In doing business offshore an individual or corporation will commonly take advantage to legal structures of ownership and management just as they would in their country of origin. This is done to make business management more efficient, to increase access to investment capital, and, at time, to reduce the tax consequences of various aspects of the business.
A holding company limits its activities to holding and managing investments of property, stock and other assets but does not manage these entities or engage in commercial or trading activities through these entities. A famous example, albeit in the USA, is Berkshire Hathaway, the brainchild of billionaire Warren Buffet, which owns billions of dollars of stock but does not manage the companies involved. On a smaller scale, where most of the world resides, a holding company can own stock, property, and more and manage these investments. It is common for a holding company to have shareholders who invest directly in the holding company and not in the individual holdings of the company. The particular laws and requirements needed to set up and run an offshore holding company vary from jurisdiction to jurisdiction.
A headquarters company is organized and run in an offshore jurisdiction. Its sole business is to service its affiliate company through management and administrative services. Such a company is commonly set up in a tax advantaged jurisdiction. The company does not buy or sell products or get involved in financial operations such as a holding company does. The headquarters company is a fixed installation which belongs to an international company.
The headquarters company will be located in a carefully chosen foreign jurisdiction whose laws allow for it to act for the benefit of one or more companies. Its sole purpose is management control, servicing, and coordinating, typically in a specified geographic area. A common situation is that the headquarters company receives a tax deduction in that it can base its taxation on a national profit typically running between 5% and 8% of total operating expenses. Depending upon the laws of the host jurisdiction profits may not be taxes at all and expenses not used in calculating taxation. Many of the aspects of this sort of company depend upon the degree to which the host jurisdiction is trying to attract foreign companies and benefits will vary accordingly. As with many offshore enterprises having the advice and expertise of someone familiar with the jurisdiction and its laws is essential.
The Practical Use of Holding Companies and Headquarter Companies in Offshore Business
Offshore companies can be set up entirely to take advantage of tax benefits in the host jurisdiction. Offshore companies can also be set up to take advantage of excellent offshore business opportunities. The ideal situation is to set up an offshore business in such a way as to maximize business efficiency and opportunity for profit and minimize taxes through the judicious use off offshore legal structures.
Holding Companies and Other Holding Structures
In the offshore business and legal world it is common for an individual or corporation to form a legal entity such as a trust in New Zealand or a Panama Private Interest Foundation in which to hold assets. These assets may be real estate, stocks, objects of art, personal property such as airplanes and yachts, bank accounts, and international business corporations. In many practical ways these entities function as holding companies. However, they provide other features which the individual or corporation may or may not wish to include in their business planning.
A Panama Private Interest Foundation has no owners. It has beneficiaries. Its held entities will do business normally but profits and ultimate control lie with the foundation for use for the benefit of the beneficiaries. A Panama Private Interest Foundation will commonly be used in lieu of a trust or will for passing assets to ones heirs as the foundation documents are simply amended to change the beneficiaries upon the death of the person who set up the foundation.
Likewise, an offshore trust will hold similar assets to a holding company or foundation but will be set up specifically for the purpose of passing assets on the heirs of the individual who sets up the trust.
An aspect of both trusts and foundations set up offshore that commonly is not found in an offshore holding company is a feature of asset protection and privacy. Trusts and foundations are commonly set up in such a way as to shield the privacy of the principals. It is usual that the names of foundation beneficiaries, trust beneficiaries, international business corporation shareholders, and offshore bank account owners are in no way available to the public.
The Practical Use of an Offshore Headquarters Company
As a general matter a headquarters company can be used solely for administrative purposes in the management of various offshore business concerns. Concerns in setting up such a company will typically have to do with cost of operation in a foreign jurisdiction and with the efficiency with which this management tool will operate. Staffing will be important as will any requirement of the offshore jurisdiction that local personnel be hired on a quota system. In addition, communications facilities and transportation infrastructure will be important both for daily passing of information and for movement of key personnel.
To the extent that tax considerations enter to decision making with an offshore headquarters company the issue will come up early in the decision making process and will be balanced against other practical business considerations and costs.
To the extent that an individual or corporation setting up an offshore business chooses to use a headquarters company as part of the operation they may also choose to integrate this corporate entity with other offshore solutions such as offshore banking, offshore international business corporations, and trusts of foundations. This planning is best done very early in the game if asset protection and personal privacy are major concerns in the undertaking.