In introducing this discussion on the benefits that can be derived from the use of an International Business Company (IBC), I would first like to establish the distinction between two major concepts that play a critical role in understanding how IBC’s, frequently referred to as ‘Offshore Companies’, function.
Although the use of offshore companies has become extremely widespread throughout the world, the basic misconception of how an offshore company can be used to save on taxes is still prevalent. Most people relate an offshore company or IBC with saving on taxes, and in so doing confuse the concepts of tax evasion and tax avoidance. Tax evasion, we may define as the act of simply refusing to pay taxes due, by means that are considered illegal within the law. In contrast, tax avoidance refers to utilizing the provisions within the taxation laws of a country to one’s advantage so that savings on taxes can be made.
In light of the sensitivity that businesses, whether domestic or international, have over the past few decades adopted to taxation regimes, establishing a basis for international taxation has been deemed utterly essential. Taxation policy has largely influenced whether or not an investor decided to invest locally or in a foreign country; hence having great potential to motivate capital inflows or outflows, particularly in an age when capital is highly mobile.
Two basic principles underlying the imposition of taxes by countries include the country in which income is produced – the Source Jurisdiction, and the country where income is consumed or saved – the Residence Jurisdiction. The current consensus concerning the correct allocation of taxation, as was established in 1923 by the former League of Nations, today known as the United Nations, is that the source country has the prior right to tax all income, while the residence country has the obligation to avoid double taxation (the taxation of income by two countries) either by tax exemption or granting foreign tax credit.
Bearing this in mind, let’s ponder on this scenario. Mr. X, handsome British citizen and resident standing at 6 feet tall registers a company in the island of Dominica. Mr. X is involved in shipping in the UK where he earns his revenue but under the Dominican International Business Act (IBC Act) is prohibited from conducting any form of business activity within Dominica and is exempted from all taxes on his earnings. Mr. X also owns an offshore bank in Dominica and goes there during the summer on vacation.
This is a simple demonstration of how the offshore industry works. In the example given, two things are clear. One, Britain is the source jurisdiction and has the right to tax, subject to its fiscal policies, income that is earned in the UK, while Dominica is bound to refrain from taxing. Secondly, Mr. X is able to avoid taxes based on the fact that Dominica legally does not impose any taxes on his income. With regards to this, it must be mentioned that tax treaties generally grant source jurisdictions the right to tax the active income (income originating from conducting business within a particular country), while on the other hand allowing residence jurisdictions to levy taxes on passive income (dividends, capital gains, interest. royalties, etc.). Thus, should Dominica decide not to levy taxes on Mr. X’s dividends and capital gains, which it has the sovereign and legal right to do, is any offence being committed given how the international taxation law functions? And by benefiting from the tax exemption that he is granted Mr. X in turn has avoided several passive income taxes by incorporating his company in an offshore jurisdiction and consequently is able to save a large portion of his earnings that he would have otherwise spent in taxes.
An International Business Company is thus defined as a corporate entity used for conducting business internationally, with the exception of the country of incorporation, in a tax free environment. Other offshore entities such as offshore trusts or international exempt trusts, offshore insurances or international exempt insurances, offshore mutual funds, offshore foundations and offshore banks all share the same concept with IBC’s. All of these companies are considered as offshore companies, though they each serve a specific purpose and the term offshore company is generally loosely applied when referring to IBC’s.
As its name implies and has already been stated, an International Business Company or IBC is used for doing business internationally. This feature is enshrined in the Dominica IBC Act, 1996, which allows IBC’s registered in Dominica to conduct any type of commercial activity so long as it is in keeping with the laws of Dominica and international rules and regulations. Some of the activities in which a Dominican IBC may engage include shipping, trade, mining, treasury management, intellectual property, patent and copyright. A Dominica IBC can also function as an investment company or a holding company. The possibility of being able to use a Dominica IBC for such diverse business activities is proof of its versatile nature.
In light of the current economic difficulties that plague human existence, taking one’s business to the next level by going offshore should be given very serious thought by those who have not yet done so. However, a clear understanding of exactly what offshoring entails is vital; thus the reason for the detailed yet simple explanation of the taxation factor and legality of the offshore industry that was provided in the introductory paragraphs of this article. Going offshore provides a corporate vehicle that enhances the possibility of tapping into new markets, undertaking new business activities, increasing earnings, and thus, maximizing profits.
Dominican International Business Companies operate within, and are regulated by, a juridical framework that adheres to international regulatory offshore standards. In 1996, the Dominica IBC Act was passed, establishing the rules that regulate the functioning, administration and registration of Dominica IBC’s. Clauses governing the issuance of shares, appointment of Directors, procedures for general meetings, payment of yearly maintenance fees, tax exemption and ownership are all thoroughly laid out in the Act, thus establishing comprehensive and unambiguous Dominica IBC norms.
Dominica IBC’s are incorporated at the Companies Registry and are required, subject to Dominica IBC regulations to have a resident registered agent and office. Registered agents must be licensed offshore service providers that serve as the first subscribers on behalf of the IBC’s members for incorporation purposes. The agencies by which offshore services in Dominica are provided are strictly supervised by the Dominica Financial Services Commission, which is mandated for ensuring that the provision of offshore services remains standard and in compliance with both local and international offshore policies. Offshore services are provided by highly skilled professionals such as lawyers, accountants and specially trained secretarial assistants.
Incorporating a Dominica IBC with Caribbean Land and Property Financial Services is generally done within 24 hours and simply requires the filing of the Memorandum and Articles of Association, in which the IBC’s constitution and by-laws must be presented before registration can be completed. Dominica also has very advanced telecommunication networking systems that facilitate the provision of very quick and efficient Dominica IBC formation services.
For legal and legitimate savings on taxes, business can be assured that they will benefit greatly through the formation of an IBC in Dominica with Caribbean Land and Property Financial Services.
Copyright Caribbean Land and Property October 2008