An "offshore" company is any company which
is formed in any of the so-called tax favored or "tax
haven" jurisdictions. In the past few years, among
the most commonly-used countries are the British Virgin
Islands, the Cayman Islands, Nevis and the Bahamas and
Barbados. The more traditional and longer-established
havens include the Isle of Man, Jersey, Guernsey and
Panama and Liberia.
What these countries have in common is the fact that
they generally impose no (or an extremely low) tax on
companies which are formed there but which do not do
any business in that country. The type of the entity
formed differs country by country but they usually have
most of the characteristics of a US corporation or Limited
Liability Company. International Business Companies
(IBCs) and Limited Companies are probably the most common.
These companies can be formed for various reasons -
to hold investment property such as real estate and
financial portfolios or to engage in international business
If you are a citizen of a country that does not tax
income earned outside of its borders, an offshore company
can be most advantageous - your money can grow tax-free
(and therefore a lot faster!) until it is repatriated.
Some countries have tax systems like the US - "global"
taxation where all income is taxed regardless of where
it is earned. If this is the case, you must declare
any income earned when you file your return so there
are few tax advantages.
However, many US citizens find another legitimate advantage
to offshore companies - asset protection. In our increasingly-litigious
society, many people keep their nest egg offshore. It's
much more private (the confidentiality laws of these
jurisdictions are usually very strong) and it's much
harder for potential creditors in a frivolous lawsuit
to get at your money.
NOTE: It's best to begin this planning as early as
possible. Many courts can seek to set aside such a transfer
of funds as fraudulent if it's within a certain period
of time (generally 3 years) of a lawsuit or "in
contemplation" of litigation.