For business owners and families who have, or are considering, an offshore company. This page covers, in order, headline and effective tax, CFC rules where the shareholders live, transfer pricing, economic substance and transparency, tax residence and place of effective management, the global minimum tax, and a short decision checklist.
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01 Headline rate, effective tax and total cost
“Offshore” describes where a company is set up; “low-tax” describes a feature of the local tax system. Neither means “tax-free”. Each jurisdiction has its own rules on company profits, foreign income, dividends and capital gains, and whether tax is due depends on the nature and source of the income, the actual activities, where the company is managed and the law that applies. Hong Kong and Singapore are not blanket tax-free jurisdictions either.
Compare total cost as well as tax: set-up and annual upkeep, plus the staff and office costs of real local operations, which can far exceed the registration fee. For what these costs include, see Offshore Company Incorporation.
02 CFC rules where the shareholders live
Many jurisdictions have controlled foreign company (CFC) rules. Broadly, where shareholders control a company in a low-tax jurisdiction that lacks enough real activity, they may have to include its profits in their own taxable income even if the profits stay in the company and are never paid out.
Whether the rules apply depends on control, how a low-tax jurisdiction is defined, whether the company has substantive operations, earnings thresholds and exemptions; the rules and calculations for individuals and for companies also differ and should be checked separately. The fact that an offshore company has not yet paid a dividend does not mean the shareholders have nothing to report.
03 Transfer pricing: dealings between related companies
If a company trades goods, services, licence fees or loans with related companies overseas, the terms should follow the arm’s length principle, that is, match what unrelated companies would agree, and the contracts, functional and risk analysis and pricing basis should be kept on file. Having an offshore company collect the income does not by itself make the shift of profit valid for tax purposes; a structure that lasts must match where the business actually operates and creates value.
04 Economic substance and transparency
Authorities and banks are paying ever closer attention to whether a company has real activity and who actually controls it. The BVI, the Cayman Islands and others have economic substance rules for certain types of business, requiring adequate local management, staff or spending; Hong Kong and Singapore also make the tax exemption of some foreign passive income, or of gains on foreign assets, received by members of multinational groups depend on local substance or other conditions.
Banks and registered agents must also identify the beneficial owners and understand the source of funds and the purpose of transactions, and financial account information is exchanged between tax authorities under the Common Reporting Standard (CRS) (see CRS and Cross-Border Asset Compliance). Information that is protected is not information that can be withheld from the authorities.
05 Tax residence and place of effective management
Where a company is tax resident does not depend only on where it is registered. Many jurisdictions look at where key decisions are actually made, such as where board meetings are held, and where and by whom major matters are approved. If an offshore company’s place of effective management is found to be where its shareholders live, the company may be treated as tax resident there and taxed there on its worldwide income. A fixed place of business or an agent in another jurisdiction may also create a permanent establishment there, with the related profits taxed locally.
06 The global minimum tax (Pillar Two)
The global minimum tax developed by the Organisation for Economic Co-operation and Development (OECD) mainly applies to multinational groups with annual consolidated revenue of EUR 750 million or more in at least two of the four preceding fiscal years. It aims to make these groups pay an effective rate of at least 15% in each jurisdiction where they operate, and Hong Kong and Singapore have both applied it since 2025. Most offshore companies owned by business owners and families fall outside its scope, but CFC, transfer pricing and other rules where the shareholders live still apply.
07 A short decision checklist
Before setting up or changing a structure, check these five questions. If any is still open, finish the assessment before paying registration fees.
Where are the shareholders tax resident?
Confirm the tax residence of every shareholder, individual or corporate, and the CFC and foreign income reporting rules there.
Where does the income come from, and where is the company managed?
List the source and nature of the main income and confirm where key decisions are made, so that the company is not treated as resident elsewhere or found to have a permanent establishment there.
How are dealings with related companies priced?
Do dealings with related companies have a pricing basis and full documentation?
Does the company have enough substance?
Does it need local staff, an office or management functions to meet economic substance rules or keep an exemption?
Have you counted the total cost?
Put tax together with set-up, upkeep and the cost of real operations, and compare options over several years.
Frequently asked questions
Where is tax paid when an offshore company pays dividends to its shareholders?
Usually two places matter: whether the company’s jurisdiction withholds tax on dividends (Hong Kong, Singapore and the BVI currently do not), and whether the shareholders’ jurisdiction taxes the dividends they receive. Some jurisdictions tax residents’ foreign dividends, some exempt them and some tax them only when the money is brought in; where CFC rules apply, the profits may already have been counted before they are paid out, so watch for double counting.
Will a company in a low-tax jurisdiction face extra scrutiny from banks or business partners?
Possibly. Banks, investors and counterparties assess clients under their own risk policies and, for companies in certain jurisdictions, may ask for more explanation of business substance, beneficial owners and source of funds. A clear organisation chart, transaction documents and proof of operations help them understand your company, but the decision remains theirs.
If a shareholder moves to another country, does the company’s tax position change?
It can. CFC rules, foreign income reporting and the test of where a company is managed all depend on the shareholders’ tax residence, so a move means checking the rules of the new home. For example, if decisions start being made there, the company itself may become tax resident there. Some jurisdictions also have rules for residents who leave, so review before you move (see International Residency Planning).
How often should an offshore company’s tax position be reviewed?
At least once a year, and again when the business model changes, income or assets grow significantly, new shareholders come in or the rules change. CFC, economic substance and global minimum tax rules have changed often in recent years, so a structure that suited you before may not suit you now.
How can a professional adviser help?
Nextrate starts from the needs of each case: we help clarify your goals, list the documents required, set out feasible options and the main risks, and work with qualified legal, tax and other professionals where needed. Any bank application, tax outcome or legal effect is determined independently by the relevant institution, case by case.