Offshore companies: advantages and disadvantages

What is an offshore company?

An offshore company is a legal entity incorporated abroad where it has no significant commercial activities. In Asia, jurisdictions such as Hong Kong and Singapore offer attractive legal frameworks for this type of company. These jurisdictions are renowned for their low taxation of international profits and their welcoming legislation for foreign companies. Under Singapore’s Companies Act, for example, an offshore company is considered tax resident if its administration is carried out in Singapore, but it is only taxed on income generated in the country.

Offshore companies are a legitimate legal tool for global wealth management, asset protection and tax planning. However, it is crucial to comply with the anti-tax avoidance laws of the beneficiaries’ countries of residence to ensure the legality of these structures.

Why set up an offshore company in Asia: the advantages

There are many reasons why investors choose to set up an offshore company in Asia. Tax optimization, asset protection and confidentiality are key motivations, particularly in jurisdictions such as Hong Kong and Singapore.

Tax optimization is a major advantage. These jurisdictions generally only tax local income. This means that a company whose activities are entirely international can benefit from a tax exemption on profits.

Setting up an offshore company also enables assets to be isolated from jurisdictions at risk of prosecution or seizure. For example, an Asian entrepreneur can shelter his assets in Hong Kong.

These locations also ensure a high degree of confidentiality regarding the identity of owners and ultimate beneficiaries, whose disclosure is strictly controlled.

What’s more, such structures are often subject to minimal administrative obligations, without having to submit detailed financial reports or hold annual general meetings.

Where to set up your company (in Asia and Middle East)?

Among the main attractive offshore destinations are:

• Hong Kong : this destination attracts for its advantageous taxation and legal stability. Under its legislation, only local income is taxed here, while foreign earnings are exempt. What’s more, setting up a company involves only a director and a shareholder, with no nationality requirements.

• Singapore: Singapore is a leading destination for offshore companies in Asia. Singapore’s Companies Act limits the creation of these entities, which can be used as holding companies for international investments. One of the reasons why Singapore is particularly attractive is the legal certainty it offers, as well as its network of international tax treaties to minimize double taxation.

• Dubai: Located in the heart of the Middle East, Dubai has become a key destination for offshore companies thanks to its advantageous tax regime and free trade zones. Companies registered in free zones such as the Dubai International Financial Centre (DIFC) or the Jebel Ali Free Zone (JAFZA) benefit from full exemption from corporate income tax for several years, as well as no tax on dividends and foreign income. Dubai’s economic and legal stability, as well as its modern infrastructure, also attract investors wishing to protect their assets and access global markets.

Legal restrictions and constraints

Although the advantages are considerable, setting up and operating an offshore company in Asia also entails some disadvantages and important legal restrictions to be aware of.

• Combating tax evasion: Many countries, including OECD members, have introduced strict measures to combat tax evasion. International tax transparency rules, such as the Common Reporting Standard (CRS), require offshore jurisdictions to share information on financial accounts with tax authorities in the owners’ country of residence.

• Restrictions on local activities: An offshore company cannot generally carry out local economic activities in the jurisdiction where it is registered. For example, an offshore company incorporated in Hong Kong cannot carry on business activities in the territory if it wishes to benefit from tax exemption.

• Unfavorable perception: Although the use of offshore companies is legal, it is often associated with tax evasion or illicit operations. This image can damage companies’ reputations, particularly in transparent business environments.

• Increased legal risks in the event of non-compliance: Notably in terms of compliance with international laws such as the Common Reporting Standard (CRS) or FATCA, which impose strict transparency and reporting obligations on offshore companies. Failure to comply with these regulations can result in substantial financial penalties, or even legal action.

• Specific legal constraints in Asia: In Asia, offshore jurisdictions such as Hong Kong and Singapore impose particular restrictions on offshore companies. In Singapore, for example, an offshore company must have at least one resident director to be registered. In addition, local laws require offshore companies to meet higher standards of transparency in financial reporting to prevent abuse and fraudulent use.

How to set up an offshore company in Asia?

There are several key steps to follow when setting up an offshore company in an Asian jurisdiction such as Hong Kong or Singapore. Firstly, the destination must be chosen according to the company’s business needs and tax strategy. These cities are often popular options in the region, thanks to their legal stability and tax advantages.

Once the location has been selected, registration of the company can begin. Typically, this involves appointing directors and shareholders, as well as a local address. The procedure is usually swift, taking just a few days.

After registration, the company must comply with the rules of each jurisdiction, including transparency and record-keeping requirements. In some cases, annual reports must also be submitted.

Conclusion

Offshore companies offer an attractive legal and tax framework for companies and individuals wishing to optimize their international investments. Across Asia, Hong Kong and Singapore are prime destinations thanks to their political stability and business-friendly laws. However, increasing international regulations and local restrictions require careful planning to avoid conflicts with local tax laws.