An offshore corporation is a company incorporated outside the legal jurisdiction of the country where its primary operations are located. For example, a company physically located in the United States might choose to legally incorporate itself in Panama instead. To be considered an offshore corporation, a company must satisfy one or more of the following criteria: it must not trade within the country or jurisdiction where it incorporates, it must incorporate itself outside the country or jurisdiction in which it conducts its operations, and it must pay the nominal fees or tax expenses levied by the country in which it incorporates. Many countries welcome this form of business activity. Some countries offer significant incentives to companies or individuals to form offshore corporations within their jurisdiction.
Individuals as well as businesses and groups of investors may set up offshore corporations. Typically, an offshore company is engaged in holding and protecting assets, investing, trade financing, international trading, manufacturing and tax reduction. Offshore corporations may be used to facilitate international operations, avoid taxes, reduce state regulation and to place funds in accounts outside of the country of residence of the individual or business for legal protection.
Corporations formed in offshore locations have several features that are useful. Simplicity and reporting is one. Countries usually make setting up an offshore company within their jurisdiction relatively simple. The reporting requirements for the corporations as well as the amount of information needed to be divulged to incorporate are often much less strict than in the country of primary operations.
Enhanced legal and asset protection is another feature that might make forming an offshore corporation an attractive option. Stricter laws to protect the privacy of corporate operations, governance and the anonymity of corporate officials and officers might be in place in the offshore incorporating jurisdiction or country. In the case of lawsuits, corporate governance rules can be written to require the use of the laws of the country of incorporation rather than those of the country where the suit was filed or where the company is physically located.
There also are financial benefits to setting up an offshore corporation, such as providing a tax haven. A company set up as an offshore corporation usually will have a reduced taxation rate in the offshore location as compared to its country of physical location. In addition, an offshore corporation often is not subject to the rules of thin capitalization. This allows the offshore corporation to be set up with a nominal amount of investment.