נכתב ע"י עו"ד טל יצחק רון ועו"ד יגאל הרכבי
For some, the term 'offshore company' may call to mind sunny beaches and far-away islands, tax evasion, 'dummy corporations', suitcases filled with cash money - shady dealings indeed. Historically, it is at least possible that such perceptions are not entirely ill-founded. But even in the wake of 9/11, and with global banking transparency constantly on the rise (eg, the now-famous US-UBS settlement, as well as the Liechtenstein-Germany banking scandal), for individuals all around the world, the use of foreign corporations has not fallen out of favour. It is in fact very much alive and well.
But our aim here is not to dispel persistent myths surrounding the possibly discredited use of foreign corporations—not directly, at any rate (indeed, such an ambitious task would go well beyond the remit of this short article). Rather, our two-fold aim is to offer a rough overview of how foreign corporations are often used; and to demonstrate how the use of foreign corporations as a vehicle may be of great value to certain internet ventures in particular.
This is a good point to pause and note that, there is of course no reason why the use of foreign corporations must take the form we shall describe here. Thus, for example, in principle, an American resident in California wishing to start a small to medium business may perfectly well set up a UK company holding all company shares in his own name, and serving as company director himself—with his name appearing in the UK Companies House as both shareholder and director—just as he would in his home state. This however is not our focus here.
Nominees and Professionals in Foreign Corporations
Instead, the type of scenario we have in mind is one where the shares in the UK company are held for our above American, A, by a nominee shareholder. It is the latter, rather than A, whose name appears as the company's sole shareholder on the public register.
Similarly, A does not personally serve as director of the company, but retains the services of a UK professional director—whose name likewise appears on the public register.
In legal terms, whilst A and the professional director will be bound by a simple contract for services, it is the legal relation between A and the nominee shareholder that is worth dilating on (in brief).
A nominee is a trustee—ie a person holding legal title to trust property, but no beneficial interest therein (that is to say, no right to enjoy the property in any way, other than receive fees for his services)—in a bare trust. As such, under the terms of the trust deed, the nominee would normally be under a duty to deal with trust property as per the instructions of his principal (in our case, A). Crucially, such a duty should be contrasted with the duty to deal with trust property as the trustee may see fit, in his own discretion (limited though it may be in some cases), for the benefit of another—a beneficiary. Indeed, a duty of the latter type may be more appropriate where the beneficiaries are minors or persons lacking legal capacity.
Legitimate Purposes—Some Examples
We now move on to our second question, namely, Why opt for a foreign corporation, rather than a domestic one? There are many legitimate reasons for using a foreign corporation. For present purposes, we will confine ourselves to those relevant to internet and online ventures.
First, there are certain online activities—such as gambling, trading in foreign currencies or securities—which may be unlawful in some jurisdictions. Carrying on such a business would only be lawful in other jurisdictions—most commonly following a certain licencing procedure, and subject to appropriate regulation. In order for a company to be eligible for a licence of this sort, as a prerequisite, the company would often need to have been incorporated in the same jurisdiction. And even in the absence of such a condition, it would certainly make things easier.
Second, as ever, there are tax issues to bear in mind. International taxation is perhaps almost infinitely broad, and certainly merits a far wider discussion than the present one. But, as we all know, with appropriate tax advice, under certain circumstances, a company's tax liability may be significantly lower in one jurisdiction, compared with what it would have been in another. The same goes for dividends distributed by the company. Amongst the considerations to take into account would be any particular jurisdiction's corporate and other tax rates; the provisions of the double taxation treaty (if any) between relevant jurisdictions; the well-known 'management and control' question, etc.
Third—and this is of particular relevance to Israelis, for example—parties from certain jurisdictions (such as those of the Arab world) may be reluctant to do business with entities from other jurisdictions (eg Israel). Israelis seeking to take their business global—appealing also to clients from the Arab world—would be well-advised to do so using a foreign corporation.
Fourth, there is the almighty Image to consider. Like it or not, a UK company, with a registered address somewhere in the City in London, seems more prestigious, solid and reliable—than would its counterparts in any number of other, less central jurisdictions.
There is no denying that, in some respects at least, banking secrecy is slowly becoming a thing of the past. But by no means does this mean the end, or decline even, of the widespread use of foreign corporations. And, as we have seen, such use may have many, perfectly legitimate purposes.
What we have done here is no more than gloss over some these purposes, as well as the basic 'mechanics' of some such corporations—all in very rough outline—in the hopes of offering those readers who are contemplating embarking on an internet venture an idea of some of the risks—and indeed, opportunities—that lie ahead
Tal Ron, Drihem & Co. Law Firm affiliated trust company - Tal Itzhak Ron Trust Company Ltd. specializes in offshore and onshore company formation for clients from the internet industry and others alike .
Our clients benefit from our professional services in incorporating companies in over twenty jurisdictions around the world, catering to the needs of both domestic and foreign clients.
The above is not intended to constitute legal advice, nor should it be relied on as such. Legal advice is case-specific, and should always be sought on the basis of a particular set of facts.
"There is no denying that, in some respects at least, banking secrecy is slowly becoming a thing of the past. But by no means does this mean the end, or decline even, of the widespread use of foreign corporations. Such use may have many, perfectly legitimate purposes."