So many times, I hear people talk about being in right place at the right time; or sadly, the wrong place at the wrong time. Luck or coincidence probably plays a much greater role in our lives than we realise, not necessarily in deciding our fate but putting us in a place where we are forced to make a choice. And the rest, as they say is history.
So, does it work that way in business? In my opinion, absolutely so. In fact, the ‘lock screen’ on my phone has a great quotation (apologies but I don’t know the author) which says “Today I will do what others won’t, so that tomorrow I can do what others can’t”. Love it. Works for me in many parts of my life. And it is a constant reminder to me that being in the right place at the right time is often more about preparation than luck. Okay, some luck as well.
In my line of work, I meet many interesting entrepreneurs and small business owners who are looking to make their mark in international business. Sometimes that means they need take some steps that ‘others won’t …’ so that they can be successful. It’s a risk, but a calculated and usually well-researched one. Perhaps luck brings them to my door? And after about 20 years of working with such entrepreneurs and SMEs I can usually predict many of the questions that they will ask.
Let’s pick one very important question that would definitely be in the top three: “Should I set up an offshore company?” No, I am not talking about palm trees, sandy beaches and suitcases full of cash. There was certainly a time like that, but that is ‘so last century’ now. I am talking about ‘offshore’ being a place that is not where you live. So to a citizen of Cuba for example, Australia could be considered offshore. To an American, Hong Kong could be offshore. To a German, Philippines could be offshore, and so on.
So should the American set up a company in Hong Kong, or the German set up a company in the Philippines? Simple enough questions. Not so simple answers. But let’s look at some scenarios where it may or may not be good thing to do. Yes, much is about timing, right place and right time. And much is dependent on the advice that being offered and by whom.
Ask a (Offshore) Corporate Services Provider
No surprise but these people will usually say “yes, go ahead, set up that company”. Granted it is good business for them but there are usually considerable benefits in doing so:
- Reduce risk
Most international business people will have one or more offshore companies. Why? One reason is that if there is any chance of risk with one, they do not want it to affect the others. Most offshore companies are all limited liability, so the risk is generally limited to the assets of the company – trading companies typically don’t hold a lot of cash nor assets (I have clients holding IP for example in one company, separate from their trading companies).
I have clients who are entering highly litigious or high risk markets, typically using an offshore holding company (such as Hong Kong) to hold their company in their chosen (highly litigious or high risk) market. If there are issues with their chosen markets, they don’t want frivolous law suits affecting their home country’s company – so the offshore company serves as a buffer.
- Attract Investment/Have an Exit Strategy
Many offshore companies are effectively tax neutral for foreign companies. Investors are happy to put money into such companies – given that there may be no or low tax on dividends, and no or low tax on capital gains when their shares are sold. It does not change their tax liability in their country of residence but it does simply avoid being taxed twice. It makes such companies attractive for investors. I agree that double tax treaties are an important part of this mix.
- Take Advantage of Developed Banking Environment
Many well-regulated offshore locations have been an international trading hubs for several hundred years. Many were developed on a trading platform and banking along with it. For example, many business people are looking to then source from China, put their administration office in Philippines, manufacture in Vietnam or wherever and do their banking in Hong Kong.
- Take Advantage of Territorial Tax and Tax Deferral
An offshore company does not necessarily mean it is in a tax haven. But it can be low tax or tax neutral. For many clients, they can legally defer their taxes in country of residence (with the right tax advice from their country of residence of course) and in principal defer tax on it until you repatriate profits. That directly helps your offshore company to grow faster, as you can reinvest pre-tax dollars.
- Be Ready for Opportunity
Okay so this point may have some rhetoric but I have seen this all too often. Clients set up an offshore company for trading purposes and then come across other opportunities – either to invest, joint venture, diversify, attract investors and so on. And their offshore company(s) often morph into other things – simply being in the right place at the right time with the right vehicle. I have done it myself.
Ask a Tax Advisor
Let me make one important comment here – this is always a good idea, always ask a qualified tax advisor in your country of residence – someone who knows and understands the benefits and challenges of setting up an offshore company.
Then, go ask another one. Second opinion. Just to be sure.
Tax advisors will be concerned about the risk to you, personally, if any. They will present a few scenarios for you to consider, giving you some possible ways to get the business result you want. Some of the best tax advisors I have ever seen know and understand international business, appreciate the risks involved and will offer pragmatic ‘plain English’ solutions that will include and exclude offshore companies. Then you can make a more informed decision.
I have also read tax advice from others that is far too generic to be useful. Tailor-made is the only way to go with tax advice in my opinion. The best advice I have read from tax advisors usually take into consideration business factors such as supply chain, currency controls (if any), banking, language and logistics matters, not just tax advice.
Ask an Outsource Service Provider or BPO
In some of my previous articles, I wrote about getting advice, buying coffee for anyone who will sit with you and talk to you. Classroom in a coffee shop so to speak. People who have been there, done that. And many of them now have their own services for the international business person ready to take the next step. Here’s a few:
- Business Centres
Ask a business centre about setting up an offshore company to do international business? The answer will usually be whatever you wish.
Most of these centres offer space to rent, ready to use workstations, or whole offices, so you can either just drop by each time you fly in to town or take a desk/office for your own.
Core business for business centres is providing office space and support services in either your chosen market or perhaps several markets. And they do this very well.
- Business Process Outsource (BPO) Centres
No surprise either with this one, most will say “no, don’t set up a company”. Why? Well, let’s take a quick look at their business model. BPO is about outsourcing work from your existing company to reduce your overheads, or increase sales volume, or research new markets and more. All very valuable and continues to help many companies from high cost countries but allowing them to take advantage of lower cost highly educated people in India, Philippines, China and other countries. Many companies from the smallest entrepreneur to the largest multinational have back offices or staff in these locations. And have had for many years already.
So why would you want to set up a company in India or Philippines when BPOs can do all this work for you? In many cases, you wouldn’t.
BPOs offer a low risk way to test the water, to try a business concept where the risk of failure may be high but the potential rewards warrant the risk. Or where it is simply too costly to venture out on your own at this stage of your business cycle. But logically it is not in a BPOs interest for you to incorporate your own company and ‘do it yourself’.
But in many cases, you would.
Some entrepreneurs are fully committed to growth, to change, to redistributing their limited resources, to taking their businesses to the next level, that setting up a company from day one makes sense. In fact, they would not have it any other way. And some literally have no choice if they want to survive.
Not surprisingly, these entrepreneurs and small business owners usually do a lot more homework first than most. I have covered that in another article, so enough said.
A good consultant can be worth their weight in gold. Experience speaks volumes when it comes to looking at new markets and deciding about structures and offshore companies.
A good consultant will be well known in their field, reputation is everything, will have testimonials (real clients that you can talk to). They won’t know all the answers but their network will be wide and varied and will include all the skills needed to advise you. They will be problem solvers first and foremost.
Will they advise you to set up an offshore company or not? Frankly, they won’t take sides. They will provide a few options for you to consider and then put you in front of the experts to ask the questions you need to ask. They will guide you in your decision making and then assist in implementing the chosen solution.
Ask Someone Who’s Already Done It Before
Okay, so I have left the best – and most obvious – to last. Ask someone who’s been there, done that. Ask the ones where it worked out exactly to plan and those who had one disaster after another. Yes, more coffee meetings. And absolutely worth it.
So, should you set up an offshore company? Well, in my opinion that depends on your commitment to making it work, what your end goal is and frankly, what you learn from who you talk to.