The short answer is that an offshore company registers in a jurisdiction (or country) with preferential politcal and economical (think in terms of taxation and privacy) laws. For example, incorporating a company in the Cayman Islands. The host country will usually place restrictions on the company’s business activities within their jurisdiction but allow them operate everywhere else, often without needing to pay high taxes (sometimes zero taxes).
An onshore company however, is incorporated in a jurisdiction with absolutely no political or economical (taxation) preferential treatment. Once registered, the firm will have to follow the law of the land, which means being subjected to their taxation rates and political laws.
For example, an American with a UK company will not be considered offshore, but onshore because the laws guiding both US and UK don’t show tax favors to others.
Both of these methods of starting up companies have their pros and cons, but in other to describe the differences and benefits of both, you’ll need a more in-depth look at each individually.
Companies that register as offshore can usually carry out the same business activities as those registered as onshore – there are no limits. Tiempo Development knows, a software development company can register as either onshore or offshore. Although some offshore hosts don’t allow offshore to conduct business within their jurisdiction, countries like Panama allow offshore companies to conduct business locally, with the local tax rate applied to them.
Most companies love registering as offshore because of the low taxation rates in these countries, so these offshore hosts are considered tax havens. In terms of management, an offshore company can be managed away from the host country, which is great. Additionally, these offshore hosts offer more privacy to incorporated businesses, so you may not need to present financial statements or audit reports.
These firms are usually subjected to the incredibly high taxation rates that come with conducting business in an economically advanced country. On the bright side though, onshore companies can conduct a large amount (or all) of their businesses in the countries they’re registered, so they have access to an economically advanced consumer base.
Of course their business activities will be subject to government regulations, so they’ll need to present their statements regularly to the government. Basically, they’re afforded significantly less privacy.
Onshore Vs Offshore Companies – Which Is Better?
So, What is the difference between onshore and offshore company? well, there are several benefits of both firms. However, in terms of which works best, it depends on what your plans are for the company. If you just want to stash money somewhere without paying taxes, an offshore sounds great. Your challenge will be when you need to move funds from your offshore company to conventional onshore banking systems – offshore transfers tend to raise red flags.
Furthermore, if you ever need legal documents for your offshore company, it may be tough getting them. Since offshore hosts don’t usually require submission of financial and audit statements, an offshore company can get complacent in preparing them. Again, you’ll only worry about this based on what your plans are for the firm.
So with regards to which is better, it all boils down to what your long term intentions are.