Regulations For Offshore Companies

Offshore companies have advantages that entice them to relocate their business operations to low-tax jurisdictions. The growth in globalization has also facilitated such development. Today many companies have moved their business operations to locations that offer favorable tax laws and limited regulatory oversight. These days the home countries of these relocating companies are fighting back with some laws aimed at making it harder for these companies to move offshore.

What is an Offshore Company?

• An offshore company is a business entity organized outside the primary jurisdiction of its home country. Such companies often take advantage of many low-tax incentives offered by the offshore havens to locate all or some of their business operations in such locations. Offshore companies sometimes are also called "nonresident companies." They are incorporated under the jurisdictions of an offshore nation such as the British Virgin Islands or the Cayman Islands.

How Are Offshore Companies Regulated?

• First it is important to note that offshore companies are regulated by their foreign tax havens, but the truth of the matter is that these offshore tax havens often do little to regulate these companies. So in a nutshell one can say that offshore companies operate in a loose regulatory environment. This is one of the more important reasons why the companies are attracted to their offshore jurisdictions. Over the years these issues have attracted much controversy particularly in the industrialized countries such as the United States and Britain. These countries feel that the movement of companies to offshore jurisdictions has chipped away at their country's tax revenues.

Regulatory Issues with Offshore Companies

• When companies incorporate in overseas jurisdictions, they are often looking to avoid the extremely high taxation which they were paying in their home countries. Many of these companies see foreign incorporation as a technique to reduce, if not totally avoid, taxation, which allows them to maximize their profit margins.

Legal Protection

• When companies move to overseas low-tax jurisdictions and incorporate under such laws, they derive some legal protection from their new incorporating country. This means that these companies are also protected by the laws of their new domicile. It is therefore expected that the laws enacted by these tax havens would be advantageous to the interests and needs of the relocating companies. For example, if you are trying to sue a company domiciled in the Cayman Islands, you would have to sue this company in the Cayman Islands where this company is chartered and incorporated. The laws in the Caymans are more considerate toward the interest of these companies than those of the United States.

Regulation Initiatives against Offshore Companies

• Some countries, such as the United States, have increasingly sought measures to regulate offshore companies which also operate in the United States. Some new laws have barred offshore companies from retaining employees in their offshore jurisdictions. There are also new regulations on the kinds of business operations which these companies could move to the offshore locations. New laws passed in the United States after the New York World Trade Center attacks made it more difficult for these companies to operate foreign bank accounts through the money laundering laws. Some countries have started to enact new measures aimed at making it illegal for companies to conduct business in the low-tax havens. One such law passed by France explicitly forbids capital markets from using any company located in tax havens as a bond-issuing vehicle.

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