An offshore corporation or offshore company could be used in a minimum of two different ways.

It could in reference to:

• A corporate group or company, or a division thereof, that participates in offshore business or manufacturing services.
• A kind of corporation or legal entity that is registered or incorporated in some offshore financial area or “tax haven”.

The latter use, i.e., firms incorporated in various offshore jurisdictions would perhaps be the more frequent usage of this term.

Understanding Offshore Jurisdictions

The extent or degree to which any jurisdiction is considered as offshore will typically be a matter of perception. The countries which are well known tax havens include British Virgin Islands, Cayman Islands and Bermuda. These are primarily offshore jurisdictions. Companies that are incorporated or registered in these jurisdictions are often called offshore companies.

Besides this, there are also some smaller, intermediate countries like Singapore and Hong Kong, also called “mid-shore” jurisdictions. These countries have big financial centers, but do not fall follow zero tax policies.

Lastly, there are some industrialized economies that could be utilized in the structures of tax mitigation. These include countries like the Netherlands, Ireland and the United Kingdom.

In addition to this, in the Federal system, states that function like classic offshore centers could have companies incorporated there being called as offshore, despite them being a part of the biggest world economy.

Classification of Offshore Companies

In the past, offshore firms were primarily placed into 2 categories. Firstly, there were firms which were compulsorily exempt from all taxation in the registration jurisdiction, given that no business was done with the residents of that particular jurisdiction. These kinds of companies were typically termed as IBCs or International Business Companies and were made popular largely by one country, the British Virgin Islands. However this model was followed widely.

But in the beginning of the 2000s, a world-wide initiative was launched by the OECD to eliminate “ring fencing” with respect to taxation. Primarily, all leading jurisdictions had to repeal the IBC law. This also included the British Virgin Islands. However, IBCs continue to be incorporated in various jurisdictions today. These include Panama and Anguilla.

Besides IBSs, some countries that work with tax regimes also achieve a similar effect. As long as the firm’s operations continue overseas and no profits get repatriated, the firm will not be subject to any taxation in the home jurisdiction. In cases where the home jurisdictions are regarded as offshore jurisdictions, companies are generally considered as offshore firms. Examples of such countries include Uruguay and Hong Kong.

Separately you can find offshore jurisdictions that do not simply impose any kind of tax on the companies. Therefore, the firms become ‘de-facto’ tax exempt. Bermuda and the Cayman Islands were some of the best examples of such countries. Other countries like the British Virgin Islands have also shifted to this kind of a model.