Offshores – a platform for online business

Conducting business from offshore jurisdictions is undoubtedly a radical solution to the issues of taxation and personal security of company owners (beneficiaries). To date, there are no worthy alternatives to the offshore model. However, the days when it was enough for a virtual business to register in such a jurisdiction to get all the benefits are gone. Over the past ten years, lawmakers in the European Union, the United States of America, and even the Russian Federation have done a great deal of work to make it as difficult as possible to minimise taxes for offshore companies.

However, government regulation, due to the lack of borders on the Internet, is poorly suited for restricting virtual businesses. Moreover, the Internet is a relatively new topic for legislators. As a result, measures to combat tax avoidance have been adopted by each country on their own and, as a rule, are not the best. Among these measures, three main areas can be distinguished:

1. Introduction of exceptions to “double taxation avoidance” agreements with specific offshore jurisdictions
2. Creation of special tax payment rules for certain types of businesses by introducing requirements for their licensing in the country where the service is provided (i.e., at the location of the consumer)
3. Introduction of a number of requirements for banks that process payments for clients of such companies

Unfortunately, these and other measures are not part of any coherent philosophy like Roman or British law; they are rather in the nature of “temporary patches” for “legal loopholes” that have arisen with the advent of the Internet. As a result, regulations even within individual countries have turned out to be inconsistent with each other, tax legislation often contradicts general corporate legislation, and the rules for submitting various reports are not clearly defined.

Nevertheless, legislative work in this area continues. In particular, in the European Union, by 2015, with the help of the mechanism of European conventions, new rules for conducting e-commerce, binding on all member states, should be adopted, which are expected to unify the situation within the EU.

The most transparent situation with legislation regarding the conduct of virtual businesses is in the United States of America. In general, it can be described as a recommendation to conduct a virtual business in the United States only from its own low-tax jurisdictions such as Delaware and Wyoming. However, due to the peculiarities of legislation and case law in each state, in any case, doing business requires good legal preparation.

As for the Russian Federation and the countries of the former USSR, the situation here clearly falls under the well-known “9.5 rules for conducting a safe IT business in Russia”, the essence of which boils down to the fact that it is better not to conduct an IT business from the territory of Russia.

When planning a virtual business model, the following factors must be considered:

• Difference in the type of business – services or trade (this is a fundamental question)
• Location of clients and the operating company in the context of interstate relations
• Location of clients and the operating company in the context of VISA, MASTERCARD payment zones, etc.
• Requirements for obtaining licenses in the country of registration of the operating company
• Licensing requirements in the client’s country
• Availability of a “double taxation avoidance” agreement
• The location of servers as the main asset of the company in the context of the perception of this by the local tax service
• The most important factor is the dependence of the cost of services of financial institutions (banks, processing) on the transparency of the offshore (prestige, availability of reporting, the degree of closeness of the registry, etc.)
• Availability and amount of regular government fees
• Minimum amount and the need to pay the authorised capital
• The need to maintain accounting records
• The existence of taxes when conducting a particular business within and outside the jurisdiction
• The complexity of closing a company if necessary and the consequences of bankruptcy for beneficiaries

To build a successful and secure online business, it is important to consider all of these factors from the outset. Our experts are always ready to help you with this. Contact us.