What is a foreign company?

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A foreign company is a legal entity registered by one or several individuals outside of their country or countries or residence. This kind of company can be set up with an aim of reducing the tax liability and increasing the protection of the assets acquired by the company.

Foreign companies sometimes are also known as "ghost companies", "shell companies" or "offshore companies". The objective of a foreign company is to generate profits by carry out activities abroad without being subject to tax. These companies are recognized as separate legal entities from its beneficial owners.

Characteristics and types

The purpose of registering a foreign company is to assume the ownership of assets of a physical person or other financial entity. The bank accounts, investments, pieces of art, planes, cars and other possessions can be put in the name of the company reducing the fiscal responsibility of the individual.   

The tax saving scheme works based on the following principle: A physical person cannot be taxed on goods that legally do not belong to him. Once the ownership of the assets gets transferred from an individual to a financial entity, in this case a foreign company registered in offshore, it is its company´s responsibility to pay tax on these possessions. When a foreign company is registered in tax havens it is generally subject to very low or null fixed or nominal tax rate. The only condition that this company has to comply with is that it can´t perform any commercial activity on the territory of the jurisdiction where it has been registered. Additionally, foreign companies registered in offshore provide higher privacy and security level for the final beneficiary and real owner of the assets.

Many of our clients come to us with a question: Why does my company is subject to such high tax rates in my country of residence while in offshore jurisdictions the tax rates for companies are so low? The answer can be found in a principle of an Anglo-Saxon "common law" that states the following: The determination of a residence of a country is based on the location of its registered office, but the country from where it is administered, where the directors and shareholders reside and where the meetings are held. Although it is required to have a registered office it will be used only for legal communications with the commercial registry.

In the process of company administration and management it is very usual to use the service of fiduciaries or interposed persons, either required by the final beneficiary or because the laws of the country require it. In this case, the directors, who usually are the resident agents of tax havens, are responsible for carrying out all the communication with local authorities and preparation of annual accounts if the legislation demands it. Very often, in order to achieve maximum level of anonymity, the appointed directors don´t meet personally final beneficiaries of the company, especially if bearer shares structure has been used. The latest CRS regulations related to automatic exchange of banking information have caused resident agents to be obliged to identify all members of the foreign company to avoid channeling money laundering activities.

The types of foreign companies registered under Anglo-Saxon law are the following:

Domiciled foreign company

Domiciled foreign companies are the entities that have been registered and have their registered office in a tax-free country. Their commercial activity is carried out in another country and, since they don’t generate any revenues on the territory of a jurisdiction where the company has been registered, they are free of paying any taxes on this revenue. The directors who administrate it do not live in the tax haven and meet outside. A typical example of domiciled companies are offshore companies, also called IBCs, and they can be registered in Belize and Panama among other foreign countries.

Exempt companies

Exempt companies are the entities that are incorporated in countries with low tax rates. Their commercial activity is developed outside of the territory of the country of registration. Directors are usually appointed by the owners of the company obtaining a "resident status". The company does not pay taxes because ownership of the shares falls on no residents and are usually subject to a nominal annual tax. Exempt companies can be registered in Hong Kong, Isle of Man and Gibraltar.

The main difference between exempt and domiciled companies is that exempt companies are required to have a director or secretary resident in the country where it has been registered. Also, they are obliged to hold meetings and present financial accounts at least once a year.

How are they formed?

Foreign companies are registered in the commercial registry by lawyers and agents accredited in the corresponding jurisdiction. Those clients who want to incorporate a foreign company without physical presence can contract the training corporate agents, residents in the tax havens, who will comply with all the process. 

The set of principle corporate documents that the final beneficiary received after the foreign company has been registered includes: "Certificate of Incorporation, Articles of Incorporation, Memorandum of Association, Articles and Statutes (Articles of Association) that indicate the characteristic of the entity, its objectives, beneficiaries and their administrators.

