What are offshore companies?

The most common use definition of “offshore” is a term that refers to a location outside of one’s home country. “Offshore” is regularly used in banking and financial sectors, describing areas where regulations are different from the home country. Offshore companies are companies that engage in offshoring business processes.

Offshore companies have been popular with the international business for 40-50 years. The function of an offshore company is mainly to take advantage of many incentives when not doing domestic business in some countries and territories. The term offshore companies, in most cases, refers to companies incorporated in "tax havens" around the world. There are hundreds of territories and countries that have been, and are, tax havens, including prominent names such as Switzerland, Cayman Islands, Panama, etc. In Asia, Hong Kong and Singapore are also considered tax havens, with their openness in business establishment regulations and taxes.

Why establish an offshore company? The answer lies in the many benefits it brings to an investor. Offshore companies can offer tax optimization. Tax havens, as mentioned, can offer much lower income tax than an investor’s home country. Some tax havens are low-tax countries or are no tax jurisdictions.

Offshore companies provide better privacy. Offshore countries will not reveal information of the company’s directors, shareholders, etc., to the public, except in certain inevitable cases.

Many jurisdictions provide asset protection. An offshore company’s assets shall be protected by financial privacy policies and foreign judgment denial.

The procedure for setting up an offshore company is fast. A company can be registered in just a few days in certain countries, with minimal incorporation requirements. Company maintenance varies in every country but usually also has minimal requirements.

Offshore companies in Vietnam

What is Vietnam’s view on offshore companies? The main concern about offshore companies in Vietnam is majorly about Vietnamese businesspeople establishing such companies in tax havens, not often the other way around.

The term “offshore companies” can be found associated with the Panama Paper on most digital news channels in Vietnam. Back in 2016, when the Panama Paper was leaked, a wave of uncertainty and suspicion arose in Vietnam, as many “big names” of the country's economy were on the Paper. People started questioning the legality of offshore companies, and investigations were launched to look into the tax activities of companies of said big names. The Panama Paper created a commotion in the community, shining a brighter light on the idea of offshore companies, which had been a somewhat distant term to most of the Vietnamese before the Panama Paper revelation.

Until now, offshore companies are still a much sensitive term. In 2016, the General Department of Taxation announced that being named in the Panama Paper does not mean that an individual or organization has violated the law or committed any wrongdoing. The Paper can be considered as an information channel for related parties. However, the Vietnamese remain skeptical.

What is the root of these suspicions among the Vietnamese? The answer may lie in the difference in taxing between Vietnam and the famous tax havens that harbor the offshore companies established by Vietnam businesses. As an investment, profit is always the top priority in business. In addition to generating profits, taxes must also be paid. However, at present, the economic development conditions of the countries are not the same. Therefore, tax policies and incentives of countries and territories are also different.

The problem is, in the era of globalization with the rapid development of multinational companies, the limits between borders and countries are also narrowing. In short, the boundaries between countries and territories are no longer clear, and the movement of companies between countries is normal. That is the seed of the so-called "tax avoidance" and "tax evasion", which has been a global problem.

Besides genuine businesses contributing to the development of Vietnam, there have been many forms of tax avoidance of companies. For FDI enterprises, the problem is "transfer pricing", a chronic issue that has plagued management agencies for a long time, causing huge losses to the country's budget.

In Vietnam, offshore companies will remain a legal and acceptable type of business activity, as long as those companies are transparent about the source of investment money and exercise tax obligations.

As for forming offshore companies in Vietnam, the country is not among the names of the best offshore destinations. However, when considered in a specific field, which is software development, Vietnam stands out as a pretty potential place for establishing offshore companies. The country is highly recommended for its deliverance of high-quality work, recognized work ethic, availability of educated labor force, and reasonable cost.

References: BBCIncorp, vietnamfinance

Compiled by VietnamCredit