Offshore companies for digital nomads is something you hear a lot about when discussing taxes. It’s also a common topic of discussion between digital nomads: where should I set up my company when I have the whole world to choose from?
Nevertheless, offshore companies also carry a negative connotation with them since the Panama Papers and disclosures alike. However, this negative sentiment isn’t always justified.
What is an offshore company?
From a strict legal interpretation, an offshore company is a company incorporated outside of your country of registration. It is off the shore of the country you generally operate in.
That begs the question if offshore companies for digital nomads even really exist as they mostly don’t have a fixed place they operate from. In this case, you could interpret it as a company in a jurisdiction other than the one you’re a tax resident in.
We can’t deny, though, that the terminology of offshore companies is most of the time also used to indicate that it’s a company which helps you reduce your tax burden. Despite the negative connotation, this is perfectly legal. If you set it up the right way of course!
How to pick an offshore company for digital nomads?
There are many opportunities regarding offshore companies for digital nomads. Therefore, it’s impossible for us to describe all possibilities. For that reason, we rather provide you with some attention points to be aware of when making your pick where to incorporate.
When picking offshore companies for digital nomads you should first and foremost look at a trustworthy jurisdiction. What I mean by that is that the country should have clear and stable regulation regarding setting up companies and (foreign) investments.
In addition to a stable climate, you could save yourself a lot of hassle with picking a country with as little red tape as possible. This will only cause you a lot of frustration and will most likely increase the cost of doing business there.
Furthermore, it might also be interesting to look at countries that don’t have the stamp of tax haven on them but that might be similarly interesting from a tax point of view.
Offshore companies for digital nomads: corporate taxes
That immediately brings us to corporate taxes. When looking at offshore companies for digital nomads, the first reflex is to ask what the applicable corporate tax rate will be.
It doesn’t need further explanation that a country where corporate tax rate is 10% is probably of more interest to you than a country where the tax rate equals 20%.
Saving on taxes is one of the most underestimated pay raise you can give yourself. Most people often say that housing is their biggest expense but they forget about the huge amounts of (income) taxes they pay.
Let’s say you could decrease your tax burden from 30% to 10%. That means an immediate increase of your pay day with 20%. Another option is to work 20% less while still retaining the same income. The decision is yours.
Once your company paid its fair share of corporate tax, your money is still in your company. In order to get the money to your private account, you’ll probably pay it out as a dividend.
Most countries have a withholding tax on dividends that your company pays out. The rate can vary depending on the country and the double tax treaty that will be applicable, if any.
Most people focus on corporate tax rates. However, to get the full taxation picture, you should also take into account the withholding taxes to make a proper assessment of your tax burden and to compare different options. One country might have a slight higher corporate tax rate but if they don’t levy any withholding taxes, that might make a major difference.
Double tax treaties
If you have your offshore company in one country but you are having your tax residence in another country, there will be two countries involved in your tax setup. This is where double tax treaties come into play.
Double tax treaties are basically agreement between countries in which they make arrangements on which country is authorized to tax which income. We’ll dive deeper into the details of double tax treaties in another article.
However, here the most important thing to remember is that double tax treaties limit the withholding tax that one country can levy if you are living in another country. The reason for this is that your country of tax residence will be permitted to tax your dividends.
Relationship to the country of your personal tax residence
This is a bit of the summary of all the above. You’ll specifically have to check how the country of your personal tax residence and that of your company work out together. This depends amongst others on the double tax treaty between them, if there is one.
Some offshore company in jurisdiction X might work well if you’re a tax resident in country A but maybe not if you’re a tax resident in country B or the other way around.
Offshore companies for digital nomads: management & control
Probably the most important topic regarding offshore companies for digital nomads is management and control. Although, it is so important, not many people pay attention to it.
We discussed before that you can – from a pure legal point of view – set up a company wherever you want. Consequently, the company will be managed according to the laws where the company was incorporated (although some countries divert from this principle).
However, it’s not because you’ve set up a company in a certain jurisdiction that you automatically will pay corporate tax in the same country. The reason for this links to the concept of management and control.
Let’s say you incorporate a company in an exotic location without any corporate tax. The Cayman Islands can be a good example. Nonetheless, you don’t feel like spending a lot of time on the Cayman Islands. The reason could be that you easily get bored of these small islands. Maybe the location in the Caribbean Sea doesn’t appeal to you as it is to far away from other places you regularly visit which makes it inconvenient. Or, maybe the cost of living is above your budget. There could be different reasons why you don’t necessarily want to spend time in the place.
In order to determine where you pay your corporate taxes, not the place of incorporation is important but the place of effective management. This is the place from where the company is actually managed and where it performs it’s activities.
If you are actually hiring people on the Cayman Islands to work for you: perfect! You have people on the ground performing the activities of your company and by that local presence. Yet, most digital nomads won’t necessarily do this. They might be operating as a freelancer on their own or have a small team of (remote) freelancers/employees.
Consequently, you become a vulnerable target for other tax authorities. The country of your personal tax residence or the country where you spend a significant amount of time might find this interesting. They could come to the conclusion that you are actually managing and controlling the company from within their jurisdiction. In that way, they open up the road to tax your companies profit according to their rules. As a consequence, you will end up paying (high) corporate taxes after all (possibly plus some fines). Not ideal; not to speak of all the hassle that comes from dealing with the tax authorities.
For the aforementioned reason, you should carefully assess whether or not setting up an offshore company is the right way to go in your situation.
Conclusion on offshore companies for digital nomads
There are plenty of options for offshore companies for digital nomads. Therefore, it is best to list the elements that are important to you based upon the attention points we discussed. From there, you can start your search for the ideal location for the setup of your offshore company.
However, before deciding on where you want to setup an offshore company, you should first consider if it is even a viable option in your situation. Therefore, you can always reach out to review your personal situation.