The Articles of Incorporation of a foreign company include the following information:

  • The activity of the company, depending on the country of registration it may be restricted to one activity or several.
  • Registered office
  • Share capital
  • Number of actions

The Articles indicate the reason why the company has been registered and hold the information about its shareholders and resident agents. This document also specifies the rules with which this entity has to comply, the structure, the managers that form it and the address. In some countries, the Supplementary Articles of Incorporation are often anonymous making it difficult to detect the identity of the final beneficiary.

The owners of offshore foreign companies are shareholders, not the directors. These are responsible for preparation and presentation of annual accounts, the arrangement of meetings of shareholders and representing them before the authorities. Offshore foreign companies may have one or more shareholders, Trust and other financial entities can also occupy this position. In most offshore jurisdictions there is no obligation to reveal the identity of the final beneficiary of a foreign company and this information can become available for third parties only after the court order is issued.

Numerous offshore jurisdictions accept bearer shares (shares warrants to bearer). Due to the fact that the holder of the shares and the individual whose name appears on the certificate of incorporation can be two different persons, this structure of registration guarantees the anonymity of a legal owner of the shares. To prevent money laundering activities through this structure, the bearer share certificate is usually stored in a safe in the resident agent's office.

When the client decides to open a bank accounts for his foreign company in this case the banking secret is not 100% guaranteed. Even if the company is registered in an opaque jurisdiction, the final beneficiary has to identify himself when opening an offshore bank account. However, there are two ways to reach the level of maximum anonymity:

The owner of the company gives a lawyer the authority to open a bank account for his company through the power of attorney. However, since the lawyer has to present identification documents to the financial institution and reveal the identity of the owner, the bank secrecy can be achieved only partially.

The appointed lawyer can open a corporate bank account in his name without revealing the identity of the final beneficiary. And once the process is completed, he has to sign an irrevocable power of attorney in favor of the owner. However, this way of bank account opening is not very common due to the high risk of money laundering.  Any resident agent takes very seriously its accreditation and requests all the necessary documentation to learn more about commercial activity of its clients.

All our clients should never confuse the terms bank secrecy with impunity. No resident agent, lawyer or Trust will assume a risk of having problems on the territory of the offshore jurisdiction where he operates defending its client. The activities related to money laundering, terrorism financing, scams and international crime are persecuted by all the authorities of  all countries in the world and affect directly the reputation and position of a resident agent involved in these illegal activities.

The name

The name of a foreign company must be approved by the Secretary of the Commercial Registry. The names of multinationals, similar or identical to others are not accepted, nor are accepted the names that could infringe the public morality of the country. In some tax havens the names that contain the words related to a specific company structure or its activity, such as "International", "Investment", "Bank", "Trust", "Insurance" and "Holding", are not allowed because a special license is required in order to be able to operate under this names.

Resident agents usually have a list of dormant companies ("Shelf companies") that can be bought instantly, and then the new beneficial owner can change the name if desired.

The legal registered address

It is mandatory that all offshore companies have a legal address to receive any government notification. However, when it comes to accounting books, the law of the majority of offshore jurisdictions allows to choose whether they are kept in a registered office or at the address of the final owner.

Tips and advantages of setting up a foreign company

  • The registration of a foreign company is relatively cheap and annual maintenance is not expensive.
  • Not subject to tax obligations.
  • Resident agents offer low fee for their services.
  • The company obtains real physical address of convenience.
  • Only certain and limited information about the final owners is revealed.
  • They can be constituted with "Bearer Shares".
  • The use of fiduciaries or frontmen can be omitted.
  • It is not necessary to go physically to the offshore jurisdiction to register a foreign company.
  • A local representative is not required.
  • Possibility to register the company in one jurisdiction and the bank account in another.
  • Make investments in countries outside of your country of residence.
  • An offshore bank account can be opened in several currencies.
  • It is not obligatory to present annual accounts; however, it is recommended to keep them in case the tax haven authorities request it.
  • Note: Do not open foreign companies in countries related to drug trafficking.

What is a foreign company?