How does an offshore business model work? The answer may appear complicated, but the key to understanding how it works stems from one word: jurisdiction. The difference between an onshore entity versus an offshore business all comes down to the question of jurisdiction. How does the location come into play? We can see this by having a look at the definition of these types of business.
The meaning of an offshore business
Outside the business world, we use the term offshore to refer to a location outside the national boundaries of the entities we’re discussing. In the case of corporations, an offshore business refers to an entity that is based in a country (that would be the jurisdiction) that is different from their principal’s country of origin.
One of the most significant misconceptions behind offshore is the assumption it is always illegal. Many corporations choose to move offshore because they decide they want to transfer to a jurisdiction where they will enjoy fewer regulations and lower taxes. The move offshore and its benefits would allow them to lower their costs of doing business. Offshoring a business (or anything else you could offshore for that matter) becomes illegal when you fail to declare it. Offshore company owners also boast significant privacy benefits depending on the jurisdiction where they set up shop.
What’s an onshore business?
An onshore business is a company that either sets up operations in the jurisdiction where they will operate their business or in their home country. An onshore entity agrees to comply with all legal and fiscal requirements required in the local jurisdiction to work within that country’s boundaries. Onshore companies often tend to be in highly economically-developed countries, leading to higher human capital training and resource costs. Plus, the owners do not have as much privacy as many of their offshore counterparts because more information about onshore companies is disclosed to the public.
What makes a business offshore?
The other key component to understanding what makes a business offshore, other than the tax benefits they tend to enjoy, is the question of where they run their day-to-day operations. This component relates to jurisdiction. We can note this in the Cambridge Dictionary’s definition of an offshore company, which states that it is “a company that is based in a different country to the one in which it does most of its business, often for tax reasons.” The key is that they legally incorporate in one country while they run their business and make their money elsewhere.
Businesses can also offshore activities (better known as outsourcing). The business offshoring process refers to when you move some of your entity’s actions out of the country where you carry out most of your operations to take advantage of another country’s conditions that are more favourable for your business. These could include lower labour costs or looser regulations.
In most countries where you can set up an offshore business, you cannot conduct business operations in the jurisdiction where you incorporate. In other words, if you incorporate in Dubai as an offshore corporation, you cannot operate locally. There are, however, some jurisdictions, such as Panama, that do allow offshore companies to conduct business locally.
Are you interested in setting up an offshore business?
There are a variety of corporate structures to choose from when going through the offshore business registration. They include the international business corporation (IBC), offshore foundation, trust, or an offshore limited liability company (LLC).
If you’re looking to set up an offshore entity in the United Arab Emirates, our team of offshore company specialists can guide you through the benefits and drawbacks of each of the corporate structures we’ve just mentioned. We will also explain all the steps you need to go through, and of course, the advantages you’ll enjoy once you finish the process. They include no direct taxes on corporate profits nor personal income, as well as customs duties being set at four per cent. Plus, there are no foreign currency restrictions whatsoever, and all the capital can come from outside the United Arab Emirates.
These entities, regardless of the structure you choose, have full operational freedom that will give you the resources to open up your business to the world from the UAE. If you’re interested in registering your offshore business in Dubai or in any of the more than 60 jurisdictions where we operate, do not hesitate to get in touch with our offshore company specialists.
Senior Associate, Europe Emirates Group