Offshore company vs Onshore company: Which one is right for you?

1. Offshore Company

An offshore company is a business entity established in a foreign country or jurisdiction that has only little or even no connection to where the business actually operates, as it has no physical office and employees. These companies are often set up in countries with flexible tax laws or no corporate tax at all, also known as tax haven countries, such as the British Virgin Islands, Seychelles, St. Kitts & Nevis and Panama,...

1.1. Advantages

Tax Benefits: Many offshore jurisdictions offer attractive tax rates or even tax exemptions, allowing business owners to legally minimize their tax burdens. This is especially beneficial for businesses with substantial revenues, as they can save a significant amount through tax advantages, making it the key factor businesses consider when deciding to establish an offshore company.

Confidentiality: Offshore companies provide a high level of privacy, protecting the identity of the business owner. Information about shareholders and directors can remain confidential. In some offshore jurisdictions, only the company name can be searched through the government website.

Flexible Structure: The structure of an offshore company is very flexible. When establishing an offshore company, there is no need for local members, and the registered capital can be freely registered without any maximum or minimum limit. Additionally, all processes and procedures are online, which helps to save time and costs for traveling.

Reduced Operating Costs: As the nature of an offshore company that does not have a physical office and employees, the owner can save the office rental costs, office maintenance costs, employees costs,… Administrative requirements can be minimal, lowering operational costs and administrative responsibilities.

1.2. Disadvantages

Reputation Risks: Due to its nature of not having an official working office, offshore companies can sometimes be associated with tax evasion or money laundering, which could affect a company’s reputation. Offshore companies may encounter increased scrutiny from international and local regulatory authorities, especially if suspected of engaging in illegal activities such as money laundering or tax evasion.

Strict legal and compliance requirements: After the offshore company’s incorporation, the owner must comply with the annual compliance requirements to maintain its operation. Failure to submit these reports on time may result in penalties or dissolution of the company. Besides that, the annual compliance requirements are frequently updated and changed to align with the global AML/CTF regulations. As a result, these offshore jurisdictions have to follow the rules to avoid being placed on the sanction list.

Limited Banking Services:

Due to the structure of the offshore company, which does not require a physical office or employees, making it difficult to verify its transparency, the banks are stricter when onboarding to open accounts for offshore companies. Banks always require the owners to provide full evidence of their company's business activities, such as invoices, contracts, company websites, financial plans, etc., in order to ensure that the company's business operations are transparent.

If an offshore company, which is related to financial crime, opens a bank account, it can affect the reputation of that bank. Therefore banks are often stricter when opening an account for offshore companies. This leads to offshore companies having limited banking services.

2. Onshore Company

An onshore company is a business entity established in the country where you actually operate and serve customers. This is the most common type of company chosen by entrepreneurs who want to maintain direct relations with the local market.

2.1. Advantages

Stability and Reputation: As the onshore company is regulated by the laws of its country and operates within a well-established legal framework, it can instill trust with investors, customers, and partners. Being onshore may also make it easier to build a reputable brand and attract customers in your home country.

Easy access to Local Markets: An onshore company can make it easier to engage with local customers, as it offers direct access to local markets. This will help the onshore company build strong relationships with the government, and connect with local customers and organizations.

Legal Protections: Onshore companies benefit from the protections provided by domestic law, including intellectual property rights and labor laws, which creates a more predictable business environment.

Higher credibility and legitimacy: Onshore companies are often viewed as more credible and transparent, as they operate under clear national regulations.

2.2. Disadvantages

Higher taxes: One of the major drawbacks of onshore companies is taxation. Onshore companies may face higher tax rates depending on the country’s corporate tax policies, which potentially reduces their profits.

Higher setup and maintenance costs: An onshore company is required to have a physical office, employees. The owner will then need to cover the costs of office rent, office maintenance, employees salaries, as well as other operational and administrative expenses.

Complex legal procedures: As an onshore company must comply with the laws of its country, meaning that the business owner has to comply with local regulations, which could involve extensive paperwork, such as licensing, and ongoing reporting and legal compliance obligations.

Limited flexibility for global business: If you plan to expand your business internationally, managing branches and operations in multiple countries can be more challenging for onshore companies, due to higher operational costs and increased administrative workload.

Limited Privacy: Onshore companies may have less privacy as they are typically required to disclose more information about ownership and financial status.

3. Which Company Type Should You Choose?

The choice between an offshore and onshore company depends on several key factors such as your business goals, the location of your customers and markets, and your financial plans.

• If you want to optimize taxes and protect personal information, an offshore company might be a good choice, especially when you are operating globally.
• If you aim to develop a strong business in your local market and maintain good relationships with the government and customers, an onshore company may be the better option.

4. Conclusion

There will be no one-size-fits-all answer when it comes to choosing between an offshore company and an onshore company. The best choice depends on your business objectives, development strategy, and specific needs. Therefore, it's essential to thoroughly research the legal regulations, taxes, and requirements of the country where you plan to set up your company before making a decision. 

This article provides only general information about the pros and cons of the onshore and offshore companies. If you need further details or want to form an offshore company, please do not hesitate to contact the G.O.C team for assistance.