Offshore Companies are only applicable if you are doing business overseas and not in the country where you’re offshore was incorporated. All income derived in and from the incorporated country is normally taxable. e.g. An offshore incorporation in Bahamas, doing business in Bahamas will require to pay taxes in Bahamas, but if the business was conducted in USA or Hong Kong, all profits are not taxable. There are some significant restrictions on UK resident and domiciled individuals using offshore companies. Generally you’ll have the best opportunities to use an offshore company to avoid UK tax if:

You are non UK resident, or  You are non UK domiciled; You are trading overseas; The company is owned by a trust; The company is controlled 
from overseas.

If you’re using an offshore company the main advantage is that if it’s non resident it will be exempt from tax on any gain on a future disposal. However, to counteract these massive tax benefits there are a number of anti avoidance rules that cover the management of the company and the location of the shareholders. If these apply they can eliminate the tax benefits of using the offshore company.

Many providers of offshore corporate services still promote offshore companies incorporated in tax haven jurisdictions as a panacea from taxation. They claim that the company is exempt from taxes in the country of incorporation. True. But it’s not carrying on any business in that country. Where does your offshore company carry on its business and pay 
taxes then?

Generally, there are two main principles that may define a tax residence of your offshore company: place of incorporation and source of income.

Place of Incorporation: Most countries charge their residents, be it an individual or a legal entity, to tax on their worldwide income. A number of countries, such as Panama, Hong Kong, BVI, have a territorial principle of taxation, meaning that only a domestic sourced income is charged to tax. And there are a vast number of so-called pure tax haven countries that provide for incorporation of companies exempt of taxation: international business companies, non-resident companies, offshore companies etc.

The main principle a tax haven country follows is granting a company tax-free status in exchange for restriction to trade on its territory.

So, indeed your offshore company may not be taxable at the place of incorporation. But it might be taxed at the source of income.

Source of Income: Many highly developed countries have adopted similar legislation in this regard.

Normally, for an offshore company, i.e. a foreign company, to be recognised as a tax resident in a high-tax country two main requirements are to be met:

The company carries on business on the territory of the country, and the central management and control of the company is located in the country (CM&C), or the voting power is controlled by shareholders who are residents of the country.

Generally, the company is to meet both requirements. The mere fact of carrying on a business in the country is not sufficient to make the company liable to tax in that country.  If no business is carried on in the country, there is no need to go further and check whether its CM&C is located in the same country.

On the other hand, depending on circumstances, merely meeting the second requirement, the CM&C location, may lead to qualification of the company as a tax resident.

There is also a concept of specific business activities inferring that place of business of the company is where its management is located. For example, in such business as investments in property or shares to generate rental or dividend income, acts of control and management are acts for carrying on business. Central Management & Control: One or a scope of the following can evidence the location of CM&C of an offshore company: Residence of the majority of its board of directors; place of the majority of meetings of the board of directors; residence of controlling shareholders, in cases where the company’s board is not in fact a strategic decision maker residence of “shadow directors,” or real directors, managing the company’s business, if the company’s board is recognised as nominee people with no power to control residence of another persons holding general power of attorney and acting on behalf of the company existence and residence of a parent company with substantial controlling powers over its offshore subsidiary.  Generally speaking, it is about who is the high-level decision maker and where he resides when he makes decisions. Having authority to make high-level decisions does not automatically make a person the CM&C of 
the  company.

Most countries’ regulations require the exercise of such power or authority to a substantial degree.

If your company is recognised as a tax resident in the country where it carries on business, it is subject to tax on all income from sources in 
this country.

Double Taxation

Potential double taxation happens when one country pretends to the right to tax the income on the basis of residence (or citizenship) of the taxpayer, and the other country — on the basis of that income source. In certain occasions it happens because both countries claim the taxpayer to be their resident or the income to be from their sources.

Avoid double taxation by means of possible tax credit, tax deduction and tax exemption options. Most of the existing double tax treaties between countries normally follow the OECD model tax convention and cover taxes on income and capital in any form. The choice of jurisdiction, as per paragraph “Tax jurisdiction” above, may often depend on availability of the appropriate tax agreement between two countries. Besides tax treaties, a number of developed countries have in place special tax regulations allowing for credit of the foreign tax paid even without the according tax treaty in force between the involved countries.

Double taxation may also have place within the distribution processes of the company’s revenue. It may be first taxed as profits of the company and later as dividends to the shareholders subject to withholding at distribution. Check the related local legislation to find a possible remedy for this case.

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