It is important to consider which jurisdiction to choose for one’s international tax planning. Specifically, whether want to stay onshore or go offshore or midshore. Offshore, onshore, and midshore refer to different kinds of jurisdictions. They have ramifications in terms of taxes, assets, and privacy. Therefore, one need to have a comprehensive understanding of each, as well as how it will affect the company.
An Offshore Jurisdiction
An offshore jurisdiction can best be defined as a jurisdiction that offers preferential tax treatment. Registering as an offshore company in many jurisdictions is easy and can be done in a relatively short amount of time without a major financial expense. However, to qualify as an offshore company, a company is typically subject to certain restrictions prohibiting it from conducting business in the country where it is registered. The offshore host country will typically make the company pay a fixed annual fee. In exchange, the host country may not tax the company or it may tax it very minimally. Offshore host countries may also offer companies a number of other financial and privacy-related benefits, as many don’t require financial statement and audit admission, don’t have monetary control, and permit specified use of service. The company owner is not under any obligation to reside in the offshore host country, and he or she may choose to run the company from his or her home country. Although there can be clear economic advantageous to forming an offshore company, it should be noted that there are several important drawbacks. First of all, choosing the right offshore jurisdiction takes time and research. In many cases, it is advisable to contact a professional to ensure you get the right advice and guidance. Each offshore jurisdiction has its own unique rules and regulations regarding taxation, financial reporting requirements, privacy, credit, etc. Therefore, it is important to consider how each of these factors in a potential offshore jurisdiction will affect one’s country and which jurisdiction can best accommodate one needs.
An Onshore Jurisdiction
An onshore jurisdiction is a jurisdiction that does not offer any kind of preferential tax treatment — typically an economically developed country where high taxation rates are applicable. Unlike an offshore company, which typically cannot conduct business in the jurisdiction in which it is registered, onshore companies typically conduct a sizeable amount of their business in the country where they are registered. In addition, company owners are afforded less privacy than they are in offshore jurisdictions, as all information on beneficial owners remains public. Onshore companies also tend to be subject to more state control.
A Midshore Jurisdiction
A midshore jurisdiction is the jurisdiction that offers nonresident companies the opportunity to register with a more favorable, interchangeable tax rate while also allowing them to create banking accounts anywhere in the world, falling on the spectrum between traditional offshore jurisdiction and high-tax-rate onshore jurisdictions. Examples of mid-shore jurisdictions include Hong Kong, Singapore, Malta, Labuan, Ireland, and Liechtenstein. Registering in a midshore jurisdiction tends to be an especially great option for those who are running international business worldwide. Midshore companies are growing in popularity, and many experts predict they may even surpass offshore options in terms of popularity. The major advantage is that even though they offer a favorable tax rate, midshore jurisdictions still adhere to all international standards on tax transparency while also offering more consistent and reliable banking and financial sectors than offshore jurisdictions.
With the stringent rules on international standard and tax transparency and the implementation of FATCA and CRS, it looks like if one is doing the international business then, a midshore jurisdiction is more relevant compared to offshore jurisdiction.
When planning for your international business, one need to consider the tax laws of country of citizenship and country of residence.
The four tax regimes are:-
There are FOUR (4) regimes of tax groupings of countries. We would not consider the 22 countries that don’t tax citizens or residents.
- Countries that tax citizens and residents on their worldwide income no matter where they live.
- Countries that tax residents on their worldwide income. This is called a residential or physical presence tax system.
- Countries that tax citizen residents on their worldwide income but NOT foreign residents.
- Countries that tax residents on their local source income but NOT foreign source income. This is called a territorial tax system.
In order to enhance the competitiveness of Labuan IBFC in the offering of a wider range of financial products and services (conventional and Islamic) as well as the continued maintenance of Labuan IBFC’s status as a well-regulated centre, specifically designed legislation and regulations, primarily based on experiences of other International Business Financial Centre (“IBFC”) around the world, provide the framework for business in the IBFC through amendments were made to four existing Labuan laws; and four new Acts (“the Labuan Acts”) which came into effect from 11 February 2010.