Global Registration

Offshore and Onshore Company: A Detailed Comparison

Every business either at the time of incorporation or at the time of scaling up has to take a major decision of choosing between an offshore and onshore company. Both are popular business models for expanding business operations. Having an insight into an offshore and onshore company is the first move toward deciding which one to choose and this blog provides exactly that!

What is an Offshore Company?

An offshore company is a company set up outside the domestic jurisdiction of the investor company. The transactions in an offshore company are conducted outside the jurisdiction of the domestic company. The purposes of incorporating an offshore company are mainly to expand the global business integration, save costs, to take tax benefits from low to nil-tax-rate countries. Thus, offshore companies are usually located in specific jurisdictions where it is beneficial for companies to establish their business like countries that provide preferential tax treatment, favorable business laws, etc.

What are the advantages of an offshore company?

The major advantages of incorporating an offshore company are as follows:

1. Privacy and Confidentiality
   An offshore company enjoys a separate legal entity from its parent business in the domestic country. Further, offshore companies have certain non-disclosure advantages where all the details of the offshore company are kept beyond the reach of the general public unless there is a criminal investigation^[1].
2. Simple Incorporation Process
   Offshore jurisdictions have an attractive framework of laws usually with simplified laws and a lower amount of compliance requirement. Some offshore jurisdictions also have policies like no audit, no financial reports and no secretaries. The process of incorporation and registering an offshore company is easier and faster.
3. Greater Flexibility
   Offshore companies can easily adapt to foreign business environments.
4. Cost Savings
   Offshore companies help save costs by reducing tax liability, lowering the incorporation costs, and reducing labour costs.
5. Asset Protection
   As offshore companies are separate legal entities, they provide another layer of protection by separating the company from its assets and liabilities. Further, the parent domestic company also uses offshore companies to shield its assets.
6. Legal Protection
   The offshore companies are separate legal entities and they are situated in overseas jurisdictions with a separate legal system and set of laws. So the offshore company also protects the parent business company from becoming a target in any investigation or lawsuit.
7. Access to resources
   Offshore companies can take benefit of resources from the parent company’s jurisdiction as well as from the host jurisdiction. The parent company jurisdiction provides resources in the form of funds whereas the host jurisdiction provides resources in the form of skilled labour, raw materials, etc.
8. Global expansion
   Having a business in an offshore country immediately opens access of the business to new market opportunities. This helps companies maximize their profitability and compete with international brands. It also makes reaching new markets faster.
9. Round-the-clock availability
   Having business offshore allows companies to take the advantage of different time zones by providing 24/7 services to clients. It allows the company to finish work faster which gives it a competitive edge over its rivals.

What are the disadvantages of an offshore company?

Apart from the numerous advantages of offshore companies, there are a few drawbacks of having offshore companies which have to be kept in mind. The disadvantages are as follows:

1. Difficult to monitor employees
   When a business has an offshore company, it becomes important to monitor the offshore team however, the physical distance and difference in time zones make it difficult to monitor the employee productivity levels and also make work process less effective.
2. Communication Barrier
   The time zone differences and the physical distance adds to the communication barrier between a domestic parent company and the offshore company.
3. Security Concerns
   Offshore companies come with the risk of disclosure of sensitive information and it also makes it difficult to monitor the warehouses, offices, production units, etc. Not having proper surveillance may raise security concerns for the company.
4. Ownership Proving
   As the offshore jurisdictions provide secrecy in providing the information. It can become difficult to prove ownership as there is no system for maintaining public registers.
5. Repatriation
   Offshore companies should keep a watch on remittances and the distribution of assets and incomes. If once the assets and incomes reach the domestic parent company it becomes subject to tax in the domestic country and all the benefits of the favorable tax system of the offshore jurisdiction lapse.
6. Offshore fees and regulations
   When a company is set up offshore, it is required to pay a fixed amount of fees on an annual basis. Further to be qualified as a legal offshore company, a company also has to satisfy certain other requirements to ensure that the business activities do not fall under the ‘restricted category’ as per the rules of the offshore jurisdiction.
7. Requires time and research
   Before setting up an offshore company, extensive research is required to decide which jurisdiction to set up the offshore company. Deciding on the jurisdiction is not so easy as various laws, costs, requirements, restrictions, and unique features of each jurisdiction have to be analyzed.

What is an onshore company?

When a company sets up another business entity within the border of the country in which it is registered, then it is known as an onshore company. It is a legal entity incorporated in a country to operate a business within that specific country border. The transactions and dealings between two entities are conducted within the country and are subject to state corporate regulations and taxes.

A company usually prefers to have an onshore company if the country has a developed economy and strong financial markets. Onshore companies carry on a sizeable amount of business within the country of their registration.

What are the advantages of Onshore companies?

1. Brand awareness
   As a company is already functioning in the country, it does not have to spend much time and money on brand building. It already has customers in local and regional areas. Further, the new company established usually has a similar brand name which is familiar to the public.
2. Easy Collaboration
   Collaboration with an onshore company is easier as every person related to the company is within the reach of the company so the entire team can easily work together. This enables the team to work effectively and helps make good relations with each other.
3. No issue with timezone
   As all the employees work in the same country, conducting meetings becomes easier. There is no need to think about the timeline issue which arises in offshore companies.
4. No cultural difference
   As all the employees belong to the same country, cultural differences are minimized. Even the language barrier is minimized. This makes it easier to convene meetings.
5. Easy in understanding rules and regulations
   Every employee is already familiar with the laws of the country which also makes it easier to understand the internal environment of the company.

What are the disadvantages of Onshore Companies?

1. Less Global reach
   Onshore companies operate in one company so their global reach is limited.
2. High cost of overheads
   In case of an onshore company, the cost of operating is high as these companies cannot take benefit of lower costs by outsourcing their products and services to different countries. Overhead costs, hiring costs, and investment costs are higher. 
3. Less confidentiality
   Onshore companies are monitored and controlled by authorities so the details of the owners of the company are not private and are accessible to the public.
4. Tax rates
   Operating in one country bars onshore companies from availing the tax benefits of operating in different countries.

Difference between an Offshore and Onshore Company

One of the major differences between an offshore and onshore company is that the former company is incorporated in one country and has the license to carry out business in the country of its incorporation as well as in another/other countries whereas in the latter the company is incorporated in one country and carries out business activities in the same country. For better understanding, a deeper discussion on the differences between an offshore and onshore company is done below:

Offshore Company	Onshore Company
Offshore companies are companies that operate in countries that offer tax benefits.	Onshore companies are companies operating in the same country in which it has been incorporated. Such companies usually reside in economically developed countries.
Offshore companies are more flexible in adapting to different work environments and enjoy the benefit of high-cost savings, skilled labour, etc.	Onshore companies enjoy the benefit of reduced labour costs and no cultural and language barriers.
Offshore companies enjoy the freedom of complete privacy as the company information is not provided outside.	Onshore companies are subjected to state control therefore, it has less privacy.
Offshore companies benefit from operating in low-tax jurisdictions.	Onshore companies work in the country in which they are incorporated therefore, no tax benefit is available to them.

Conclusion

After understanding the difference between an offshore and onshore company, a company has to decide the type of business model most suited to them. The decision I is usually based on the business purpose, objective, financial status, and products and services. Irrespective of the trend, a company must choose wisely by weighing the benefits against the pitfalls. Further, when choosing between an offshore and onshore company, various ramifications and protocols relating to privacy, assets, and taxes have to be considered.

Also Read:
Why start an offshore company in Canada?
Offshore Company Incorporation in Malaysia: A complete Procedure