.
Loss of socio-political stability
Hitting their peak in 2019-2020, the riots over anti-extradition, democracy, and police brutality led to the shutdown of crucial infrastructure within the country. This included major disruptions to roads, trains, and even the closure of the Hong Kong International Airport.
Whilst the enactment of the pandemic control laws and the national security law from Beijing have largely kept the situation under control, the arrest and prosecution of key leading figures from the protests threaten to re-erupt the underlying tensions. These effects would be felt not only by businesses operating domestically but also offshore businesses. Hong Kong’s economy fell into recession, and the Hang Seng Index fell by 4.8%. These negative investor sentiments were also reflected by Fitch Ratings revising their outlook on the country from “stable” to “negative”
Overall, Hong Kong seems to be a more niche pick as compared to the general versatility of a Singaporean offshore business. It does offer easy access to the mainland Chinese market for investors that are confident of managing the negative effects arising from the loss of socio-political stability.
3rd: United Arab Emirates
The United Arab Emirates (UAE) currently ranks third on our list as it falls behind Hong Kong and Singapore in the World Bank Ease of Doing Business rankings, being ranked 16th.
The growth potential of the region
Given that 100% foreign ownership was only allowed from 1st December 2020 onwards, the UAE definitely has a lot to catch up on in terms of policies and regulatory framework as compared to more established countries. In terms of tax, it already offers a 0% tax rate for all corporations (other than those in banking or oil and gas), regardless of income source.
With their grand aim of topping the 2021 World Bank Ease of Doing Business rankings, the UAE has shown its willingness to continually update and reform its policies to make it a better place to do business. This might make it a better option to do business in the future than established countries.
Additionally, being located in the Middle East, it holds a strategic location between Asia, Europe, and Africa. Thus, it would be very beneficial for a company looking to do trading activities or related operations on an international scale.
The UAE squeezes into our top three countries to set up offshore business since it offers both immense potential and a strategic location for international trade.
Ranking fourth in our list, Estonia is most famous for its e-Estonia initiative and its embracement of blockchain technology. This makes it easy for companies to register and manage their companies online, serving owners of offshore businesses extremely well.
In particular, the country is one of the major cryptocurrency hubs of the world, being one of the first to regulate and legalize cryptocurrency. It is also home to one of the most responsive and comprehensive cryptocurrency regulatory frameworks.
Given its association with illegitimate activities such as terrorist financing and money laundering, the integrity and accountability of cryptocurrency firms might come into question. Hence, this framework encompasses safeguards that are compliant with or even exceed international standards and directives. This helps to build trust with suppliers and customers that makes them more comfortable and accepting of this new method of payment. This facilitates the operations of cryptocurrency businesses since it offers them a lot more certainty in their business dealings.
Estonia would earn a higher place on our rankings, but its taxation policy is not as attractive as the other three jurisdictions previously mentioned. Corporate tax is only exempt when profits are reinvested, otherwise, it would be taxable at 14-20%, depending on the regularity of dividend payouts. Hence, Estonia would be more suitable for offshore businesses that are intending to delve into cryptocurrency and are intending to reinvest their profits.
Lastly, we have Mauritius. Being a “traditional tax haven”, it is not suited to trading or related offshore business since the lack of credibility might lead to additional scrutiny from banking authorities or your clients.
Asset privacy and protection
Rather, it is better suited to serving the rather niche purpose of being an investment holding company. To do so, establishing an Authorised Company is sufficient and would allow the firm to be tax-exempt.
Mauritius has relatively lenient reporting requirements which will help you to keep your name off public records. They also have strict privacy protection and confidentiality laws that will help defend any claim to your assets.
Mauritian residency by investment
As an added bonus, Mauritius has a residency by investment program that has lesser requirements as compared to other jurisdictions. This makes it a suitable location not only for wealth management and planning but also for retirement and residency planning. The minimum investment sum is US$500,000 with a residency period of two years to get citizenship, relatively little when compared to a country like Seychelles where the minimum investment sum is doubled, and the residency period is a staggering eleven years.
Once more, Mauritius does not rank higher due to its niche usage. Investors looking for a more general-purpose offshore business should consider the above-mentioned jurisdictions instead.
The main criteria used in ranking these countries was versatility. This is so that investors need not open and manage different offshore businesses to serve their different needs. Whilst the later options in the listserve more niche purposes, they often necessitate trade-offs in terms of credibility or other factors. Ultimately, this list is a general ranking, but the top jurisdiction for you will depend on your own business activities and needs.
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