In the current economic climate, the media often makes references to offshore companies as a method of companies "evading" tax. In the 2008 presidential campaign, Barack Obama called Cayman Island investments "the biggest tax scam on record." The reality is somewhat different. A company doesn't need to be offshore to have tax advantages. President Obama should have looked a little closer to home before he critised the Cayman Islands. 1209 North Orange Street, Wilmington, Delaware (the USA homeland state of Delaware) is the legal registered office address of no fewer than 285,000 separate businessess which makes the 50,000 or so businesses registered in the Cayman Islands seem like small fry! There are more businesses registered at just this one address in a quiet American town than then whole of the Cayman Island!

Tax is the largest single liability that a company is likely to experience and it is sensible to take to take steps to minimise tax liability so it's no wonder that businesses look to create an offshore company to minimise their liability.

First some terminology. Tax evasion is evading tax. This is illegal. Deliberately evading tax is most jurisdictions is illegal. Tax avoidance is not illegal. This is designing a corporate structure to minimise tax liability and complying with the laws of the jurisdictions where the company operates. This is perfectly legal. So offshore company formation in most situations is perfectly legal.

There are many reasons why you might want to create an offshore company and they are not always about tax avoidance. Take property. Say you've just taken your holiday in Thailand and you've fallen in love with the place and have your heart set on buying a property you've seen there. Well unless you are a Thai national you are out of luck. Under Thai laws it's illegal for a foreign national to own land. There are ways around this and a common solution is to form a Thai Limited Liability Company. Under Thai law, the Thai national would need to be the majority shareholder. An agreement would then be put in place during formation of the company that would result in the Thai entity handing over complete power of attorney to the foreign partner, which would then provide them with a reasonable degree of security and control over the property without direct ownership.

This kind of legal structure is not limited to far flung lands like Thailand. Thinking of buying a holiday home in France? Be careful. You may fall foul of French inheritance law which can easily over-rule the inheritance laws of the country in which you are domiciled and make your whole estate subject to French inheritance tax. French laws dictate who can inherit your possessions - over-ruling the wishes laid out in your will. Establishing a company to own your little piece of France can avoid the minefield of international inhertiance law.

Bermuda, British Virgin Islands and the Cayman Islands are examples of offshore jurisdictions which are widely considered classic tax havens. Why is this? There are a number of reasons. Firstly it can be down to the laws in the country which result in low rates of corporation tax. The USA state of Delaware has a low annual corporation tax rate of just 8.7%. Contrast this with the federal corporate income tax rate of 35%. When you consider this, it shouldnt be a surprise that so many USA companies are registered in Delaware.

The second reason why these jurisdictions are popular is secrecy. The laws in the jurisdiction can create secrecy since there are few (or even no) disclosure requirements.

Countries like the UK have very high levels of transparency and information about the financial state of companies are publicly available. Datalog makes lots of this data available for free.

Picking a jurisdiction with high levels of secrecy does suggest that the reason for the offshore company is tax evasion rather than tax avoidance, so be careful. World leaders are attacking jurisdictions such as Switzerland since they are seen as harboring companies and individuals who are evading tax.

UK territories such as the Channel Islands and Isle of Man are safe choices since they have very high levels of transparency (actually higher than most USA states), low taxation and also importantly - credibility.

Delaware is a popular choice since it's a low tax regime and also because the levels of transparency are low. It's possible to hide behind service companies so that information about the officers and shareholders is hidden from prying eyes.

Panama is very topical right now. Interestingly the transparency levels for Panama are very high. Although you need to register to use the Panama company register (and use Google translate to navigate the Spanish), it's possible to find the directors, shareholders and a range of documents about offshore companies. Delaware doesnt meet the same levels of disclosure as Panama. How long before the media picks up on this?

Jersey has a standard corporate tax rate of 0% for non financial companies and has the added benefit of credibility. Assuming your business trades internationally then you could achieve significant tax savings by operating in Jersey. A Jersey headquartered company could easily apply for a UK VAT number or in-fact a VAT number for any European member state country. Doing the same for a Bermuda headquarted company would be more challenging!

Transparency levels for the offshore UK territories is very high. Information is freely available for companies in these territories so transparency is high however there may be a charge to access certain documents. However some other states/countries don't even disclose the existance of the documents let alone provide access!

OK you've decided that you need to form an offshore company. What next? You'll need to engage the services of an offshore company formation agent. Generally these companies are based in jurisdictions which have high levels of secrecy so sadly you probably won't be able to use Datalog to do due diligence on them. We would recommend you take legal advice and use reputable agents. Why? Often these companies may be acting as nominees (you don't have direct control) and so there is a risk that they could take your money and run!

It is easier to research companies that provide offshore company formation services for less secretive jurisdictins. For example XEPHYR LIMITED provides formation services for the USA state of Delaware. Details can be found via the Xephyr website.