In this article we’ll have a look at the question: what is a shell company?
Furthermore, we’ll explore how digital nomads can use a shell company and look at the benefits and risks.
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What is a Shell Company?
A shell company refers to a company which exists on paper but doesn’t have any significant business operations or assets.
You can use a shell company for legal purposes but they are often associated with tax evasion and money laundering.
Therefore, they sometimes have a bad stigma attached to them.
A shell company is also referred to as shell corporation.
Why Would a Digital Nomad Use a Shell Company?
As a digital nomad you can use a shell company for various reasons. These include:
- Minimizing taxes: a shell corporation can help you minimize your taxes.
- Avoiding reporting obligations: avoid reporting income in your personal name by running a remote business through a shell company.
- Asset protection: by having your shell company own assets, your personal debtors won’t be able to come after these assets directly.
- Limited liability: on the contrary, any debtors from the company can only go after the company and not you personally.
- Privacy: traditionally shell companies were often used for privacy purposes and to hide ownership. Anti-money laundering rules have made this harder though.
- Banking and payment processing: opening a shell company can increase your banking access and you can use it as a billing entity.
What to Consider before Using a Shell Company
If you are planning to start using a shell company, you should take into account the following elements:
- Purpose of the shell company: justification for the use of a shell company.
- Legality and regulatory compliance: avoid legal penalties and regulatory scrutiny.
- Jurisdictional risks: regulatory risks of the jurisdiction where you open your company.
- Ownership transparency: possibly required for administrative approval and banking
Legal Limits and Common Risks
In the past, the use of shell companies was quite common in order to avoid tax and sometimes even to evade it.
However, since Panama Papers and similar publications, tax authorities have been cracking down on such structures.
Moreover, tax authorities started cooperating more cross-border.
Furthermore, more and more countries introduced legislation to discourage you to open shell companies.
Therefore, if you consider opening a shell corporation, you need to be aware of the legal limits and some common risks.
Substance Requirements
If you open a company but it doesn’t have much local substance (e.g. office, employees,…) this can lead to complications.
A remote business without much local presence, can easily become liable to taxes in another country. This can basically ruin your whole tax setup.
A common way for tax authorities to tax the profits of a foreign company is by applying the theory of permanent establishments.
Sometimes, people try to solve this by using a nominee director but this doesn’t always work.
Reputation
Opening a company in the wrong country can actually hurt your reputation as some countries do have the label of tax haven.
This can have various consequences.
First of all, some clients might not want to work with you or accept invoices from exotic countries.
Second, opening bank accounts and managing your financial affairs might become more difficult if your company is registered in a country with a bad reputation.
Last but not least, owning a shell company can work as a red flag to a bull. It can attract more attention than usual from the tax authorities.
Maintenance & Costs
Finally, you also want to asses if the effort and costs involved with setting up and maintaining a certain structure are worth it.
I’ve seen many times that nomads focus on the percentage in taxes they’ll pay while totally ignoring the costs of such a solution. This doesn’t make much sense as money you’ll pay for maintaining your structure is still money which will come out of your pocket.
Therefore, you want to make sure you pick a solution which helps you reaching your goals without breaking the bank.
Work With Me
Reach out if you want to figure out if using a shell company is actually a good idea in your situation. During my career I have assisted hundreds of digital nomads with their tax structure.
FAQ
Let’s have a look at some frequently asked questions regarding shell companies.
Can I Legally Use a Shell Company as a Nomad?
You can most certainly use a shell company as a digital nomad.
Nevertheless, you want to make sure your setup is solid. A shell company as such is not illegal.
However, you want to make sure you use them for the right reasons and within the right situation.
Doing otherwise, could open you up to (tax) risks and potential penalties.
Is a Shell Company the Same as an Offshore Company?
Technically speaking a shell company and an offshore company are not the same.
On the one hand, a shell company is a legal entity that has little or no active business operations and itself doesn’t hold significant assets.
On the other hand, an offshore structure is just a company set up offshore or a company set up in another jurisdiction than where the owner has his tax residency.
Nevertheless, many people often use both terms together or use them to refer to the same concept.
Moreover, you’ll often incorporate a shell company overseas due to which it’s also an offshore company.
Do I Need to Live Where my Company is Registered?
You don’t need to live where you register your company.
However, the actual answer is a bit more nuanced. If you don’t live in the country where your company is registered and your company doesn’t have much other substance in there, this might be an issue.
A lack of economic substance of your business in the country of registration is scrutinized more and more by the countries where you actually run your business from or are a tax resident.