The concept of an offshore company is not new, but it gained prominence after the Panama Papers affair. Since then, the term “offshore company” has often been associated with tax fraud.
However, not all offshore companies are automatically linked to fraudulent activities. To understand how they work, it is necessary to revisit the definition of the model and its relationship with tax optimization.
The definition of an offshore company
An offshore company is a business registered in a country where it is not authorized to conduct local commercial activities. It is also called an extraterritorial or non-resident company.
Its main attraction lies in the tax benefits it may receive in the jurisdiction where it is registered. In Dubai, in particular, there is no wealth tax or corporate tax, no tax on profits and capital gains, and no withholding tax on distributed dividends.
Nevertheless, each jurisdiction has its own rules and regulations.
What is a holding company?
Holding active
An active holding company is a parent company that can provide services to its subsidiaries.
Passive holding
The passive holding company is primarily used to hold stakes in the group's various companies.
Dubai holding company: taxation and double tax treaty
A holding company can bring together several subsidiaries located in different countries. Dividends received by the holding company may benefit from favorable tax treatment.
However, please note that the benefits of double-taxation treaties do not apply in the same way. Only companies established in a Free Zone can benefit from them.
What is a tax haven?
A tax haven is a territory where taxation is reduced, or even nonexistent in some cases. The jurisdictions mentioned include the Cayman Islands, Delaware, Hong Kong, Dubai, Monaco, the Seychelles, Panama, Andorra, the Bahamas, Bermuda, Gibraltar, and Singapore.
The levels of cooperation and transparency vary from one jurisdiction to another.
Tax optimization and tax evasion: two concepts to distinguish
Tax optimization
Tax optimization is the use of legal means to structure one's taxes in compliance with applicable obligations.
Tax fraud
Tax fraud, on the other hand, involves using illegal means to reduce or conceal the tax owed.
Why is this distinction important?
The line between tax optimization and tax fraud can be misunderstood. Strictly comply with tax rules and seek professional guidance when you wish to establish an offshore company.
The aim is to benefit from an appropriate international framework without exposing the company or its directors to the risk of tax fraud.