Funding Offshore Companies

Foreword
Companies will generally require assets to perform their intended activities and how those assets are transferred in will be an important consideration for service providers. Often it will also determine how funds can then be distributed back to the beneficial owner.

There are a number of options which are available but perhaps the following are the most commonly used methods.

Loans
Usually, the beneficial owner of a company will introduce funds by way of a loan. Any loan which is made or eventually repaid should be approved by the directors and properly recorded. This would usually involve the completion of a loan agreement or promissory note setting out the details of the loan and for a directors' meeting to be held, at which the proposed transaction is discussed and an appropriate resolution passed.

A loan agreement, rather than a promissory note, would often be desirable which should include terms which cover, among other things, the lendee and lendor, the amount lent, the proposed duration of the loan with details of how this can be altered and also a clause which confirms the interest, if any, which is to be paid on the balance outstanding.

Ideally, there should be a commercial reason why a loan is to be made. Usually this would require a market rate of interest being payable. However, many loans, which have been created involving offshore companies, are structured as interest-free arrangements with no fixed date for repayment. The directors and administrators of companies who have entered into such an arrangement would be well advised to take note that the loan might be difficult to justify if ever questioned by an outside party.

Allotment of Shares
The owner could introduce funds in return for shares. However, it might prove difficult for the company to be able to return funds which have been introduced in this manner as it might mean having to cancel issued shares, an action which require court approval in some centres.

Dividends
Realised gains and income could be distributed to the members by way of a dividend. As the members would usually be holding the shares as nominees on behalf of the beneficial owners, any sums distributed in this manner would pass directly to the client (in accordance with the nominee declaration which should be in place).

However, dividend payments are generally treated as income and there might be tax implications if funds were distributed in this manner. In addition, withholding tax may have to be deducted from dividends which are paid by certain types of offshore companies from low tax centres (usually resident companies) to persons who reside outside that centre.

Capital Distributions from Reserves
As an alternative to a dividend, it might be possible, under the terms of the articles of association (and provided it did not contravene local company law), to make a distribution out of the reserves of the company. This would usually be treated as a capital distribution rather than an income payment and might therefore avoid the possible taxation problems which could arise if a dividend payment was made. Often assets contributed by the beneficial owner will be treated as a capital distribution, thus making a return of capital possible if these assets are to be repaid in the future.

Salaries / Commissions
It might be possible to introduce funds into the company by way of services which the client has performed, either for or on behalf of the company. For example, the company might enter into a contract for the provision of certain services (such as advice or know-how) which the company asks the client to perform (under terms of a contract perhaps). The company would then invoice the recipient of the services and in turn the client is paid a salary or commission in recognition of their services performed.

MULTI-COMPANY STRUCTURES

In many cases more than one offshore company will be used in a structure to meet the needs of a particular client. In addition, offshore companies are widely used in collaboration with offshore trusts.

Reducing Risk by Diversification
Although there are usually no restrictions on the type or number of assets which an offshore company can hold or own, it is usual practice for separate companies to be used to hold different types of assets. For example, if a client wanted to place his property, investment portfolio and works of art into an offshore structure, it would be common practice for his adviser to suggest that three companies be used, one to hold the property, one for the investments and one to hold the works or art.

If the ownership is divided in this manner, the client would enjoy a greater level of protection and security than if all the assets were held by one company. This is designed to provide protection in the situation where a dispute may arise relating to part of the client's assets, as the dispute should, in theory be restricted to the company which is used to hold the asset under dispute. The other assets should be protected as they would be owned by a different entity which one would hope would not be party to the problem.

By the same token, if there were, for example, three freehold properties then three separate offshore companies would usually be created, with one being used to hold each property.

Lex Situs
This is perhaps an extension to the above reason. The law of the jurisdiction where the asset is held may demand that a company be used to hold that particular asset. For example, realty will usually have to be registered in the name of a company or an individual.

Confidentiality
Some clients prefer to use more than one offshore centre in which to conduct their financial affairs. They perceive that this would offer greater scope for confidentiality and secrecy. Hence, you will often find that a client will place a proportion of his assets in a company in one centre and another company would be used in another centre in which the balance of his assets are held.

In this way the protection which can be provided by a multi-company structure can be further enhanced by multi-jurisdictional protection.